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Thursday, 29 May 1997
Page: 4496


Mr BRUCE SCOTT (Minister for Veterans' Affairs)(11.01 a.m.) —by leave—I move government amendments Nos 1 to 4:

(1)   Schedule 2, item 3, page 12 (line 10) to page 13 (line 2), omit the item, substitute:

3 After subsection 128A(1AA)

Insert:

(1AB)   For the purposes of this Division:

interest includes an amount, other than an amount referred to in subsection 26C(1):

(a)   that is in the nature of interest; or

(b)   to the extent that it could reasonably be regarded as having been converted into a form that is in substitution for interest; or

(c)   to the extent that it could reasonably be regarded as having been received in exchange for interest in connection with a washing arrangement.

washing arrangement means an arrangement under which the title to a security is transferred to a resident shortly before an interest payment is made where the sole or dominant purpose of the arrangement is to reduce the amount of withholding tax payable by a person.

(1AC)   An example of an amount in the nature of interest is an amount representing a discount on a security.

(1AD)   An example of an amount in substitution for interest is a lump sum payment made instead of payments of interest.

(1AE)   For the purposes of this Division, if a lender assigns a loan, or the right to interest under a loan, any payment from the borrower to the assignee that represents an amount that would have been interest if the assignment had not taken place is taken to be a payment of interest.

(1AF)   For the purposes of this Division, if a person acquires a security, or the right to interest under a security, any payment from the issuer of the security to that person that represents an amount that would have been interest if the acquisition had not taken place is taken to be a payment of interest.

(2)   Schedule 5, item 12, page 31 (lines 17 and 18), omit "that is not a resident (the subsidiary )", substitute "(the subsidiary ) that is not a resident of Australia".

(3)   Schedule 5, item 12, page 31 (after line 23), after paragraph (c), insert:

(ca)   when the debenture is issued, the subsidiary is treated as a resident of that country for the purposes of the tax law (see subsection (9)) of the country; and

(4)   Schedule 5, item 12, page 32 (after line 10), after the definition of global bond , insert:

tax law , in relation to a country other than Australia, means:

(a)   if the country has federal foreign tax—the law of the country that imposes the federal foreign tax; or

(b)   in any other case—the law of the country that imposes foreign tax.

I would just like to outline to the committee the detail of those amendments. The banking and finance industry and the community in general have welcomed the government's initiatives to extend the anti-tax avoidance measures to withholding tax. However, some concern has been expressed by the banking and finance industry that the proposed definition of interest contained in the bill could be seen by some as impacting on certain financial products which are not currently subjected to withholding tax, such as interest swapping arrangements where, for example, a floating rate of interest is swapped for a fixed interest rate in order to limit exposure to fluctuations in interest rates.

In response to those concerns, the government has decided to amend the provisions so that they more accurately target certain arrangements which attempt to convert an interest income stream into another income form, which some argue is not interest or in the nature of interest. Concerns have also been expressed that the provisions, as currently drafted, may capture some legitimate trading activities, especially those occurring on the secondary markets, instead of targeting arrangements which attempt to avoid the payment of withholding tax.

Once again, in response to those concerns, the government has decided to narrow the effect of the provisions. The definition will therefore concentrate on these arrangements and ensure that the interest component of trade and securities is subjected to withholding tax, where they are sold by non-residents to residents of Australia just before interest becomes payable in order to avoid withholding tax. These arrangements are commonly known as `washing arrangements' and are now specifically catered for in the proposed legislation.

The proposed subsection 128F(8) provides an Australian resident company with the option of raising funds free of interest withholding tax, through a non-resident subsidiary company. Under this proposed provision, a non-resident company can only issue debentures in a country listed in the income tax regulations.

Amendment 2, will clarify that a non-resident subsidiary company, for the purposes of the proposed subsection 128F(8), cannot be a resident of Australia. Amendment 3 will require a non-resident borrowing subsidiary to be resident of the country in which it issues debentures. It must be treated as a resident under the tax laws of such a country.

Amendment 4, defines the term `tax law' for the purposes of amendment 3. The interest withholding tax and related measures, paragraph 5.59, in the explanatory memorandum, will be replaced. The new paragraphs will more fully explain the need to explore the definition of the interest for the purpose of foreign bank provisions of the tax law. These amendments apply from 1 January 1996 and I present an explanatory memorandum.

Amendments agreed to.

Bill, as amended, agreed to.


Mr DEPUTY SPEAKER (Mr Truss) —The bill has been agreed to with an amendment. The question now is:

That the bill be reported to the House with amendments.

Question resolved in the affirmative.