Loan Agreement for Australian Law

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					                             AUSTRALIAN BANKERS’ ASSOCIATION INC.
Tony Burke                                                                      Level 3, 56 Pitt Street
Director                                                                        Sydney NSW 2000
                                                                                Telephone: (02) 8298 0409
                                                                                Facsimile:    (02) 8298 0402




6 February 2007



The Hon Peter Dutton, MP
Minister for Revenue and Assistant
Treasurer
Parliament House
CANBERRA ACT 2600




Dear Minister,

               Tax Laws Amendment (2006 Measures No. 7) Bill 2006

               Amendments to Interest Withholding Tax exemptions

The Australian Bankers’ Association (“ABA”) is the peak body for the Australian
banking industry. The ABA’s 26 members include all of Australia’s major banks.

The ABA has grave concerns about the content of Schedule 2 of Tax Laws
Amendment (2006 Measures No. 7) Bill 2006 (“Bill”), which contains proposed
amendments to the interest withholding tax (“IWT”) exemption in section 128F
and related provisions of the Income Tax Assessment Act 1936.

Among other issues, if enacted in its current form, the Bill will be retrospective
and will impose tax on borrowers who negotiated loan arrangements in good faith
based on current law.

For the future, the Bill will prejudice the ability of Australian firms to participate in
the syndicated loan market, which is growing rapidly and was worth $68.4 billion
in 2004/05, according to the Reserve Bank Bulletin of September 2005. These
concerns are more fully explained in the Attachment to this letter.

The ABA requests as a matter of urgency that the Government not proceed with
the enactment of Schedule 2 of the Bill until these matters are resolved. The
prospect of a regulation being promulgated at a later date is not a sufficient
means to address the adverse impacts of the Bill. The IWT measures in the Bill
should not be enacted until there is much greater clarity as to what instruments
will in fact be covered by the regulation.



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Australian Bankers’ Association Inc. ARBN 117 262 978
(Incorporated in New South Wales). Liability of members is limited.
AUSTRALIAN BANKERS’ ASSOCIATION INC.                                                       2


If the Government does decide to proceed with passage of the Bill including
Schedule 2, the ABA requests that:

              the commencement provisions of the Bill be amended to remove
               from the scope of the measures amounts arising under loans,
               including syndicated loans and revolving credit facilities, established
               prior to the introduction of the Bill into Parliament;

              Items 4 and 7 of Schedule 2 be excised from the Bill; and

              the Government issues advice as soon as practicable that the
               current IWT exemption will not be removed from syndicated loan
               arrangements and revolving credit facilities.

These issues are explained in more detail in the Attachment.

The ABA is also concerned with a significant breakdown in the consultation
process in relation to the proposed IWT amendments. The ABA lodged
submissions with Treasury in June and December 2006, but was not engaged in
formal consultation until a request for comment was made by a Treasury officer
in late January 2007, following introduction of the Bill on 7 December 2007.

Given the magnitude of the changes proposed, further and more extensive
consultation should have occurred.

We note the Bill is scheduled for debate in the Senate on 8 February, and would
welcome a meeting with you at your earliest convenience to explain in person the
serious difficulties that the current draft Bill creates.

Yours faithfully




______________________________

Tony Burke

Cc:   Phil Lindsay, Office of the Minister

      Jo Laduzko, Treasury




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AUSTRALIAN BANKERS’ ASSOCIATION INC.                                                      3



                                  ATTACHMENT



1.       Issues

The provisions of Schedule 2 of the Tax Laws Amendment (2006 Measures No. 7)
Bill 2006 (the “Bill”) will withdraw the exemption from interest withholding tax
(“IWT”) currently available for interest paid on certain kinds of debt interests.
This exemption was inserted into the Act in 2005. Until March 2005, the
exemption from IWT was available only for interest paid on “debentures”, but in
2005 the Act was amended so that an exemption from IWT was available for
interest paid by certain companies and eligible unit trusts “in respect of a
debenture or [any kind of] debt interest …” where specified conditions are met.

As a result of the amendments proposed in the Bill, the exemption from IWT will
only be available for interest paid in respect of:

          an instrument which is a debenture;

          an instrument which is not a debenture but which is either

           -      a debt interest in the form of non-equity share; or

           -      a debt interest that is an instrument prescribed in the
                  regulations.

In all cases, the exemption may be disallowed by regulation.

Although the Explanatory Memorandum (“EM”) to the Bill does not refer to it, the
Bill is thus directed at curing what is now seen as a defect in the drafting of the
2005 amendments. Instead, the EM to the Bill refers to –

         … interpretative pressure on the relevant law has the potential to
         substantially widen the range of debentures and debt interests that could
         qualify for exemption from interest withholding tax, beyond the original
         policy intent. This represents a threat to the integrity of the tax system
         [para 2.9]

While the ABA does not agree that the current law is susceptible to
misinterpretation or “interpretative pressure,” the ABA considers it entirely
unsatisfactory that the proposed amendments to cure drafting errors will:

          retrospectively impose tax on borrowers who negotiated loan
           arrangements in good faith based on current law (that is, the legal
           liability for IWT which will arise to the foreign lender will be sheeted
           home to the Australian borrower via “gross up clauses”); and

          prejudice the ability of Australian firms to participate in the syndicated
           loan market, which is worth in excess of USD68 billion.




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AUSTRALIAN BANKERS’ ASSOCIATION INC.                                                      4


1.1       Retrospectivity – the application of IWT to existing instruments

We do not believe there is or should be any dispute about the proposition that
IWT should not now be imposed on interest arising under loan arrangements that
were entered into relying on exemption from IWT arising from the 2005
amendments.

Our concern is that the current drafting does not protect existing borrowings.

The current application provision in Schedule 2 of the Bill provides,

          8 Application

          The amendments made by this Schedule apply to interest paid in respect
          of debt interests issued on or after the day the Bill for this Act was
          introduced into the House of Representatives.

The reference to “interests issued on or after …” the date does not address the
special problems of:

           draw downs made under existing revolving credit facilities; or

           the position of purchasers of traded interests in syndicated loans.

Current law and ATO practice views each draw down of an amount under an
existing revolving credit facility as amounting to a new loan. This approach is
evident for example in ATOID 2006/230: Income tax: Revolving credit facility:
Facility Agreement - Debt interest in which the ATO says –

          … the debt interest will not arise until such an Advance is actually drawn
          down, and each drawdown made under the terms of the Facility
          Agreement will form a separate debt interest …

A similar view is expressed in ATOID 2006/231 Income tax: Interest Withholding
Tax Exemption: revolving credit facility - public offer test –

          … The creation of the revolving credit facility means that a debt interest
          will be issued by the borrower each time the borrower makes an
          advance…

Current law and ATO practice similarly views the position of a purchaser of traded
interests in a syndicated loan as amounting to a new loan. This arises principally
from the fact that under the terms of the syndication agreements the substitution
of the purchaser for the original lender / seller is usually constructed as the
novation of the loan originally made. This notional re-lending is necessary so that
the purchaser can become subject to the obligations (as well as the rights) of the
original lender / seller. This approach is evident for example in ATOID 2006/195:
Income Tax: Interest Withholding Tax Exemption: novation of revolving credit
facility - public offer test in which the ATO says –

          the novation of the loan from a lender to a transferee bank will constitute
          the issuing of a new debt interest under paragraph 128F(a) of the ITAA
          1936 …


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AUSTRALIAN BANKERS’ ASSOCIATION INC.                                                     5


Hence the draw down of additional funds under a revolving credit facility or the
sale of an interest in a syndicated loan will be new debt interests, no longer
entitled to the benefit of the existing immunity from IWT.

For example, assume that a 5 year syndicated loan facility was entered into by an
Australian corporate borrower in January 2006, on the strength of the 2005 IWT
amendments, so as to fund an infrastructure project in Australia. The loan is in
the form of a debt interest, but does not constitute a “debenture”.

The borrower has the legitimate expectation that its funding for 5 years will be
free of IWT, and the cash flow and viability of the project are critically dependent
on this assumption. The loan documentation provides that the loan interests of
the lenders are able to be transferred. Assume that, in January 2007, one of the
foreign lenders in the facility transferred its loan interest to another foreign
lender, and that the transfer was by novation, as will commonly be the case. The
Bill will treat this new (non-debenture) debt interest as being subject to IWT – the
section 128F exemption will not apply. The Australian borrower will bear the cost
of the IWT, via a “gross up” clause, notwithstanding that it has received no
additional funds, and that it is otherwise in the same economic position as if the
novation has not occurred. Australian borrowers will be exposed to major
uncertainty as to whether/when such transfers/novations of their liabilities may
occur, as this will be at the discretion of the foreign lenders.

The solution to this problem will require the amendment of Item 8 of Schedule 2.

Item 8 should be clearly drafted so that the new provisions do not apply to
interest paid under arrangements which were entered prior to the day the Bill was
introduced into the House of Representatives. The effective commencement date
should be the date upon which the relevant loan facility was put in place, not the
date upon which loans made under it were made.

The ABA recommends that amendments to the following effect should be made:

8   Application

        (1)   The amendments made by this Schedule apply to interest paid in
              respect of debt interests issued on or after the day the Bill for this
              Act was introduced into the House of Representatives (introduction
              day).

        (2)   For the purposes of subsection (1), a debt interest shall be treated
              as issued prior to the introduction day if the debt interest resulted
              from a written *financing arrangement entered into before that
              day.

        (3)   Subsection (2) shall not apply if:

              (a)   the financing arrangement is materially altered after the
                    introduction day;

              (b)   the financing arrangement is rolled over after the introduction
                    day; or

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AUSTRALIAN BANKERS’ ASSOCIATION INC.                                                     6


              (c)   the original term of the financing arrangement is extended
                    after the introduction day.

The Explanatory Memorandum to this provision should then read:

Application and transitional provisions

        2.30 The amendments limiting eligible debt interests to non-debenture
             debt interests that are non-equity shares will apply to debt interests
             issued on or after the introduction day, being the day on which
             this Bill is introduced in the House of Representatives [Schedule 2,
             item 8(1) ].

              Loans made after the introduction day, but which represent the
              draw-down of amounts specified in a written loan agreement
              existing at the introduction day, will be treated as made before the
              introduction day. This will extend to the assignees of interests
              under syndicated loans – for example, where a third party acquires
              an interest under a pre-introduction day debt interest, the interest
              they hold will be treated as arising from a pre-introduction day debt
              interest whether the third party acquires their interest in the pre-
              introduction day loan by assignment or novation [Schedule 2,
              item 8(2) ].

              In order to enjoy the benefit of subsection (2), the debt interest
              must “result from” an existing financing arrangement. A debt
              interest will be viewed as “resulting from” a financing arrangement
              in the kinds of circumstances outlined in Taxation Determination TD
              1999/8 and ATOID 2006/231. Financing arrangement has the
              same meaning as in section 974-130 ITAA 1997.

              The amendments limiting eligible debt interests to non-debenture
              debt interests that are non-equity shares will apply to a pre
              introduction day debt interests if the overall financing arrangement
              (of which a particular debt interest is one component) is materially
              altered, rolled over or extended after the introduction day
              [Schedule 2, item 8(3) ].

              The amendments establishing regulation-making powers will have
              effect from the date of Royal Assent.

1.2     The treatment of syndicated loans

The ABA’s second concern is ongoing. The design of the proposed amendment is
now behind industry practice and will preclude Australian firms from participating
in some debt markets.         The requirement which the Bill will impose is a
requirement of legal form, insisting the Australian borrowers document their
transactions in a particular way – a way that in many cases is not industry
practice, which is unfamiliar to some trading partners and which is an impediment
to Australian firms participating in some markets.



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AUSTRALIAN BANKERS’ ASSOCIATION INC.                                                     7


The most obvious example is the syndicated loan market. As the Reserve Bank of
Australia (“RBA”) noted in its September 2005 Bulletin, the borrowing
requirements of businesses are sometimes beyond the funding and credit risk
capacity of single lenders. As a result, some loans are arranged as syndicates
with the funds jointly provided by two or more lenders. The RBA notes that
syndicated loans are a significant source of external funds for non-financial
businesses in Australia.

The syndicated loan market has grown rapidly in Australia in recent years and the
RBA reports that 126 new syndicated loans were approved in 2004/05, totalling
$68 billion. It is evident that foreign banks and other lenders are substantial and
important participants in the syndicated loan market. Such lenders will be
typically subject to IWT unless the section 128F exemption is available. The RBA
refers to Bank of International Settlements data which indicates that foreign
banks (including subsidiaries) participated in deals that together accounted for
around 3/4 of the value of total signings in the Australian syndicated loan market
in 2004.

The proposed amendments will wind back the scope of the exemption from IWT,
limiting the exemption to instruments which are debentures, non-equity shares or
instruments prescribed in the regulations. As a result of these amendments,
interests in syndicated loans will now have to be documented as debentures if
they are to qualify for IWT exemption (which is a necessary condition of
participating in this market).

Industry practice in the syndicated loan market is increasingly to leave behind the
notion of a note or debenture. While some syndicated loans are structured so as
to be debentures, the modern documentation of syndicated loan transactions
tends to be to construct the arrangement as simple loan facilities without the use
of a debenture. This makes the instrument much more attractive to foreign
participants, especially those who are unfamiliar with the peculiarities which
Australian tax law used to generate. This practice was able to grow in Australia
because of the 2005 amendments which allowed all debt interests to be free from
IWT, subject to the other requirements of s128F being satisfied.               The
requirements in the Bill will impose onerous requirements which are legal form,
serving neither to achieve any obvious tax policy goal nor to protect against a
challenge to the integrity of the tax system, but instead creating impediments for
Australian borrowers.

1.3     Denying exemption by regulation

The ABA’s third concern arises from the proposal in the Bill to allow for an IWT
exemption authorised under the Act to be denied by regulation.

Items 4 and 7 of Schedule 2 permit the IWT exemption given by the Act to be
withdrawn “in prescribed circumstances” – that is, not by amending the law, but
rather by the passage of regulations. The EM at para 2.10 and 2.11 indicates that
a regulation-making power will provide a safeguard against certain financial
instruments that have not traditionally been regarded as debentures from being
interpreted as such based on a strict legal form assessment.

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AUSTRALIAN BANKERS’ ASSOCIATION INC.                                                       8


The EM to the Bill also takes the curious position that this power is desirable
because, inter alia, it will add certainty for the benefit of the market –

           provide clearer guidance to the market in relation to the eligibility of
           debentures for interest withholding tax exemption, a regulation-making
           power has been included [para 2.11]

The ABA’s view is that, rather than add to market certainty, it will lead to a loss
of confidence in the rule of law in tax matters. Indeed the development of this
matter to date is perhaps the best object lesson of the kinds of problems that the
proposed power will create: a clear provision allowed an immunity from IWT;
Treasury proposed legislation which will remove that protection and will be
removed retrospectively!

Moreover, the power to disallow an IWT exemption is expressed in a way that is
over-reaching. The disallowance power is not simply addressed to the new
emerging instruments which the market might develop; it extends to all
instruments. Introducing this power now creates the possibility of denying an IWT
exemption for interest paid on instrument which has in fact traditionally been
regarded as a debenture and where one might have thought the law and policy
was quite settled.

The ABA is aware that the Asia Pacific Loan Market Association (“APLMA”) wrote
to the Assistant Treasurer in December expressing the view that,

           Unfortunately the manner in which the Bill has been introduced has
           caused significant uncertainty and concern in finance markets. The
           power to issue regulations under the section as proposed gives rise to the
           possibility of recognition of the market and transactions which access it,
           but also to the possibility of uncertainties and denial of that access.

The ABA agrees.


2.         Recommendations

 1. The ABA the requests as a matter of urgency that the Government not
    proceed with the enactment of Schedule 2 of Taxation Laws Amendment
    (2006 Measures No 7) Bill 2006 until these matters are resolved.

 2. If the Government does decides to proceed with passage of the Bill including
    Schedule 2, the ABA requests that:

              the commencement provisions of the Bill be amended to remove
               from the scope of the measures amounts arising under loans,
               including syndicated loans and revolving credit facilities, established
               prior to the introduction of the Bill into Parliament;

              Items 4 and 7 of Schedule 2 be excised from the Bill; and




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AUSTRALIAN BANKERS’ ASSOCIATION INC.                                                  9


            that the Government issues advice as soon as practicable that the
             current IWT exemption will not be removed from syndicated loan
             arrangements and revolving credit facilities.




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