Angela Flannery and Mark Friezer
Key Point
- Recent ATO Interpretative Decisions provide some clarity to the requirements of the section 128F "public offer" test in the context of a revolving credit facility.
The ATO has recently released ATO Interpretative Decisions ("ATO IDs") ATO ID 2006/195 and ATO ID 2006/231. Essentially, these ATO IDs set out conclusions from, and are the public versions of, ATO private rulings in relation to the application of the section 128F "public offer" interest withholding tax exemption for revolving credit facilities. The ATO IDs are important as they relate to the question of how the public offer test may be satisfied in the context of syndicated financings.
Reliance on ATO IDs
We note that ATO IDs are published as precedential ATO views for ATO officers. Although ATO IDs are publications approved in writing by the Commissioner, they are not published as a form of advice. They are neither legally nor administratively binding on the Commissioner (unlike public rulings, which may be legally and/or administratively binding).
However, if a taxpayer reasonably applies an ATO ID in good faith to their own circumstances (which are not materially different from those described in the ATO ID) and that ATO ID is later found to be incorrect, the taxpayer will not be liable for any administrative penalties and general interest charges will not be imposed for the period up to 21 days after the Commissioner notifies the taxpayer of the correct position (Practice Statement PS LA 2006/8). The taxpayer would still be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it.
Although ATO IDs do not have the same force as public rulings issued by the ATO, given the terms of the two ATO IDs considered here (as described further below) and the clear wording of section 128F itself, it is our view that it is no longer necessary to draft syndicated financings (whether for term loan facilities or revolving facilities) as loan notes or debentures to take advantage of the section 128F exemption. Instead, reliance can be placed on the broad interpretation of "debt interest" for syndicated financings.
What is a "debt interest" for section 128F purposes?
Effective 21 March 2005, section 128F was amended to provide that the public offer test could be satisfied not only by offering "debentures", but also by offering "debt interests".
Clayton Utz is aware that the loan agreement to which the ATO private ruling related and upon which the ATO IDs are based was a "standard" form syndicated revolving facility agreement, which was not structured as a loan note or debenture arrangement.
ATO ID 2006/195 and ATO ID 2006/231 clarify that an interest of a financier under a syndicated facility agreement will be considered to be a "debt interest" for the purposes of the section 128F public offer test. Therefore, by implication (though this is not expressly stated in either of the ATO IDs), syndicated financings do not need to be in the form of loan note or debenture structures to take advantage of the section 128F exemption.
Relevance of revolving nature of facility
Revolving credit facilities allow for amounts to be borrowed, repaid and then borrowed again. Therefore under a revolving credit facility a debt interest will be issued by the borrower each time the borrower makes an advance.
ATO ID 2006/231 provides that debt interests that are issued over a period of time under a revolving credit facility will be regarded as connected with the initial offer because the initial offer of the facility will commit the lenders to advance funds in accordance with the terms of the facility agreement. Accordingly, provided the initial offer of the facility satisfied one of the public offer tests, the debt interests that are subsequently issued in accordance with the terms of the facility agreement will also satisfy the public offer test. Therefore it is not necessary to structure a revolving facility to provide that there is always at least a nominal amount outstanding. This approach has been adopted in the past to avoid a perceived risk that the repayment in full of the revolving facility would mean that any subsequent redrawing would be considered to be a new debt interest which would need to separately satisfy a public offer test in section 128F.
ATO ID 2006/195 provides that where a participation in a syndicated revolving credit facility is transferred on syndication of that facility or otherwise novated, the section 128F exemption would still be satisfied if, when the revolving credit facility was first put in place, one of the public offer tests in section 128F was satisfied. While the transfer or other novation of the participation would constitute the issuing of a new debt interest, that transfer or other novation would still arise from the original credit facility and would be based on the original public offer. As such, the issue of the new debt interest would be taken to have "resulted from" the original offer.
Conclusion
Provided a "public offer" test in section 128F is initially satisfied in relation to the revolving credit facility, it would not matter if that facility was drawn down and repaid in full on one or more occasions and whether that occurred before or after syndication of the facility. Any transfer of a participation in the facility and any redrawing of the revolving facility (even if that is a separate "debt interest") will not be seen as an unconnected issue which must separately satisfy one of the public offer tests in section 128F.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
