- Coming to a computer near you - trading of government backed securities
- Making offshore debt issues easier
Coming to a computer near you - trading of government backed securities
The Federal Government has introduced amendments to the Commonwealth Inscribed Stock Act 1911 (Cth) (the Act) which will provide for the electronic issue and transfer of Commonwealth Government Securities (CGS) through the ASX's clearing system, CHESS. Currently, under the Act, CGS are issued in paper form. The Commonwealth Inscribed Stock Amendment Bill 2001 (Cth) (CIS Bill) will amend the Act to provide for the:
- issue of CGS by electronic means;
- creation of equitable interests in CGS;
- electronic transfer of legal and equitable interests in CGS (this may done be by incorporating some of the provisions of the Corporations Act 2001 (Cth));
- recognition of private clearing and settlement facilities regulated under the Corporations Act 2001 (Cth) as registrars under the Act instead of the Reserve Bank of Australia;
- operating rules of a clearing and settlement facility appointed as registrar to apply to the transfer of CGS; and
- inclusion of Treasury Bonds and Treasury Notes in the definition of "stock" under the Act.
The CIS Bill has been passed by the House of Representative and is currently before the Senate Economic Legislation Committee which will report on the CIS Bill by 6 December 2001.
Making offshore debt issues easier
A number of recent developments on the Australian tax front make it easier to sell an offshore debt capital markets issue by an Australian issuer in the primary and secondary markets. Matthew Barnard, a partner in our Hong Kong office takes a look at what these changes mean.
Section 128F of the Income Tax Assessment Act 1936 (Cth) (ITAA) provides for exemption from interest withholding tax provided that the "public offer" test is satisfied. That test is not satisfied if the issuer knew, or ought to have known, that the relevant instruments would be purchased by its associates.
The changes to the tax law take effect from the date of the Australian Treasurer's announcement on 29 August 2001. From that date the fact that instruments will or could be purchased by:
- Australian onshore associates of the issuer; or
- non-resident associates of the issuer who act as the clearing house, paying agent, custodian or funds manager, is no longer relevant for the public offer test.
Unfortunately the Treasurer's announcement makes reference to the fact that associates who act as the clearing house, paying agent, custodian or funds manager do not normally hold debentures to their own account. While the holding of the debentures on the account of others is not stated to be a requirement, until clarified it would be prudent to treat it as such.
Changes to taxation of discounted instruments
Under present law, the gain on the sale of a discounted instrument by a non-resident to an Australian resident was deemed to be interest, but could not benefit from the s128F exemption, even if the issue of the instrument had satisfied the public offer test, because the deemed interest was not paid by the issuer.
The Treasurer's announcement included the extension of the s128F exemption to this deemed interest if the instrument would otherwise have qualified for that exemption. This should facilitate the integration of offshore and onshore trading in discounted instruments.
Australian Tax Office determination on bearer debentures
On 8 August 2001, the Australian Taxation Office confirmed that when a bearer global instrument is held in a clearing system such as Clearstream or the Hong Kong CMU, the holder will be the clearing system. Many practitioners already took this view, but the existence of some doubt made some issuers cautious.
Some transactions for Australian issuers can only be achieved if the pool of investors consists of offshore investors as well as Australian based investors. Typically, however, offshore investors usually want bearer notes lodged with Euroclear or Clearstream, while the issuer wants to issue registered notes to Australian investors, not bearer notes.
The issuer has preferred to issue registered instruments to onshore investors because of s126 of the ITAA. Where the issuer does not give the Commissioner of Taxation the name and address of the holder of a bearer debenture, the issuer could be liable to pay income tax (known as bearer debenture tax) at the rate of 47% on the interest. This was a problem for the issuer if an investor was an Australian resident or carried on business at or through a permanent establishment in Australia. The problem also existed if the notes were sold in the secondary market to Australian based investors. Bearer debenture tax does not apply to non-resident holders of debentures if the initial issue satisfied the public offer test under s128F, but it is difficult in practice for issuers to ascertain the resident status of holders.
On the basis of the new determination, however, distribution and secondary sales to Australian based investors are no longer problematic. Bearer instruments - or more precisely, indirect interests in global bearer instruments - can be issued to, and sold in the secondary market to, Australian based investors without attracting bearer debenture tax provided the global instrument is held in a clearing system and the relevant details of the clearing system are given to the Commissioner.
(For completeness, please note that the investor will become a holder of the note if the global has been exchanged for definitives. In most programmes, this can only occur if there has been a payment default.)
(Source: Assistant Treasurer Press Release, No. 042, 29/08/01. For more, see the press release)
