1 March 2004

Tax Changes Increase Opportunities for Australian Businesses

The Government will introduce legislation to change the income tax law to make sure that the current Interest Withholding Tax (IWT) exemptions for payments relating to offshore borrowings stay in step with the way companies raise finance on competitive terms, Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, announced today.

“These changes follow extensive consultation with key stakeholders,” Senator Coonan said.

“They will be welcomed by business as sensible initiatives to allow Australian businesses to confidently take advantage of global opportunities to lower their cost of debt and to facilitate efficient business structures.”

The first change updates the meaning of debenture and offshore borrowing for IWT purposes and aligns it with the meaning of debt for tax purposes. This change will ensure that returns on financial instruments treated as debt for tax purposes - including certain redeemable preference shares - may also be exempt from IWT.

“This will lower the costs of borrowing for companies using such finance and will ensure the tax treatment is in line with the treatment of traditional debt instruments,” Senator Coonan said.

The second change treats payments made in respect of certain financial instruments - Upper Tier 2 capital - as interest for IWT purposes. This will ensure an appropriate tax and withholding treatment for such instruments once regulations are introduced to treat them as debt for tax purposes.

“This is part of implementing the decision I announced last year to have these regulations made,” Senator Coonan said.

The final change ensures debentures transferred from Australian subsidiaries of foreign banks to Australian branches will retain eligibility for the IWT exemption. Foreign banks will now be able to simplify their business structures by transferring debentures issued by their subsidiaries after 18 June 1993 to their Australian branches without losing the IWT exemption available for such instruments. This is consistent with removing tax impediments to facilitate the restructuring of foreign bank operations in Australia from subsidiary to branch structure.