Skip to content.

Home

Allens Arthur Robinson

Focus: Tax – 1 April 2003

Tax deductibility of interest paid by securitisation vehicles

In brief: Amending legislation to exempt most securitisation vehicles from the thin capitalisation rules was introduced into the Federal Parliament on 27 March 2003, reports Senior Associate Thomas McAuliffe.

The thin capitalisation rules, in their current form, may operate to deny tax deductions for interest payments and therefore potentially represent a serious concern for securitisation vehicles that are generally either fully, or almost fully, funded by debt.

Although a concession (the 'zero capital amount') for securitisation vehicles was included in the current thin capitalisation regime that came into force on 1 July 2001, the very restrictive definitions of 'securitisation vehicle' and 'securitised asset' in those provisions meant that a large number of bona fide securitisation structures would never qualify for the concession. This meant that the securitisation vehicle either had to attempt to rely on the vague and restricted 'arm's length debt amount' rule or suffer the loss of interest deductions.

The amended law will provide a complete exemption from the thin capitalisation rules for any special purpose entity (including a trust) that meets all of the following conditions:

  1. The entity is established for the purpose of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself).
  2. At least 50 percent of the entity's assets are funded by debt.
  3. The entity is an insolvency-remote, special purpose entity, according to the criteria of an internationally recognised rating agency that are applicable to the entity's circumstances. This condition can also be met without a rating agency determining that the entity meets those criteria (ie unrated entities can qualify for the exemption). According to the Explanatory Memorandum to the amendments, a rating agency may be satisfied where an entity can demonstrate that it:
    • is restricted to activities necessary to its role in the transaction;
    • is restricted from incurring additional indebtedness;
    • cannot be subject to reorganisation, merger or change of ownership; and
    • holds itself out to the world as a separate entity.

Some rating agencies publish general criteria, whereas others have specific criteria for particular types of special purpose entities. The Explanatory Memorandum notes that Standard and Poor's have published Structured Finance Criteria for Australian and New Zealand Special-Purpose Entities (available from www.standardandpoors.com).

The new exemption for special purpose entities has deliberately been drafted widely to recognise the broad and evolving range of securitisation activity and structures. The exemption is not restricted to traditional residential mortgage-backed securities issues, but rather is intended to extend to warehousing structures, conduits, credit derivatives and other synthetic securitisation and origination by the issuer.

Where an entity is a qualifying special purpose entity, it will not be regarded as part of a consolidated tax group for the purposes of applying the thin capitalisation rules to the head company of that group. However, such an entity will still be a member of a consolidated tax group for all other purposes of the tax legislation. Therefore, in the absence of a valid tax sharing agreement, a qualifying special purpose entity will remain jointly and severally liable for the tax-related liabilities of the consolidated group of which it is a member, unless it is structured so that it is not eligible to be a member of a consolidated tax group.

Although the existing concession for 'securitisation vehicles' (as defined) will remain as part of the law, it will only be of use in very limited circumstances. In any event, the new provisions provide a complete exemption from the thin capitalisation regime for qualifying special purpose entities, whereas the thin capitalisation rules will still apply to entities relying on the existing concession for securitisation vehicles, subject to the 'zero capital amount' provisions. Accordingly, there will be a clear preference for satisfying the conditions of the new exemption for qualifying 'special purpose entities' rather than relying on the existing concession for 'securitisation vehicles'.

These amendments are the result of extensive consultation between the Australian Securitisation Forum and the Australian Taxation Office and the Treasury and appear to achieve the Government's stated policy of ensuring that most securitisation vehicles will be outside the scope of the thin capitalisation rules. The amended law, once enacted (which may not occur for several months), is intended to apply (retrospectively) from 1 July 2001 (the date of commencement of the current thin capitalisation rules). The Treasury and the ATO are to be commended for their enlightened willingness to address the legitimate concerns of the securitisation industry.

Return to top

For further information, please contact:

Return to top

Tweet or bookmark with
Tweet this article

What are these?

 

Recent Tax publications