updated 2014 financial services conference - obus - frost, mac

© Frost, Mac Donald and Marston, 2014

Disclaimer: The material and opinions in this paper are those of the authors and not those of The Tax Institute. The Tax Institute did not review the contents of this paper and does not have any view as to its accuracy. The material and opinions in the paper should not be used or treated as professional advice and readers should rely on their own enquiries in making any decisions concerning their own interests.

2014 Financial Services

Taxation Conference

Offshore Banking Units

Written by:

Tony Frost

Managing Director

Greenwoods & Freehills

Ultan Mac Donald

Head of OBU

Institutional Banking &

Markets

Commonwealth Bank of

Australia

Presented by:

Tony Frost

Managing Director


Craig Marston

Senior Associate


Ultan Mac Donald

Head of OBU

Institutional Banking &

Markets

Commonwealth Bank of

Australia

National Division

19-21 February 2014

InterContinental Sanctuary Cove Resort

Frost, Mac Donald and Marston Offshore Banking Units

© Frost, Mac Donald and Marston, 2014 2

CONTENTS

1 Overview 7

2 Offshore banking in Australia (including legislative responses thereto) 8

3 Overview of the OBU regime 11

3.1 Conceptualising the OBU 11

3.2 Concessional tax rate 12

3.3 Assessable OB income 12

3.3.1 OB activity 12

3.3.2 The “OBU requirement” 15

3.3.3 Non-OB money 15

3.4 Allowable OB deductions 15

3.4.1 Exclusive OB deductions 16

3.4.2 General OB deductions 16

3.4.3 Exclusive non-OB deductions 16

3.5 OB money and the “purity test” 17

3.6 Interest withholding tax exemption 17

3.7 Use of “OBU resident-owner money” 17

3.8 Foreign income tax offset (FITO) rules 18

3.9 Administrative guidance 18

3.10 OECD view of the OBU regime 18

4 How are OBUs currently being used? (Does OBU really stand for Only Barely Usable?) 20

4.1 Introduction 20

4.2 Some reasons for lack of OBU activity 21

4.3 Some further observations 22

4.4 The impact of franking credits on OBUs 23

4.5 So, are OBUs only barely usable? 23

4.5.1 Useful? 24

4.5.2 Usable? 24



4.6 Some difficulties in day-to-day OBU operations 26

4.6.1 Who has been transacted with? 26

4.6.2 The FITO rules 26

4.6.3 Other issues 27

4.7 Summary 28

5 Can we compete against Singapore and other financial centres? 29

5.1 Singapore’s Financial Sector Incentive Scheme 30

5.1.1 Background 30

5.1.2 Success of the FSI Scheme 30

5.1.3 OBU regime vs. Singapore’s FSI Scheme: some comparisons 32

5.1.4 The Awards 35

5.2 United States’ International Banking Facility 36

5.2.1 Background 36

5.2.2 Who can establish an IBF? 37

5.2.3 Deposit and loan services 37

6 What reforms will make OBUs more useful and competitive to both Australian and

foreign owned institutions? 40

6.1 Introduction 40

6.2 Making the existing safeguards work 41

6.2.1 The “purity test” 41

6.2.2 Whether OBUs need separate bank accounts 41

6.2.3 Clarifying the “OBU requirement” for permanent establishments 42

6.2.4 Interactions with the consolidation regime 42

6.2.5 A$ nostro accounts 43

6.2.6 Definition of offshore person 44

6.3 Making the existing concession work 44

6.3.1 Deem the RBA to be an offshore person 44

6.3.2 Borrowing and lending 44



6.3.3 Efficient hedging 45

6.3.4 Interaction with foreign income tax offset (FITO) rules 46

6.3.5 Multi-jurisdictional lending arrangements 46

6.3.6 Section 121EB 46

6.4 OBUs and the funds management industry 47

6.4.1 Introduction 47

6.4.2 Making vs. managing vs. advising 47

6.4.3 Portfolio investments (s.121D(6A)) 48

6.4.4 Offshore person vs. non-resident 51

6.4.5 Trading 51

6.4.6 Hedging 51

6.4.7 OBU investment funds 52

6.4.8 Related party transactions 53

6.5 Other improvements 53

6.5.1 Non-operating holding companies 53

6.5.2 Making of a financial derivative: ATO ID 2004/962 53

6.5.3 Issues with trading 54

6.5.4 Issues with managing A$ risks 54

6.5.5 Guarantee-type activity 54

7 What changes (good and bad) to the OBU rules are likely to emerge from the (former)

Government’s 2013/14 Budget announcements? 56

7.1 Budget Announcement 56

7.2 Discussion Paper 57

7.3 Inappropriate access to the OBU concession 58

7.3.1 Related party transactions that convert non-OB income into OB income 58

7.3.2 Transactions transferred between an OBU and DBU 61

7.3.3 Trading in shares or securities issued by a related party 62

7.3.4 OBU to OBU transactions 63



7.4 The “choice” principle 64

7.4.1 Background 64

7.4.2 Industry submissions 65

7.4.3 Possible changes 65

7.5 List of eligible activities 65

7.5.1 Background 65



7.6 Allocation of expenses between OB income and non-OB income 66

7.6.1 Background 66

7.6.2 Industry submissions – allocation of expenses 71

7.6.3 Possible changes – allocation of expenses 72

7.6.4 Industry submissions – exclusive non-OB deductions 72

7.6.5 Possible changes – exclusive non-OB deductions 72

7.7 Streamlining the OBU application process 73

7.7.1 Background 73



7.8 Ensuring other provisions interact appropriately with the OBU regime 74

7.8.1 Background 74



7.9 Treatment of existing transactions 75

7.9.1 Background 75



7.9.4 Treasury’s possible approach – some comments 76

Appendix A Chronological summary of major developments in the OBU regime 77



Appendix B The Financial Institution Directory of Singapore as at 16 January 2014 89



1 Overview1

If the Offshore Banking Unit (OBU) regime in Australia’s income tax law had to be described

in one word, that word would be “ambivalent”. On the one hand, successive Governments

have declared the aspiration that Australia be a global or at least a regional financial services

centre. On the other hand, in more recent times, Treasury and the Australian Taxation Office

(ATO) seem to have some concerns that the OBU regime is being abused. Generally

speaking, and with some exceptions, the financial services industry has also reacted with

ambivalence to the regime, in part due to its complexity and the restrictions as to the types of

activity which qualify for the available concessions.

This paper reflects on where the OBU regime is at. The main part of the regime has been in

operation for more than 20 years now. On that basis, one could be forgiven for assuming that

Australia had a highly mature offshore banking industry with many OBUs supporting

Australia’s vibrant financial services centre. But that is not the case.

Accordingly, this paper considers how (as a matter of fact) OBUs are currently being used in

Australia as well as their useability: Does, contrary to popular belief, OBU really stand for

“Only Barely Usable”? In considering the useability of the regime, this paper juxtaposes the

OBU regime against merely two examples of foreign concessional regimes, being:

Singapore’s Financial Sector Incentive Scheme; and

the United States’ International Banking Facility Regime.

These are but two examples of regimes that many countries have introduced to promote the

financial services sectors of their economies.

Next, this paper briefly considers some of the major requests from industry for improvements

to the regime that are not canvassed in the Treasury’s June 2013 Discussion Paper:

Improving the Offshore Banking Unit Regime (Discussion Paper).

Finally, this paper addresses the proposed reforms to the OBU rules announced by the

former Government in the 2013-2014 Budget and considered in the Discussion Paper, before

commenting on the current Government’s progress in reforming the OBU regime.

In this paper, all legislative references are to the Income Tax Assessment Act 1936 (ITAA36)

or to the Income Tax Assessment Act 1997 (ITAA97) unless indicated otherwise.

1 The Authors are grateful to Professor Richard Vann, Challis Professor, University of Sydney and Consultant to Greenwoods &

Freehills for his contribution to section 3.10 of this paper. The Authors are also grateful to Betsy Rumble, Senior Associate,

Greenwoods & Freehills for her contribution to section 5.1 of this paper. Further, the Authors are grateful to Lynn Kelly and

Jerome Wood of Commonwealth Bank of Australia for their comments on various parts of the paper.

The views expressed in this paper are the views of the Authors and do not necessarily represent the views of either

Greenwoods & Freehills or Commonwealth Bank of Australia.



2 Offshore banking in Australia

(including legislative responses

thereto)

Since at least 1984, it has been the policy of successive Australian Governments to promote

“offshore banking” in Australia. That policy is part of a broader objective for Australia to be a

major international financial centre.2

The expression “offshore banking” is something of an misnomer. A key policy objective of the

tax regime applying to OBUs, so as to facilitate the growth of financial expertise and

employment within Australia, is to only provide concessional tax treatment where the relevant

activity of the OBU is in fact conducted in Australia.

In broad terms, “offshore banking” involves an Australian based financial institution (or other

qualifying financial services provider) providing, from Australia:

financial intermediation services for borrowers and lenders located outside of Australia;

and/or

other financial services to non-residents in relation to transactions that do not otherwise

involve Australia.

For example, in a simple case, offshore banking might involve the OBU of an Australian

authorised deposit-taking institution (bank) lending US dollars to a borrower based in Asia,

where that Australian bank had sourced those US dollars from a US lender. In this sense,

offshore banking involves the export of financial services from Australia which generates

employment and benefits the Australian economy more generally.

Taxation measures to promote offshore banking in Australia have taken the following major

forms:

First, the introduction from July 1986, of an exemption from interest withholding tax on

interest paid by an Australian based financial intermediary to a non-resident where that

Australian financial intermediary borrowed funds from one or more non-resident lenders.

In this regard, in his Second Reading Speech to the Bill that introduced this measure, the

then Treasurer noted the policy underpinning this measure was “to encourage the

development of offshore banking in Australia”.3

Secondly, the introduction with effect from July 1992 of the broader OBU regime, under

which an OBU’s net income (i.e. its “assessable OB income” less its “allowable OB

2 It is beyond the scope of this paper to provide a complete and detailed history of “offshore banking” and the development of

the OBU regime. However, Appendix A to this paper provides a chronological summary of the major developments. See also

the paper by Steve Southon, OBU Reform, given at The Tax Institute’s 2011 Financial Services Taxation Conference, and in

particular the Appendix thereto. 3 Refer to items 1 to 4 of Appendix A.



deductions”) is only taxed at a 10% effective rate instead of the standard company tax

rate, currently 30%. In this regard, the introduction of the measure was foreshadowed by

the Commonwealth Government’s “One Nation” Economic Statement published in

February 1992.4 In that statement, the Government noted:

“A 10 per cent tax rate for profits from offshore banking will provide further stimulus to

the development of offshore banking in Australia at a time when such activity might

be shifted from Hong Kong to elsewhere in the Asia Pacific region. … Development of

offshore banking in Australia would help to integrate Australia more closely with the

Asia Pacific growth economies by becoming an expanding financial centre of the

region.”

Thirdly, the continuing expansion of the scope of the OBU regime since its inception in

1992 through successive legislative amendments up to, but, yes, stopping in,1998.5 In

particular, the range of “OB activities” (i.e. activities that can generate “assessable OB

income” entitled to the concessional tax rate) has been progressively expanded. For

example, in 1996 the statutory definition of “investment activity” (which is a type of “OB

activity”) was broadened to permit OBUs undertaking funds management services for

non-residents to invest in Australian assets (subject to a 10% limit). In this regard, in his

Second Reading Speech to the Bill that introduced this measure, the Hon. Chris Miles

M.P. said:6

“These amendments have the potential to bring about a large increase in the level of

offshore funds managed by Australian banks and enhance the development of

Australia as a financial centre in the Asia Pacific region.”

It is apparent that since 1998, the appetite of Government to enhance the regime has waned.

The report by the Australian Financial Centre Forum issued in November 2009 (Johnson

Report) made several recommendations to enhance the regime7 and provided the

Government with the opportunity to instigate further reforms. Alas, this was not to be. Instead,

the former Rudd-Gillard-Rudd Government in:

May 2010, stated its support “in principle” for the OBU regime;8

August 2012, reconfirmed its commitment to implementing the recommendations in the

Johnson Report;9 and

May 2013, announced that changes would be made to the regime to “close loopholes”,

and that the Government would consult with industry on issues raised in the Johnson

Report – this was followed shortly by the Discussion Paper in June last year.10

4 Refer to items 5 and 6 of Appendix A.

5 Refer to items 11 to 14 of Appendix A.

6 Refer to item 12 of Appendix A.







The willingness of the relatively new Coalition Government to implement the

recommendations of the Johnson Report regarding OBUs and to favourably consider other

requests from industry (refer to section 6 below) is not yet clear. Based on the Treasurer and

Assistant Treasurer’s Joint Media Release on 6 November 2013,11

it is apparent that the new

Government has some integrity concerns with the OBU regime.

The Government recently announced that the start date for any of the reforms that it makes to

the OBU regime will be 1 July 2015.12

Significantly, in that announcement, the Assistant

Treasurer foreshadowed that the OBU reforms would encompass not only those measures

arising from the 2013/14 Budget proposals that it approved, but also a legislative response to

some of the recommendations included in the Johnson Report.

A 1 July 2015 start date should hopefully provide the Government with time to consult with

industry in a comprehensive and meaningful way. However, the Government’s challenge will

be whether it can put their integrity concerns in perspective, whilst enacting much needed

enhancements to the OBU regime – consistent with Australia’s aspiration to be a major

international financial centre, and to have some hope of competing against Singapore in

particular.





3 Overview of the OBU regime

Division 9A of Part III of the ITAA36 contains the main rules for the OBU regime with the

interest withholding tax exemption housed in Division 11A. Set out below is a brief overview of

the more significant OBU rules. An appreciation of the way the OBU rules operate is

important when attempting to understand the rest of this paper – especially, the industry’s

requests and the reforms proposed in the 2013-2014 Budget and in the Discussion Paper.

3.1 Conceptualising the OBU

An OBU is not a separate legal entity, nor even a separate taxpayer. Instead it is a “unit” (or

notional division) within a taxpayer that conducts OBU and potentially other (non-OBU)

activities.

Subsection 128AE(2) confers power on the Treasurer to declare certain types of “persons” to

be an “offshore banking unit”.13

This list of eligible “persons” is exhaustive. Relevantly, it

includes authorised deposit-taking institutions, foreign exchange dealers, life insurance

companies, appropriately licenced fund managers and wholly owned subsidiaries of an OBU.

At present there are approximately 14614

entities that have been declared to be OBUs,

although many appear to be either dormant or relatively inactive.

These types of taxpayers are typically part of large income tax consolidated groups (TCG).

Where one or more members of a TCG are OBUs, then the head company of that TCG is

effectively deemed to be an OBU. In this regard, s.717-710 provides:15

“Division 9A … applies to the *head company of a *consolidated group as if the head

company were an OBU … at a time when a *subsidiary member of the group is an

OBU …”

References in this paper to an “OBU taxpayer” are to a taxpayer that either itself has been

declared to be an OBU, or is the head company of a TCG with at least one TCG member that

has been declared an OBU.

13 Subsection 128AE(2) is expressed to be only for the purposes of the withholding tax rules in Division 11A of Part III of the

ITAA36. However, s.121C (in Division 9A) includes a definition of “OBU” which incorporates the meaning of “offshore banking

unit” in Division 11A. 14

Determining the precise number of OBUs is not as easy as one would have thought! The ATO previously periodically

published a list of OBU taxpayers. However, the ATO has now ceased this practice. The last version of the ATO list located by

the Authors is dated 21 December 2011. Accordingly, to determine the current number of OBU taxpayers, it is necessary to

look through the Gazettal Notices post that date to determine additions to (and, recently, removals from) that list. That exercise

has revealed the estimated (but not confirmed) number of OBUs indicated above. 15

On one view, the single entity rule in s.701-1 would operate to have this effect in any event.



3.2 Concessional tax rate

The taxable profit of an OBU taxpayer is effectively taxed at 10% rather than the standard

company tax rate which is currently 30%. However, rather than calculating 10% of the OBU’s

net taxable profit, and then adding that amount to the rest of the OBU taxpayer’s taxable

income, both the assessable income and allowable deductions of an OBU are reduced to

achieve the same result. In this regard, s.121EG does this by:

reducing the amount of the OBU taxpayer’s “assessable OB income” to the “eligible

fraction” (currently, one-third of 30%) to result in an effective 10% rate; and

reducing the amount of “allowable OB deductions” that the OBU taxpayer can deduct

against their assessable income to the same “eligible fraction”.

Furthermore, s.121EG(3A) deems the amount of foreign income tax paid by an OBU taxpayer

on its “assessable OB income” to be reduced to the same “eligible fraction”. This effectively

reduces an OBU taxpayer’s foreign income tax offset entitlement to only one-third of the

amount that it would otherwise be.

Naturally, and in accordance with the policy of the OBU regime, the above rules elicit a strong

incentive to book as much OB eligible income as is possible through the OBU to obtain the

10% tax rate.

3.3 Assessable OB income

The term “assessable OB income” is defined in s.121EE(2). In this regard, it is “so much of

the OBU’s assessable income” for the year of income that is either “derived from OB activities

of the OBU” or “included in the assessable income because of such activities”. However, this

is subject to an exception: an amount of an OBU taxpayer’s assessable income is not

“assessable OB income” “to the extent that the money lent, invested or otherwise used in

carrying on the activities is non-OB money”.

Accordingly, the meanings of “OB activity” and “non-OB money” are critical.

3.3.1 OB activity

The term “OB activity” is exhaustively defined in s.121D and constitutes the activities set out

below. However, these activities are only “OB activities” if, in each case, importantly, the

activity is undertaken by an OBU in a way that satisfies the “OBU requirement” in s.121EA

(refer section 3.3.2 below).

For the purposes of determining whether an OBU taxpayer carries on an “OB activity”, per

s.121EB, an OBU taxpayer must treat its permanent establishments in Australia through

which it conducts OB activities as the “OBU” and any other permanent establishments (either



in or outside Australia) as separate “persons”.16

This is significant because it means that in

some cases dealings between an OBU taxpayer’s OBU and DBU or foreign permanent

establishment can constitute OB activities of the OBU.

To avoid issues around the source of income, s.121EJ provides that income of an OBU

taxpayer that is derived from “OB activities” is taken to be derived from a source in Australia.

This deeming provision does not prevent a foreign jurisdiction from also treating some or all of

that income as locally sourced. This brings into play the operation of Australia’s foreign

income tax offset rules (refer to section 3.8).

Borrowing and lending activities (s.121D(2))

This activity involves the borrowing from or lending of money or gold to an “offshore person”.

Where that offshore person is either (i) an associate of the OBU taxpayer or (ii) an Australian

resident carrying out their business through a foreign permanent establishment and is not

another OBU, then that money must be denominated in a foreign currency to be an eligible

borrowing or lending activity.

An “offshore person” is defined in s.121E as, broadly:

a non-resident whose “involvement” in the OBU related activity does not occur through an

Australian permanent establishment;

a resident whose “involvement” in the OBU related activity occurs through an overseas

permanent establishment; or

another OBU that, where applicable, the “doing” of the “thing” does not involve “non-OB

money” (refer section 3.3.3 below).

Guarantee-type activities (s.121D(3))

The “guarantee-type” activities specified in the subsection include the OBU taxpayer providing

guarantees or letters of credit to an offshore person. Other activities include underwriting an

offshore risk for an offshore person, syndicating a loan for an offshore person or issuing a

performance bond to an offshore person. If the relevant offshore person is a “related

person”,17

then any money payable under the guarantee, letter of credit, underwriting, loan or

performance bond must be denominated in a foreign currency.

Trading activities (s.121D(4))

This activity involves the OBU taxpayer trading with an offshore person in certain prescribed

types of financial instruments/securities, including shares/units in non-resident

16 The parts of an OBU taxpayer’s Australian/domestic operations that do not form part of their OBU are typically collectively

referred to as that OBU taxpayer’s “Domestic Banking Unit” or “DBU”. 17

The term “related person” is defined in s.121C as an “associate” (per s.318) of the OBU taxpayer or a permanent

establishment (either in or outside Australia) of the OBU taxpayer.



companies/trusts, “eligible contracts”, securities issued by non-residents, or certain

option/rights in respect of the foregoing. This activity also includes trading with an offshore

person in A$ or a foreign currency (or options/rights in respect of a foreign currency) or

trading with an onshore person in a foreign currency only. Other types of activities are also

included in the definition in this subsection which concern trading in certain base and precious

metals. However, somewhat anomalously, trading in soft commodities, such as wheat and

sugar, is not included.

Eligible contract activities (s.121D(5))

This activity involves entering into an “eligible contract” (other than a loan contract) with an

offshore person. The term “eligible contract” is defined in s.121C as “a futures contract, a

forward contract, an options contract, a swap contract, a cap, collar, floor or similar contract or

a loan contract”. In other words, eligible contract activities encapsulate entering into all types

of defined “eligible contracts” except for loan contracts.

Investment activities (ss.121D(6), (6A) and (6B))

This activity involves the OBU taxpayer (acting in a broker, agent or trustee capacity) making

an investment for the benefit of a non-resident not acting through an Australian permanent

establishment (per s.121E(a)). The investment must not be made in Australian currency, and,

if the investment involves the purchase of any “thing”, then, broadly, that “thing” must be

located outside of and not be connected with Australia.

The scope of this activity was expanded in 1996 by the insertion s.121D(6A)18

and, again, in

1998 by the insertion of s.121D(6B).19

In particular, s.121D(6A) provides that an “investment

activity” is also the managing by an OBU of a “portfolio investment”20

where the portfolio

investment is managed for the benefit of a non-resident and certain other conditions are

satisfied. Significantly, the OBU is permitted to include “not more than 10%” of Australian

based assets in the “portfolio investment”.

Advisory activities (s.121D(7))

This activity involves the OBU taxpayer providing “investment or other financial advice” to an

offshore person. Where that advice is in relation to a particular investment, then that

investment must not be made in Australian currency, and must be located outside of and not

be connected with Australia.



20 The definition of “portfolio investment” is contained in s.121DA(1) and means all of the investments being managed by the

OBU taxpayer for the relevant non-resident.



Hedging activities (s.121D(8))

This activity involves the OBU taxpayer hedging its own interest rate or currency exchange

rate exposure by entering into a “financial arrangement”21

with an offshore person, but only

where the exposure arises in respect of borrowing or lending activities.

3.3.2 The “OBU requirement”

Section 121EA articulates the “OBU requirement”, which legislates the policy objective of

ensuring an OBU taxpayer undertakes its activities in Australia:

“For a thing done by an OBU to be an OB activity, it is necessary that, when the thing

is done:

(a) the OBU is a resident and the thing is not done in carrying on business in a

country outside Australia at or through a permanent establishment of the

OBU; or

(b) the OBU is a non-resident and the thing is done in carrying on business in

Australia at or through a permanent establishment of the OBU.”

3.3.3 Non-OB money

Section 121C defines “non-OB money” as, broadly, money of the OBU, other than money:

received by the OBU in carrying on an “OB activity”;

paid by a resident “owner” of an OBU taxpayer (such as a holding company) to subscribe

for shares in the OBU taxpayer;22

and

paid by a non-resident (not acting through an Australian permanent establishment) to

subscribe for shares in the OBU taxpayer.

3.4 Allowable OB deductions

Where an OBU taxpayer has an OBU and a DBU, it is necessary to apportion that taxpayer’s

expenses between its OBU and DBU. The way in which this ought to be done is the subject of

some recent controversy and is one of the areas currently being considered by Treasury and

Government (discussed in detail in section 7 below).

21 The term “financial arrangement’ is defined in the TOFA rules in Division 230 (refer ss.230-45 and 230-50). This term was

substituted for “contract” by the legislation that introduced Division 230. 22

Refer to the definition of “OBU resident-owner money” in s.121EC. Also refer to section 3.7 below which deals with the use of

“OBU resident-owner money”.



Currently, the OBU regime contains a statutory expense allocation mechanism in s.121EF. In

this regard, in calculating an OBU taxpayer’s “allowable OB deductions”, the two key

components are the taxpayer’s “exclusive OB deductions” and its “general OB deductions”.23

3.4.1 Exclusive OB deductions

Subsection 121EF(3) defines an “exclusive OB deduction” as follows:

“An exclusive OB deduction is any deduction (other than a loss deduction [24

])

allowable from the OBU's assessable income of the year of income that relates

exclusively to assessable OB income.”

3.4.2 General OB deductions

Subsection 121EF(4) defines a “general OB deduction” as follows:

“A general OB deduction is so much of any deduction (other than a loss deduction, an

apportionable deduction, an exclusive OB deduction or an exclusive non-OB

deduction) allowable from the OBU's assessable income of the year of income as is

calculated using the formula:

”

Therefore, “general OB deductions” relate to both the OBU taxpayer’s “OB activities” (i.e. its

OBU) and its “non-OB activities” (i.e. its DBU). Such expenses will effectively be deductible at

a rate somewhere between 10% and 30%, having regard, broadly speaking, to the proportion

of the taxpayer’s assessable OB income to its total assessable income, as adjusted.25

3.4.3 Exclusive non-OB deductions

An “exclusive non-OB deduction” necessarily cannot be a “general OB deduction” (and,

therefore, is not subject to DBU/OBU apportionment).26

Subsection 121EF(6) defines

“exclusive non-OB deduction” as follows:

23 Subsection 121EF(2) defines “allowable OB deductions”. In addition to “exclusive OB deductions” and “general OB

deductions” the definition includes “apportionable OB deductions”. The term “apportionable OB deductions” relates to

“apportionable deductions” (as defined in ss.6(1) and 995-1) as, broadly, deductible gifts to deductible gift recipients and certain

rates and land tax deductible under s.25-75. Further discussion of this subject is beyond the scope of this paper. 24

A “loss deduction” is defined in s.121EF(7) as any allowable deduction under Division 36 of the ITAA97 – i.e. dealing with

deducting prior year losses. A further discussion of this topic is beyond the scope of this paper. 25

Deductions for interest and discount are subtracted from both assessable OB income and total assessable income so as to

arrive at “adjusted” amounts: s.121EE(4) and (5). 26

In this regard, there is naturally a preference for an OBU taxpayer’s expenses to be “exclusive non-OB deductions”.

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s121c.html#exclusive_ob_deduction

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s121c.html#loss_deduction

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html#assessable_income

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s6.html#year_of_income

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s121c.html#assessable_ob_income

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s121c.html#general_ob_deduction


http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s121c.html#exclusive_ob_deduction

http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s121c.html#exclusive_non-ob_deduction






“An exclusive non-OB deduction is any deduction (other than a loss deduction)

allowable from the OBU's assessable income of the year of income that relates

exclusively to assessable income that is not assessable OB income.”

3.5 OB money and the “purity test”

The so called “purity test” in s.121EH is aimed at deterring the excessive use of non-OB

money by the OBU. In simple terms, if more than 10% of an OBU’s assessable income for an

income year is attributable to activities that used non-OB money, then the OBU is “blown up”

for that particular income year, i.e. the 10% concessional tax rate will have no application to

any of the OBU’s income in the relevant year.

More precisely, s.121EH(a) hypothesises that the exception in s.121EE(2) (refer to section

3.3 above) does not apply. In this regard, if “more than 10% of what would then be the OBU’s

assessable OB income of any year of income would be attributable to … use of non-OB

money”, then s.121EG(1) does not apply to reduce the OBU taxpayer’s OB assessable

income (per s.121EH(c)). Concomitantly, the amount of the OBU taxpayer’s eligible OB

deductions is also not reduced (per s.121EH(d)).

3.6 Interest withholding tax exemption

Section 128GB provides an exemption from Australia’s 10% interest withholding tax that

might (refer next paragraph) otherwise be imposed under s.128B on “offshore borrowings” or

“offshore gold borrowings” made by OBU taxpayers. However, in broad terms, under s.128NB

(in conjunction with the Income Tax (Offshore Banking Units) (Withholding Tax Recoupment)

Act 1988) that withholding tax is effectively recouped if the OBU fails to use the resulting “tax

exempt loan money” or “tax exempt gold” in an eligible OB activity.

As an OBU taxpayer will frequently raise money for its DBU from overseas in a way that

qualifies as an “offshore borrowing”, then the OBU taxpayer will need to choose to book the

borrowing through its DBU27

and the borrowing will not be subject to the interest withholding

tax exemption under s.128GB (but possibly may be exempted under another provision, such

as s.128F).

3.7 Use of “OBU resident-owner money”

Section 121EK applies where a non-OBU taxpayer capitalises a subsidiary that is an OBU

taxpayer and that OBU taxpayer then uses (or holds ready to use) some or all of that money

(the relevant amount is referred to as “the OB use amount”). The perceived “mischief” here is

that the non-OBU taxpayer could borrow the funds in question and deduct the interest

expense at a 30% rate, whereas the OBU will use that money to derive income assessable at

an effective 10% rate. If this section is activated, then broadly:

27 This “choice” principle is discussed in more detail in section 7.4 below.







http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s121c.html#assessable_ob_income



The (non-OBU) “owner” of the OBU taxpayer must include an amount of deemed interest

in their assessable income. The interest is calculated by taking 90% of “the OB use

amount” as the principal and then calculating interest on a daily-rests basis for the “OB

use period”28

at a rate that is 2% above the 90-day bank bill rate from time to time during

that period.

The OBU taxpayer can deduct that same amount as an “exclusive OB deduction”.

3.8 Foreign income tax offset (FITO) rules

An OBU taxpayer is entitled to claim a FITO in respect of foreign tax paid on income derived

from OB activities. However, s.121EG(3A) operates to limit the amount of that FITO to an

effective 10% rate. That subsection does this by deeming the amount of foreign tax paid to be

reduced to the eligible fraction. This interacts with s.770-10 which provides the conditions for

a taxpayer’s FITO entitlement, including that an amount of foreign income tax is paid.

3.9 Administrative guidance

The ATO has published various material to assist OBU taxpayers in applying the OBU rules.

The material includes several series of Taxation Determinations and a number of edited

private binding rulings on the ATO’s database of edited PBRs dealing with OBU matters.

3.10 OECD view of the OBU regime

The Committee on Fiscal Affairs for the Organisation for Economic Co-operation

Development (OECD) undertook a multi-year project reviewing harmful/preferential tax

regimes in OECD countries. In its 2004 Progress Report, the OECD stated:

“13. The Australian Offshore Banking Unit regime and the Canadian International

Banking Centre regime caused some concerns under the ring fencing criterion. In its

overall assessment, the Committee determined that these potentially harmful regimes

were nevertheless not actually harmful on the basis that they do not appear to have

created actual harmful effects. This determination was made on the specific facts

relating to the current limited nature and reduced scope and size of the regimes. Of

crucial importance to this determination was the fact that the relevant countries apply

very high standards regarding transparency and exchange of information for tax

purposes.”

Since that report, and especially more recently, the OECD and the G20 have become

increasingly concerned about corporate base erosion and profit shifting (BEPS). Much work

on identifying and reaching international consensus on responses to BEPS is in train in 2014

28 The “OB use period” is the period in an income year during which the OBU uses or holds ready to use the relevant amount

from the “owner” (refer to s.121EK(a)).



– the year in which Australia is president of the G20. It is not clear just how far Australia could

expand/improve its OBU regime without incurring the wrath of the OECD and our international

friends. However, that should not stop us from trying to make our rules more workable and

competitive. Certainly, we should be able to make substantial improvements and still maintain

“very high standards regarding transparency and exchange of information for tax purposes”.

More specifically, BEPS Action 529

proposes to revive the harmful/preferential tax practices

work of the OECD that withered away (except in relation to transparency) in the mid-2000s,

largely due to US objections to the work:

ACTION 5

Counter harmful tax practices more effectively, taking into account transparency and

substance

Revamp the work on harmful tax practices with a priority on improving transparency, including

compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring

substantial activity for any preferential regime. It will take a holistic approach to evaluate

preferential tax regimes in the BEPS context. It will engage with non-OECD members on the

basis of the existing framework and consider revisions or additions to the existing framework.

The main principle now adopted in the harmful practices area is requiring “substantial activity”

for any preferential regime to be acceptable, which is consistent with the general BEPS theme

of separation of income and the activities generating it. The Australian Treasury Scoping

Paper identifies that this policy is what is new – previously it was necessary that the income

be mobile, but not that there was separation of activities and income. The method for judging

preferential regimes instead was a balance between ring-fencing (bad – and now largely

abandoned by countries’ tax regimes) and transparency (good).

There is no singling out of any particular regime in the BEPS Action Plan. One potential target

in light of recent developments may be “patent boxes”. These are regimes that tax income

from intangibles at low rates as a means of encouraging the location of intangibles in a

country. They have spread in Europe, including the UK which justifies its regime as a way of

attracting/keeping UK based R&D rather than mobile income alone.

As noted above, the Australian OBU regime was given a clean bill of health previously by the

OECD, because of the limited nature and small scope and size of the regime and of the fact

that Australia applies very high standards regarding transparency and exchange of

information for tax purposes. Will the answer be different under the BEPS revised regime?

29 Action Plan on Base Erosion and Profit Shifting, OECD, Paris, July 2013, at page 18.



4 How are OBUs currently being

used? (Does OBU really stand for

Only Barely Usable?)

4.1 Introduction

The fact that there are approximately 146 OBUs currently registered suggests that there is

certainly an aspiration to use the OBU concession. However, the number of active OBUs (i.e.

those completing OBU items in tax returns) appears to be less than half of that number as

can be seen from the table below. Those returns show that in most years less than 2% of

financial and insurance services (F&IS) net income is being earned from OBU activity and,

indeed, that net OBU income appears to have peaked in the 2006-07 income year and has

decreased ever since. This would imply that this aspiration is not always realised and the gap

between the desire to use OBUs and their actual usage has given rise to the numerous

soundings, surveys, submissions, papers and proposals over the last 20 years.

TABLE: OBU usage 2001 – 201130

30 Unless otherwise noted, the data in this table is taken or derived from the ATO’s annual Taxation Statistics publications. Net

OBU income and Net F&IS income are net profit numbers. The most recent (as at January 2014) ATO data only covers up to

and including the 2010-11 year. 31

For the years 2001-02 to 2007-08, the number of OBUs is taken from the paper by William Potts, OBU Reform, at The Tax

Institute’s 2011 Financial Services Taxation Conference. For the years 2008-09 and 2009-10 the number is an estimate only.

The figure of 133 for the 2010-11 year is from a list of OBUs as at 12 July 2011, as provided by the ATO.

Number of OBUs

31

Companies with OBU income

Net OBU income

Net F&IS income

OBU income as a

proportion of F&IS income

2001-02 76 60 $243m $70,872m 0.34%

2002-03 78 45 $269m $70,193m 0.38%

2003-04 85 40 $374m $42,913m 0.87%

2004-05 92 35 $443m $71,328m 0.62%

2005-06 95 35 $809m $90,566m 0.89%

2006-07 101 50 $1,607m $99,255m 1.62%



4.2 Some reasons for lack of OBU activity

The reasons for this gap have been well documented elsewhere and are probably best

summarised in the Johnson Report which followed extensive industry consultation and

feedback. Based on the Johnson Report and other observations since that time the main

reasons for the lack of OBU activity appears to stem from:

1. A lack of a clearly defined ownership of the OBU within an organisation. The chasm

between the in-house tax function and on-the-ground deal originators is a chasm of

knowledge and a lack of knowledge. This is especially the case because matters of tax bring

an element of fear of the unknown and a fear of being responsible for the unknown to what is

potentially an already complex and complicated transaction. The larger the organisation, the

larger this gap. The fear of using OBUs has certainly not been helped much by recent press

on the alleged misuse of the concession.

2. A lack of properly structured remuneration arrangements to reward deal originators

for using OBUs. This results from reluctance of organisations to make the up-front investment

necessary to utilise the OBU concession, as the potential benefit does not outweigh the cost

involved. Some organisations may have a greater focus on pre-tax profit, or conversely, place

a high value on imputation credits within the home jurisdiction (see below) and therefore the

reduced entity tax rate may not justify the significant cost of compliance involved.

3. The additional and complex internal controls and systems to aid compliance with the

myriad of rules relating to the operations of an OBU. The controls do need to be robust, do

need to be continually strengthened and updated and do need to be extensive and range

from front office through middle office and down through (that last line of defence) back office.

Those controls come at a cost but are typically one-off spends. In this regard, if one can get

technology working to aid compliance, then it is a huge a help to the continual vigilance

required under the compliance burden.

4. Accounting systems that do not distinguish between offshore and domestic

transactions. Once again, a one-off spend may be required but most modern systems provide

multi-“entity” functionality.

5. Complexity of the OBU rules. The adequacy/inadequacy or, indeed, clarity of the

rules will be dealt with elsewhere in this paper. However, perhaps a question worth asking is:

“Is the number of rulings and determinations, and general discussion on OBU matters

“outsized” in relation to the mere 12 or so pages that the words of the main part of the regime

2007-08 117 45 $1,514m $95,091m 1.59%

2008-09 125 45 $1,342m $19,021m 7.06%

2009-10 130 50 $1,267m $57,883m 2.19%

2010-11 133 55 $1,092m $83,585m 1.31%



comprise in the Tax Act?”. If the answer is “Yes” this suggests something is clearly wrong with

the way those current rules are drafted.

6. The lack of certainty surrounding the choice principle. Much has been written on the

need to retain this principle but what often receives little mention - or gets diluted by other

concerns - is that Australian banks source approximately 40% of their funding from offshore

sources. A lack of “choice” would deliver these funds into the banks’ OBU which has no need

for these billions of funds and leaves the domestic part of the bank (i.e. the DBU) with a

shortfall and unable to fund its obligations to its domestic customers. The “trapped” funds in

the OBU cannot be on-lent to the DBU without triggering an interest withholding tax (IWHT)

clawback and creating issues in relation to purity test.

8. A lack of awareness amongst many financial market participants of the potential

benefits of the OBU regime. While this may have been the case at the time of the Johnson

Report, recent page press would have certainly boosted awareness of the regime. However,

this more recent publicity may have also sowed doubts in the minds of prospective users

around the regime’s suitability and appropriateness.

9. The language of the legislation is now out of date with the modern banking and

financial services industry (e.g. Islamic financing and trade finance products are simply two

examples). Current financial services activities are diverse and do not fit comfortably within

the prescriptive nature of the existing OBU provisions.

10. The fact that many organisations, especially foreign owned ones, appear to have

concluded that the Singaporean Financial Services Incentive Scheme, discussed in the next

section of this paper, is considerably more attractive and user-friendly than our OBU regime.

Not many organisations have the size/scale of activities to support two regimes with the same

broad objectives in the same geographical region.

4.3 Some further observations

Beside the abovementioned real or perceived hindrances to the OBU regime’s growth and

development, the Authors would make the following further observations:

An entity proposing to use an OBU must have enough eligible income to make it

worthwhile. Given the previously mentioned set up costs, the income must be somewhat

sustainable year-in-year-out to make it truly worthwhile. Pre-TOFA, one of the reasons for

not booking income to OBUs by Australian based foreign banks was the variability in tax

outcomes given the unrealised/realised portion of a large swap book. Those banks

typically do not have the offsets that a large Australian trading bank would have through

its extensive retail base. As a result booking business to an OBU only subsequently to

find that the entire branch in a loss making position would have been counterproductive.

While TOFA has alleviated this situation somewhat, its legacy remains. In this regard, a

typical response from these banks is that they looked at using OBUs “years ago” but

could not see the value.



Education is critical. Unless a “whole of process” approach is taken, it simply will not

work. Everyone involved in the transaction process needs to understand not just what

needs to be done, but why. It is this easy step that is critical in surmounting the various

and often complex operational issues that arise in managing an active OBU.

The GFC changed the global landscape. Foreign banks operating in Australia suffered

from the ill winds that blew across the US and Europe and withdrew from some non-core

and indeed core activities in the light of constrained and often imperilled balance sheets.

Survival rather than matters relating to OBUs were paramount. Indeed the post-GFC

consolidation of the banking industry has potentially led to fewer active OBUs and less

diverse activities being conducted by those OBUs, given banks’ post-GFC preferences for

vanilla rather than complex transactions. Conversely, Australian banks have taken the

opportunity to send teams offshore to claim the space vacated by international banks in

general corporate lending and also in asset financing as international banks restore

balance sheets and divest assets.

Finally, recent press relating to OBUs on both the expense allocation front and proposed

changes to the regime have created concern and confusion for both current and

prospective users. To ensure a sustainable and robust regime, these issues need to be

resolved quickly. Perhaps that is the ideal opportunity for the Government to voice more

than “in principle” support for the regime.

4.4 The impact of franking credits on OBUs

Depending on franking credit balances, and investor demand for those credits, Australian

domestic organisations may place a high-value on franking credits.

This in itself deters Australian-based organisations from establishing or expanding presence

in offshore locations (e.g. Singapore), as the benefits from being in those locations, not just

tax benefits, is offset by the non-generation of franking credits.

Similarly, the benefit of the OBU concession is reduced with the more importance

organisations place on those franking credits, and a large volume and deal sizes are required

to justify the additional costs in establishment and maintenance of an OBU.

4.5 So, are OBUs only barely usable?

The original drafters view was probably “Build it and they’ll come”. Well, for the financial

industry to come, first, the OBU regime must be useful and secondly it must be usable. OBUs

are incredible useful to a bank that has a large diverse business with genuine offshore

business with offshore clients.



4.5.1 Useful?

On the asset side of the balance sheet, the OBU tax concession feeds into investment or

lending decision-making models with the lower tax rate operating to effectively better enable

an OBU to meet the required internal hurdle rates and therefore assisting with the stated

purpose of the regime: winning business to Australia that would otherwise go to more

competitive jurisdictions. In this respect, the OBU regime is in theory largely fit for purpose,

bearing in mind the significant limitations and outdated nature of the rules as explained at

various points in this paper.

On the liability side, the IWHT exemption is essential in providing IWHT-exempt funding to

underpin those assets as well as for the purposes of bringing much needed offshore funding

to Australia.

In addition, the concession also helps to attract and hold certain activities in Australia.

Witness a number of hedge funds which have been gazetted as OBUs in recent years. These

funds are highly mobile global macro style funds with a lot of their activity being OBU eligible.

Hedge funds typically seek funds from global Institutional investors and part of the due

diligence conducted by potential investors is post-tax returns. The OBU concession greatly

helps with this aspect.

Unfortunately, the attractions of centres like Singapore - above and beyond any tax

considerations discussed later in this paper (i.e. lower personal income tax, a larger ex-patriot

community, cultural diversity, a time zone in a better position in relation to the UK and the US

(in the sense of being more convivial with European and American time zones) and being part

of the Asian Century) - has meant the loss of some key talent and profitable businesses to

those centres.

4.5.2 Usable?

So OBUs are useful and the regime in some ways is fit for purpose. But are OBUs usable?

The OBU tax return data set out in the table earlier would suggest that they are useful, usable

and being used, albeit to a somewhat limited extent. But what are banks and other OBUs

actually using them for?

Ignoring the complexity of the OBU rules, as a consequence of the increased globalisation of

businesses, large and/or complex transactions do not always sit or fit neatly in any single

jurisdiction.

Assuming that Australia can be established as the correct booking jurisdiction for a

transaction under tax principles, what types of banking/finance transactions typically get

booked to an OBU?

1. Loans (and lots of them!): Project finance, acquisition finance, leveraged finance, gold

loans, floating rate loans, fixed rate loans, syndicated deals, club deals, bond and note

purchases, etc.



What’s been financed? -Toll roads, ships, planes, ports and airports in all parts of the world,

copper mines in Laos, LNG pipelines in PNG, property in the UK, energy projects in Chile,

pubs in NZ, and shopping centres in the US etc.

Who is being financed? Construction companies, private equity firms, telecoms, food and

beverage companies, commodity houses, brewers, pension funds, global banks, SPVs,

funeral companies, manufacturers, gaming companies, retailers, technology companies,

leasing companies, energy companies, infrastructure funds, healthcare companies, property

companies , miners, other OBUs, and related parties etc.

2. Liabilities, and lots of them. OB eligible assets need to be funded using eligible OB

money, which can include: bond and note issuance, deposits (ranging from vanilla to exotic)

commercial paper, etc.

Funding is from a variety of mainly foreign sources, including other banks, other OBUs,

related parties, family offices, private banks, central banks, supra-national entities, and

individuals.

3. Guarantee type activities: This includes the syndication of bond issuance for a variety

of international banks, multinationals and supra-national organisations (World Bank etc.) and

also of private placements for NZ companies into the US market. It also involves the issuing

of letters of credit to a variety of International clients and a host of trade finance deals where

none of the goods being transacted, the importer or exporter being financed, nor the exporter

being guaranteed payment nor an importer being guaranteed delivery, nor any credit

intermediary has any Australian nexus. Finally, it also covers the issuing of various

guarantees and performance bonds.

4. Trading activity:

a. The holding of (with the intention and subsequent sale thereof) equity and bonds in

offshore companies.

b. The trading of eligible contracts: CPI swaps, credit default swaps (CDS), interest rate

swaps, total return swaps, commodity swaps, forward contracts locking in price, interest rate

options (caps, collars, floors) and a vast number of futures contracts (ranging from NZ bank

bills, to Korean equities) on a wide variety of global exchanges.

c. The trading of foreign exchange and gold (spot, forwards and options) with a variety

of global counterparts and clients (and domestic counterparts and clients where permitted).

d. Trading in base and precious metals with offshore commodity houses and

exchanges.

e. Commodity activity warrants a separate mention and includes: milk contracts, pulp

swaps, fibre forwards, copper hedging, gold novations, cotton trades, oil hedging, aluminium

structures booked under either the trading or eligible contract activity provisions.

A perfect example of an OBU in full flight is where an offshore borrower borrows from an OBU

for, say, oil exploration, swaps the interest rate risk from fixed to floating (or vice versa) under

a swap with the OBU, hedges some of the anticipated FX exposures with the OBU, hedges



some of the oil price risk (hedging the value of future production) with the OBU and then

deposits any surplus funds with the OBU. A perfect deal! An OBU being useful and usable!

4.6 Some difficulties in day-to-day OBU operations

All of this might look plain sailing to a functioning OBU, however, issues abound. While some

of the omissions and contradictions in the legislation and suggested remedies will be dealt

with elsewhere in this paper, not all of the issues can be dealt with (or at least not easily)

through legislation. The following is a mere snapshot of some of the issues.

4.6.1 Who has been transacted with?

Dealing with partnerships and trusts is problematic as it is often difficult to establish the tax

residency of those partners and trustees, which may extend beyond typical “Know Your

Customer” requirements. A bank dealing with a client can only push so far or hard in attaining

answers to these questions and if the deal is a multi-bank global syndicate the borrower,

usually operating through their offshore agent, might refuse to respond to such questions as

there’s simply nothing in it for them and nobody else in the syndicate is asking those

questions. An OBU’s ability to incentivise them to answer through better pricing is absent in a

syndicated deal where the pricing is equal across all financiers.

Even more difficult is getting answers from hedge funds who participate in equity issues given

that they are notoriously protective about their investor base and operate through offshore

brokers.

Add to this the issue around an OBUs ability to identify, pre-deal, interbank counterparts when

dealing over electronic media which is now how most day to day interbank FX gets

transacted. In this scenario, there is no-one even to ask the question of in any

meaningful/timely manner.

If any of the above scenarios arise, there is no choice but to book the transaction to the DBU.

Where an OBU deals with an onshore broker in an activity that can only be done with an

offshore entity, while not a principal party to the deal, the onshore broker does receive

brokerage from the transaction from the OBU. This situation is even more complicated in the

futures market where the futures clearer of an OBU must be an OBU as the clearer is the

counterparty to the deal, not the offshore exchange on which it occurs.

4.6.2 The FITO rules

Under the foreign income tax offset (FITO) rules, an OBU can only claim one third of

withholding tax paid in a foreign jurisdiction. This appears to penalise OBUs as the global

effective tax rate for most transactions, depending on the margin on the transaction and the

rate of foreign withholding tax, will be greater than 10%. Alternatively, the same transactions

booked in the DBU would always have an effective tax rate of 30% as the full WHT can be

claimed as a FITO.



Accordingly, the OBU concession is effectively diminished where foreign tax is paid (and

therefore the FITO entitlement is reduced). As a matter of policy, the availability of the OBU

concession should not depend on whether or not the applicable foreign jurisdiction imposes

tax.

Whilst a lender can ask for a gross-up clause, a borrower in a multi-bank global syndicate

arranging a loan for, say, 20 subsidiaries in 15 jurisdictions is not likely to give the OBU (and

only the OBU) a gross-up clause.

4.6.3 Other issues

Try as an OBU might to avoid them, other issues occasionally arise. For example,

the Australian Prudential Regulation Authority (APRA), which monitors banks’ structural

liquidity, looks at liquidity on a consolidated basis. However, unfortunately, in a liquidity

crisis, an OBU has no central bank from which to borrow as a lender of last resort, as an

OBU cannot transact via repurchase arrangements or direct borrowings with the RBA, it

being a domestic entity. In addition, the treating of the RBA as an OBU would help vostro

business to be retained by Australian banks using their OBUs as this business will soon

be under threat from offshore operators looking for new markets to add scale to existing

operations in order to maximise returns on their investment in technology.

Collective loan loss provisions, by their very nature, are done on a whole bank portfolio

basis, whilst specific provisions need to be recognised in the OBU where relevant.

Inward and outward collateral may be managed by offshore branches (which are located

in better time zones), notwithstanding that some portion of the collateral being paid or

received may relate to an underlying OBU transaction.

Dodd Frank legislation in the United States has brought the introduction of mandatory

clearing rules but currently exchanges such as the LCH for swap clearing only allows for

a single instance of any bank branch meaning that an OBU cannot avail itself of the

facility and can potentially be in breach of Dodd Frank.

Domestically, how does a bank determine splits in front-end and on-going fees between

the OBU and the DBU when there are both domestic and offshore borrowers under a

single facility and the right to draw under that facility is not tranched or pre-determined?

If an offshore client deals in A$ FX this transaction may be booked to the OBU. The

hedging of this transaction is problematic in that the readily available and cheapest hedge

will almost certainly be an ineligible domestic counterparty. Obviously, that hedge cannot

be booked to the OBU but good risk management does not suggest waiting for an

offsetting client deal or indeed an eligible bank counterparty with which to transact.

generic FX trades are more easily hedged in the OBU but what to do with complex FX

options structures.



Likewise, where an OBU enters into a CDS with an offshore counterparty but cannot then

find an offshore counterpart for the exit might mean that the OBU simply can’t exit the

trade which is a rather dangerous position to be in.

Finally, how does an OBU deal with collateral or a guarantee offered by the domestic

parent of an offshore borrower?

These are just some of the issues often encountered by an active OBU in trying to garnish

offshore business to the OBU and yet maintain full compliance with the rules. The best

“solution” for an OBU faced with such issues is “When in doubt, don’t!”

4.7 Summary

So are OBUs only “barely” usable? The answers appears to be that they are more than just

“barely usable”, as there is much evidence of their usage and, as mentioned, they appear to

be fit for purpose in some respects. While their use requires a certain commitment in terms of

set-up time and costs along with ongoing maintenance, OBU data and anecdotal comments

suggest that some organisations hosting OBUs have found the effort worthwhile. However,

the road to those rewards is long, twisty and bumpy and sometimes even confusing. Some

rule changes coupled with a common sense approach to those issues which can’t easily be

legislated for will go a long way towards making the scheme even more usable and yet easing

compliance with the scheme. Perhaps a look at a comparative scheme, such as Singapore,

might shed some light on the way forward. As we note in the next section, the equivalent

Singaporean regime to our OBU appears currently to be considerably more attractive than our

concession.



5 Can we compete against Singapore

and other financial centres?

Australia is obviously not the only jurisdiction to introduce a tax incentive to promote “offshore

banking”. Considered below is Singapore’s Financial Sector Incentive Scheme (FSI Scheme),

as well as the United States’ International Banking Facility (IBF regime) – these being merely

two examples of financial sector style incentives operating in other countries. Whilst it is not

the Authors’ intention to oversimplify things, it could rightly be concluded that the FSI Scheme

has served Singapore extremely well in developing itself as an international financial services

hub, whereas the IBF regime has (much like Australia’s OBU regime) encountered difficulties

in attracting participants.

In short, our OBU regime is seriously behind, and as currently configured is unable to

compete (viewed from a tax incentive perspective and leaving aside other pros and cons),

with our main competitor in the region – the Singaporean FSI scheme.

There is plenty of anecdotal evidence to the effect that many, perhaps most, foreign owned

financial institutions with Australian operations have already voted with their feet. Even if they

formally retain Australian OBU status, many are dormant. They have concluded that the OBU

rules are too hard, too complex, too uncertain and too restrictive. Most of these institutions

have operations in Singapore that take advantage of the Singaporean FSI Scheme, to

Australia’s significant loss.

The Singaporean Government, including its tax and monetary authorities, is clearly committed

to its FSI Scheme; it has the right mindset. The Government is receptive to, and indeed seeks

out, enhancements that will improve the attractiveness and usability of the FSI Scheme –

hence the ongoing amendments to the FSI Scheme mentioned further below.

If a country really, seriously wants to attract mobile activities and transactions with a tax

concessional regime as an important (albeit not only) carrot, it needs to pay extremely close

and ongoing attention to what other countries are doing in the same field, especially if they

are in roughly the same geographical part of the world. Sadly, as a country, we appear to

failed in this respect, especially as regards Singapore.



5.1 Singapore’s Financial Sector Incentive Scheme

5.1.1 Background

The FSI Scheme was introduced with effect from 1 January 2004, by the merger of a number

of pre-existing incentive schemes.32

The object of the FSI Scheme is to encourage the

development of high growth and high value-added financial services in Singapore, for the

purposes of further developing Singapore’s (already well-established) position as a prominent

international financial services hub. As observed in the Singaporean Annual Budget

Statement of 3 April 2002, which introduced the new “umbrella” FSI Scheme:

“… financial sector activities are highly mobile. As global tax competition

intensifies and drives tax rates down, we need to provide more incentives to attract

and anchor cutting-edge activities to Singapore. We should therefore streamline

and update our existing incentives to keep them relevant and effective.”

Under the FSI Scheme, income derived by an approved financial institution (an FSI

awardholder), from qualifying activities, is subject to concessional rates of Singaporean

income tax. The rate of tax that applies depends on the relevant “award” which covers a

particular type of activity. There are now three broad categories of awards, taxed at 5%, 10%

or 12%, depending on the perceived “value-add”. Some further details about each of the

relevant “awards”, reflecting anticipated changes to the award categories announced in

Singapore’s 2013 Budget with effect from 1 January 2014, are set out below. As at the time of

writing, no amending legislation or regulation has been introduced to effect the changes

announced in the 2013 Budget.

5.1.2 Success of the FSI Scheme

The success of the FSI Scheme is borne out by data published by the Inland Revenue

Authority of Singapore concerning the number of “financial companies”33

reporting income

between 2004 and 2012, the growth of the chargeable (taxable) income attributable to such

companies, as well as the decrease in the average rate of tax applicable to that income as

reflected in the table34

below. We note that it is not necessarily the case that all “financial

companies” are FSI awardholders. Rather, this table illustrates the growth in the Singaporean

financial sector more broadly:

32 There were the following seven schemes previously in operation, some for many years: Approved Bond Intermediaries, Asian

Currency Units (ACUs), Approved Derivative Traders, Approved Fund Managers, Equity Capital Intermediaries, Operational

Headquarters, and Syndicated Offshore Credit and Underwriting Facilities. 33

A summary of the number of different types of financial entities operating in Singapore is attached as Appendix B to this

paper. In many categories (for example, the number of foreign banks), Singapore has considerably more market participants

than Australia. 34

This table was generated using statistics supplied by the Inland Revenue Authority of Singapore concerning Taxable

Companies by Economic Sector, which can be downloaded at: https://www.iras.gov.sg/irasHome/page.aspx?id=15060#CIT

https://www.iras.gov.sg/irasHome/page.aspx?id=15060#CIT



TABLE: Singapore financial services sector activity

Year Number of

financial

companies

Chargeable

(taxable) income

S$’000/US$’00035

Net tax assessed (and as a

percentage of total chargeable income)

S$’000/US$’00036

Comments

2004 3,403 S$10,051,255

US$7,900,789

Not provided Principal FSI Regulation came into effect from 1 January 2004. Parts of Reg 835/2010 deemed to come into effect.

2005 3,299 S$12,358,275

US$9,714,222

27.7%

2006 3,601 S$12,503,897

US$9,828,688

S$1,927,521

US$1,515,128

(15.5%)

Amendments to FSI regime. Regulation 260/2006 came into effect and parts of Regulation 586/2008 deemed to come into effect.

2007 3,758 S$17,507,425

US$13,761,711

S$2,833,853

US$2,227,550

(16.2%)

Parts of Regulation 586/2008, 54/2010 and 835/2010 deemed to come into effect.

2008 4,495 S$21,951,629

US$17,255,078

S$3,234,165

US$2,542,215

(14.7%)

Parts of Regulation 54/2010 and 835/2010 deemed to come into effect.

2009 4,969 S$18,998,912

US$14,934,095

S$2,835,445

US$2,228,801

(14.9%)

Parts of Regulation 54/2010 and 835/2010 deemed to come into effect.

Reduction in chargeable income likely the fallout from the GFC.

2010 5,155 S$21,574,449

US$16,958596

S$2,879,095

US$2,263,113

(13.3%)

The 2009 budget was viewed as a “race to the bottom” and the FSI Scheme was expanded to include more activities and income (see association of Corporate Council article from 22 April 2009).

2011 5,669 S$25,155,298

US$19,773,321

S$3,164,642

US$2,487,567

(12.6%)

Amendments to Regulations - Regulation 638/2011.

2012 6,249 S$25,568,294

US$20,097,957

S$3,303,260

US$2,596,528

Lack of growth in chargeable income relative to numbers of financial companies seems to

35 For comparative purposes we have translated S$ amounts into US$ at the spot rate applicable on 17 January 2014 (S$1 =

$US0.786050). 36

For comparative purposes we have translated S$ amounts into US$ at the spot rate applicable on 17 January 2014 (S$1 =

$US0.786050).



Year Number of

financial

companies

Chargeable

(taxable) income

S$’000/US$’00035

Net tax assessed (and as a

percentage of total chargeable income)

S$’000/US$’00036

Comments

(12.9%) be a likely fallout related to the European debt crisis.

5.1.3 OBU regime vs. Singapore’s FSI Scheme: some comparisons

FSI Scheme is able to be (and is) kept up to date regularly

In the Authors’ view, one of the key reasons for the success of the FSI Scheme (and an area

where it has a considerable advantage over the OBU regime) has been the relative ease with

which the FSI Scheme can be updated to reflect changes in financial market practices and

product innovation.

Whereas changes to the OBU regime are very infrequent and ad hoc, which could be

attributed at least partly to the fact that they can only be amended by legislation, or

regulations requiring Parliamentary sign-off, the Singapore Income Tax Act (SITA) gives the

Minister of Finance alone (rather than Parliament) authority to make and amend regulations

governing the FSI Scheme37

. Indeed, all of the operative rules governing the FSI Scheme are

contained in regulations (the FSI Regulations), which reflect the implementation of various

amendments (in 2006, 2008, 2010, 2011 and 2014) announced by the Singaporean

Government in many of its annual Budgets since the FSI Scheme was established.

It is clear that compared to our OBU regime, the FSI Scheme is nimble and progressive. The

last substantive amendments to the OBU regime were made in 1999, 15 years ago and well

before the FSI Scheme was even introduced!

Broad range and certainty as to qualifying activities

The bulk of the FSI Regulations detail the extensive list and descriptions of the qualifying

activities to which the various awards may apply. Two things immediately stand out from a

reading of the FSI Regulations:

Broad range of qualifying activities: considerable effort has gone into describing (and

keeping current) the broad range of activities covered by various awards. Merely a few

(far from comprehensive) examples, as regards which our OBU regime compares

unfavourably, of activities that qualify for certain awards specified in the FSI Regulations,

are as follows:

o Debt and equity securities lending and repurchase (repo) transactions

37 Refer to section 43Q of the SITA.



o Derivatives and associated physical trading in commodities, petroleum, emission

units and freight

o Islamic finance activities

o Custodian, nomine and trustee services

o Various types of other services, e.g. billing/administration services to non-resident

holders of credit cards.

Certainty: as a consequence of the specificity of the FSI Regulations, there appears to

be much less uncertainty, as compared to the OBU regime, as regards what things are or

are not covered.

Expense allocations and money rules

As compared with the rules comprising the OBU regime which are highly prescriptive as

regards, for example, expense allocations in s.121EF and the concept of “good” v “bad” OB

money, the FSI Regulations are decidedly more general. There is no concept in the FSI

Scheme analogous to our “non-OB money”, and the determination of “income chargeable with

tax” is ultimately left to the discretion of the Comptroller (analogous to the Australian

Commissioner of Taxation). Specifically, as regards expense allocations, FSI Regulation 9 (as

amended) provides:

“9. For the purposes of regulations 4, 4A, 5, 6 and 8, the Comptroller shall

determine —

(a) the chargeable income of the financial sector incentive company having regard

to such expenses, capital allowances and donations allowable under the Act as

are, in his opinion, to be deducted in ascertaining such income;

(b) the manner and extent to which any loss arising from the activities specified in

those regulations may be deducted under the Act in ascertaining the chargeable

income of the company; and

(c) the manner and extent to which any income should be excluded under

regulation 8(5).”38

38 In this regard:

Regulation 4 deals with 10% tax payable on qualifying income of FSI Standard Tier company;

Regulation 4A deals with 12% tax payable on qualifying income of FSI Standard Tier company derived on or after 1 January 2011;

Regulation 5 deals with 10% tax payable on qualifying income of FSI (headquarter services) company;

Regulation 6 deals with 10% tax payable on qualifying income of FSI fund management company;

Regulation 8 deals with 5% tax payable on qualifying income of FSI company (bond market, credit facilities syndication, derivatives market, equity market); and

Regulation 8(5) excludes income attributable to activities carried out in Singapore which add value to the commodities by physical alteration, addition or improvement of the commodities or relate to the storage or bulk-breaking of the commodities.

Note that the FSI Regulations also consider expense allocation in Regulation 4. However, this expense allocation is only

relevant for the purpose of working out the “qualifying base” of a taxpayer, being the base amount of qualifying income that

must be derived in order to benefit from the regime. The concepts of “specified income” and “specified loss” incorporate the



Subsection 37(2) of the SITA specifically deals with the apportionment of deductions where

different rates of tax apply. It provides:

(2) For the purposes of this section, unless otherwise provided in this Act or the

Economic Expansion Incentives (Relief from Income Tax) Act (Cap. 86), where a

person is a company whose income, if any, is subject to tax at different rates of tax

for any year of assessment, the Comptroller shall apportion any sum allowable

under subsection (3)(b), (c), (d) or (f) among the different rates of tax on such

basis he considers reasonable. (emphasis added.)

No dividend withholding tax

One key problem with the OBU regime, being the difficulty in attracting offshore participants

as a result of the application of dividend withholding tax to partially unfranked dividends on

expatriation39

, is not an issue for offshore participants in the FSI Scheme. That is, Singapore

does not impose withholding tax on dividend payments to non-residents.

Related incentives

Singapore also has further complementary incentives to encourage financial institutions to its

shores, such as the 10% tax payable on certain headquarter services, and exemptions from

withholding tax for payments such as interest, commissions, fees and other payments made

in connection with certain loans and indebtedness that would otherwise typically attract

withholding tax at the rate of 15% of gross amounts (absent a relevant tax treaty).

idea that expenses “attributable to” the relevant income must be deducted from the total. The relevant definition in Regulation

4(4) provides:

“specified income” or “specified loss” means the aggregate of the following:

(a) interest income from the activities specified in paragraph (1), after deducting any interest expense allowable

under the Act which is attributable to such interest income;

(b) all fees, commissions and other income from the activities specified in paragraph (1), after deducting any direct

expense allowable under the Act which is attributable to such fees, commissions or other income; and

(c) profits or loss from the disposal of equity securities, debt securities or secondary loans specified in paragraph

(1), after deducting any specific provision allowable under the Act for the diminution in value of such securities or

loans, and adding any taxable specific provision for diminution in value of such securities or loans which is written

back. 39

That is, where a foreign entity has an OBU subsidiary in Australia, the benefit of the 10% concessional tax rate is washed out

to some extent when partially unfranked dividends from the Australian subsidiary are paid to the parent, bearing typically either

15% or 30% dividend withholding tax on the unfranked part of the dividend, subject to the operation of any relevant double tax

treaty. By contrast, no quasi-withholding tax arises in Australia where a foreign entity has a branch in Australia and any OBU

profits therefrom are repatriated intra-entity to the foreign head office.



5.1.4 The Awards

Enhanced-tier awards

The “enhanced-tier” awards identify certain areas that are considered to represent high value-

added processes. The net income arising from activities under these awards is generally

taxed at only 5%. These awards include the following:

The Capital Market (FSI-CM) award, which, from 1 January 2014, merged the following

two pre-existing awards:

The Bond Market (FSI-BM) award, encompassing arranging, underwriting and

distributing certain qualifying debt securities as well as trading in qualifying debt

securities.

The Equity Market (FSI-EM) award, encompassing the arranging, underwriting,

management and placement of IPOs of stocks, shares, bonds and other securities

issued by foreign companies (foreign securities), for the purposes of listing on the

Singapore Stock Exchange (SGX). Activities covered under this award also include

the sale of SGX listed foreign securities. Furthermore, this award includes certain

brokerage, nominee and custodian services in connection with transactions relating to

SGX listed foreign securities.

The Derivatives Market (FSI-DM) award, which previously encompassed five sub-

schemes. From 1 January 2014, they are to be merged into a single FSI-DM scheme.

The five sub-schemes were: (i) Exchange-Traded Commodity Derivatives award, (ii)

Financial award, (iii) Financial, OTC and Exchange-Traded Commodity Derivatives

award, (iv) OTC and Exchange Traded Commodity Derivatives award, and (v) OTC

Commodity award.

The Credit Facility Syndication (FSI-CFS) award, encompassing arranging, underwriting

and participating in a syndicated offshore credit facility, or an offshore guarantee facility,

where the loan is used outside of Singapore and interest is not deducted against income

accruing in or derived from Singapore.

Standard-tier award

The Standard-Tier (FSI-ST) award covers a broad range of activities. The income from

activities arising under this award is generally taxed at only 12%. The award encompasses

the following matters:

Lending in foreign currencies and undertaking certain activities related to foreign

currency, including providing guarantees, performance bonds, standby letters of credit

and services relating to foreign currency remittances.

Undertaking debt capital market related activities including trading in debt securities,

arranging, managing, underwriting or selling certain qualifying debt securities and

providing corporate advisory services.



Undertaking equity capital market related activities, including arranging, managing,

underwriting, selling or investing in respect of foreign currencies and providing corporate

advisory services.

Undertaking treasury related activities, including foreign exchange transactions, trading in

certain types of derivatives, including interest rate and currency swaps and transactions

in certain precious metals.

Undertaking certain Islamic financing activities (these were previously specifically dealt

with under a separate Islamic Financing (FSI-IF) award).

Funds Management award

The Funds Management (FSI-FM) award encompasses undertaking funds management, trust

administration, custodial and other advisory services to or on behalf of a foreign resident,

including a foreign mutual fund or foreign trust. The income from activities arising under this

award is generally taxed at only 10%.

Headquarter Services award

The Headquarter Services (FSI-HQ) award encompasses providing certain “headquarter

services” where the taxpayer’s headquarters is in Singapore and it provides services to

approved offices or associated companies that are outside of Singapore. The income from

activities arising under this award is generally taxed at only 10%.

5.2 United States’ International Banking Facility

5.2.1 Background

The IBF regime was introduced with effect from December 1981. The object of the IBF regime

is to enable institutions operating in the United States (US) to compete more effectively for

foreign source “deposit and loan” business in the eurocurrency40

market. In this regard, the

IBF regime encourages US banks to use their domestic (rather than their overseas) branches

when undertaking such business with non-US residents.41

Provisions regarding the establishment and maintenance of an IBF are included in Federal

Reserve Bank regulations. Specifically, s.204.8 of Regulation D: Reserve Requirements of

Depository Institutions 12 CFR 204 provides for the establishment of an IBF and prescribes

certain rules for the way in which they must operate.

The main incentive provided under the IBF regime is not actually a tax incentive. Instead,

depository institutions located in the US can (via their IBF) offer deposit and loan services to

foreign residents and institutions without needing to comply with the Federal Reserve’s

40 In this context, “eurocurrency” means United States Dollars (USD) held or traded outside of the United States.

41 Refer to the Federal Reserve Bank of New York’s information sheet regarding IBFs for more information:

<http://www.newyorkfed.org/aboutthefed/fedpoint/fed34.html> (accessed 18 November 2013).

http://www.newyorkfed.org/aboutthefed/fedpoint/fed34.html



“reserve”/prudential requirements.42

Consequently, IBFs typically have a lower cost of funds

(because they are not required to hold an amount as prudential capital) which can result in

lending at a relatively lower rate and offering interest on deposits at a relatively higher rate –

that is, relative to the bank’s domestic banking operations.

Furthermore, relief is also provided to IBFs from certain local and State taxes in some US

states (although, curiously, not from Federal taxes). The nature of those concessions

depends on the particular jurisdiction in which the IBF operates.43

5.2.2 Who can establish an IBF?

The institutions that can establish an IBF include US commercial banks, Edge Act

corporations,44

foreign commercial banks acting through branches/agencies in the US, as well

as certain other savings and loans associations and mutual savings banks (eligible

institutions).

Unlike OBU taxpayers that require formal assessment and gazettal before their OBU is

established, an eligible institution can establish an IBF by notifying the Federal Reserve of the

location in the United States of the IBF and accompanying that notification with a statement of

intention by the eligible institution that it will comply with the rules in s.204.8 regarding the

operation of IBFs.45

5.2.3 Deposit and loan services

Section 204.8(a)(1) provides:

“International banking facility or IBF means a set of asset and liability accounts

segregated on the books and records of a depository institution, United States branch

or agency of a foreign bank, or an Edge or Agreement Corporation that includes only

international banking facility time deposits and international banking facility

extensions of credit.” (emphasis added)

IBF deposit services

The definition of an “international banking facility time deposit” provides the rules for an IBF

providing deposit services. The term means a “deposit, placement, borrowing or similar

obligation” that meets either one of the following conditions:

42 One of the quid pro quos for this is that deposits are not insured by the Federal Deposit Insurance Corporation. For further

information see the Federal Reserve of New York’s information sheet: refer to note 41. 43

For example, in New York State where most of the US’s IBFs are located, there is an exemption from State and local taxes

for an IBF’s net income that exceeds a prescribed base. For further information see the Federal Reserve of New York’s

information sheet: refer to note 41. 44

An Edge Act corporation is a corporation chartered by the US Federal Reserve to engage in international banking and

finance operations. For more information refer to Gagion L V, “A Constitutional and Statutory Analysis of State Taxation of

Edge Act Corporate Branches”, 51 Fordham L. Rev. 991 (1983). 45

Refer to ss.204.8(d) and (e).



The obligation must remain on deposit at least overnight and the instrument evidencing

that obligation must be issued to:

an office located outside the US of a US depository institution or a foreign bank;

a US office or a non-US office of the eligible institution establishing the IBF;

another IBF; or

a foreign national Government or an agency or instrument thereof that (in very broad

terms) is engaged principally in ordinary governmental activities.

The obligation is payable within two business days of the deposit being made and

represent funds deposited to the credit of a foreign branch, office, subsidiary, affiliate or

other foreign establishment controlled by one or more “domestic corporations”. However,

this only applies where:

the funds are used to support the depositor’s (or its affiliate’s) operations located

outside of the US; and

no deposit or withdrawal of less than US $100,000 is permitted (unless to close

the relevant deposit account).

IBF loan services

The definition of an “international banking facility extension of credit” provides the rules for an

IBF providing loan services. The term means “any transaction where an IBF supplies funds by

making a loan, or placing funds in a deposit account”. However, under the definition such

credit may only be extended to:

an office located outside of the US of another US depository institution or a foreign bank;

a US office or a non-US office of the eligible institution establishing the IBF;

another IBF;

a foreign national Government or an agency or instrument thereof that (in very broad

terms) is engaged principally in ordinary governmental activities; or

a non-US resident or a foreign branch, office, subsidiary, affiliate or other foreign

establishment controlled by one or more domestic corporations, provided that the funds

are used only to finance the operations outside the US of the borrower or the borrower’s

affiliates.

The restrictions contained in the above two definitions serve “to insulate U.S. economic

activity from IBF transactions”.46

The most obvious restriction is that the deposit and loan

activities must generally be with non-US residents. However, the other restrictions/limitations

are also in place to prevent US based entities accessing an IBF. For example:

46 Refer to Kay S J and Terrell H S, “International Banking Facilities”, International Finance Discussion Papers Number 333,

September 1988 at p.6.



the two day maturity restriction on IBF deposits is intended to prevent such accounts

being substitutes for “reservable” transaction accounts at domestic banking offices;

the US$100,000 restriction is intended to preserve the “wholesale” nature of the IBF

deposit business; and

the requirement that deposits and loans to non-bank customers must relate to operations

outside of the US.47

47 See generally, Kay and Terrell, note 46, at pp.7 to 8.



6 What reforms will make OBUs more

useful and competitive to both

Australian and foreign owned

institutions?

6.1 Introduction

Over the years since the main component of the OBU regime was introduced in 1992,

industry has requested that Government make various amendments to Division 9A to

modernise, rectify technical defects and improve access to the OBU regime. Some of these

requests have been embraced by the Government and reflect amendments made to Division

9A between 1992 and 1998.48

Other requests have not been so embraced and remain on

industry’s wish list.

It is beyond the scope of this paper to discuss each of these outstanding requests from

industry in detail. A number of them are canvassed in the Discussion Paper and are

considered in section 7 below, rather than in this section.

However, many of the important submissions over the years have received no or little air time.

These are summarised below and their significance to the efficacy of the OBU regime is

considered where applicable. These can be divided into the following three general categories

– requests to:

make the existing safeguards in Division 9A work – in this regard, measures to prevent

perceived exploitation of the OBU regime should not inhibit genuine offshore banking

activities;49

make the existing concession work – in this regard, the current measures that promote

offshore banking in Australia should actually adequately cover the types of activities

intended to be promoted; and

expand the scope of the OBU regime to cover financial product and service innovation –

in this regard, Division 9A should keep up with the dynamic finance sector to stay useful,

usable and relevant.

Despite the intended scope of the OBU regime, as amended in the 1990s, that it encompass

many of the activities undertaken by participants in the funds management industry, the take-

48 Refer items 11 to 14 of Appendix A.

49 Or, for that matter “genuinely mobile banking activities” – this phrase was preferred by the former Labor Government (refer to

their 2013/14 Budget announcement and the Discussion Paper), and has also been picked-up by Senator Sinodinos, the new

Assistant Treasurer, in his 29 September 2013 Press Release. Whoever said both sides of politics cannot agree on anything!



up of OBUs in that sector has been low. A number of apparent limitations/problems with the

rules are addressed below. Although funds management related issues have not been

addressed in the OBU regime since the 1990s, the Government might say that the sector has

benefited from reforms through existing and ongoing/proposed rules addressing Managed

Investment Trusts (MITs) and the Investment Manager Regime (IMR). However, it is not

obvious why, despite these reforms, there should not also be amendments to make the OBU

rules work more effectively for the funds sector.

Whilst many of the requests noted below may seem very specific, they represent examples of

the operational uncertainty which prevents the OBU regime from incentivising offshore

banking in Australia to the fullest extent possible. Ultimately, in the Authors’ view, that

uncertainty hampers Australia’s capacity to be a major international financial services centre.

6.2 Making the existing safeguards work

6.2.1 The “purity test”

As noted in section 3.5 above, s.121EH has the capacity to “blow up” an OBU (albeit – but

subject to what is said below – only for the particular income year in which the purity test is

failed). In response, industry has sought a number of reforms to enable this test to be less

draconian. In particular, to address the difficulty in tracing non-OB money within a pool of

money, industry has sought to enable OBU taxpayers to “untaint” their funds. In this regard,

absent such an allowance, an OBU taxpayer may face practical difficulty in proving that their

OBU has been purged of its excessive non-OB money.

6.2.2 Whether OBUs need separate bank accounts

Section 262A deals with the general requirement for taxpayers to keep records. Subsection

262A(1A) requires an OBU taxpayer to “separately account for money used in its OB

activities”. However, s.262A(1AA) provides that subsection (1A) does not require an OBU to

maintain separate nostro or vostro accounts50

for its OBU activities thereby saving OBUs

substantial costs. Whilst the ATO has indicated that since the introduction of s.262A(1AA) it

has not been necessary for OBU taxpayers to maintain separate bank accounts, there

remains some uncertainty regarding the scope of subsection (1AA). In this regard, as a

technical matter, an OBU taxpayer could not rely on s.262A(1AA) when attempting to

demonstrate the extent to which non-OB money has been used within the OBU.

In response, industry has requested that the intention underlying s.262A(1AA) be

incorporated into Division 9A. In particular, industry has requested that the position regarding

not requiring separate bank accounts be made explicit in Division 9A. Furthermore, industry

50 Nostro accounts and vostro accounts are accounts held or maintained by an OBU taxpayer for the sole purpose of settling

international transactions.



has requested that the ATO and industry work together on formulating administrative

guidelines in respect of OBU accounting and cash management practices.

Shared nostros greatly reduce operating costs of OBUs, but bring their own problems. There

are practical difficulties for an active OBU making and receiving many payments a day to get

the OBU’s nostro account balance exactly to zero.

6.2.3 Clarifying the “OBU requirement” for permanent establishments

As noted in section 3.3.2 above, for a “thing” to be “done” by an OBU, that thing must be done

by a resident in Australia (i.e. not through an overseas permanent establishment) or by a non-

resident through a permanent establishment in Australia. Industry has observed that this test

can be difficult to apply in the context of financial services companies with integrated

multinational operations because all aspects of a single transaction may not necessarily take

place in Australia. Even where there has been absolutely no offshore office involvement in the

arranging and execution of an eligible transaction, the on-going maintenance of the deal may,

on occasion, require the assistance of offshore offices: in particular if there are issues around

payments where it is the responsibility of the office that is “awake” to step in and resolve the

issue. Sometimes that resolution requires the “awake” office to make the relevant payments

on behalf of the OBU. This has engendered uncertainty as to where the relevant “thing” is

“done” for the purposes of s.121EA.

Industry has also observed that s.121EA could, rather perversely, disadvantage resident OBU

taxpayers as compared to their non-resident counterparts with OBUs. This is because, on one

view:

s.121EA(b) permits part of an OB activity undertaken by a non-resident to take place

overseas (i.e. by the non-resident in its home jurisdiction or through another overseas

permanent establishment); whereas

the consequence of s.121EA(a) is that where any part of the thing done is undertaken by

an Australian resident through an overseas permanent establishment, then that otherwise

eligible OB activity fails the OBU requirement.

In response, industry has requested the removal of the permanent establishment restrictions.

Instead, only profit attributable (based on OECD guidance) to the Australian operations of the

OBU would be entitled to the 10% concessional rate.

6.2.4 Interactions with the consolidation regime

The general tax consolidation single entity rule in s.701-1 and the more specific rule for OBUs

in s.717-710 (refer section 3.1 above), only apply for specific purposes being, broadly, the

ascertainment of the head company’s liability for income tax or a loss in the relevant year.

The limitation of the single entity rule gives rise to a number of issues in the context of the

OBU regime, including the following.



Section 128NB

The single entity rule does not apply to s.128NB51

which, as noted in section 3.6, imposes a

tax to recoup “lost withholding tax amounts”. Consequently, transfers of “tax exempt loan

money” from an OBU taxpayer to other members of a TCG potentially trigger s.128NB. In

response, industry has requested that transfers within the TCG be permitted so long as the

ultimate use of the funds is for an eligible “OB activity”.

Section 121EK

Industry has observed that the legislative intention of the income tax consolidation regime is

that s.121EK (refer section 3.7 above, regarding OBU resident-owner money) not apply in the

context of a tax consolidated group. This is based on paragraph 7.64 of the Explanatory

Memorandum to New Business Tax System (Consolidation and Other Measures) Bill No.2

2002 which states:

“Similarly, section 121EK deeming interest to be paid on OBU resident-owner money will

not operate in respect of the internal shareholding arrangement within the consolidated

group.”

In response, industry has requested that this intention be made clear by amending Division

9A.

Section 121E(c)

Section 121E contains the definition of an “offshore person” for the purposes of the various

OB activities set out in s.121D. As a result of s.121D and s.121E(c), one OBU (the first OBU)

can undertake certain transactions in certain situations with another OBU (the second OBU).

However, the first OBU needs to deal with an entity that is itself actually a registered OBU,

and not merely an entity that is part of a tax consolidated group which includes an OBU for

the purposes of the second OBU’s own single entity purposes. That is, the single entity

deeming rule for the first OBU is not relevant when considering whether the second OBU is in

fact an OBU.

6.2.5 A$ nostro accounts

Industry has observed that OBU taxpayers that do not have an Exchange Settlement Account

(ESA)52

with the Reserve Bank of Australia (RBA) must maintain an A$ nostro account.

Where the nostro account is held outside of the OBU then money withdrawn from that

account will lose its character as “OB money” (that is, money which is not non-OB money).

51 Section 701-1 does not encompass a withholding tax liability. Equally, s.710-710 does not apply to s.128NB because it only

applies for the head company core purposes in s.701-1(2). For further discussion of this, refer to Steve Southon’s article

“Offshore banking units: don’t let tax consolidation cause you to forget about s 128NB” Thomson Weekly Tax Bulletin 48 (20

November 2009). 52

An ESA is used to settle financial obligations arising from the clearing of payments.



Industry has also observed that there is a shortage of OBU taxpayers that can provide OBU-

compliant nostro accounts. In response, industry has requested that OBUs without ESAs

(typically, non-residents that operate an OBU) be able to hold A$ nostro accounts with any

part of an Australian bank (accepting that interest on such accounts held by the DBU would

be taxed at the corporate rate).

6.2.6 Definition of offshore person

Industry has observed that the definition of an offshore person in s.121E relies upon the

definition of a “person”. In this regard, there is the potential that an activity with an entity not

satisfying this description53

could be denied recognition as an “OB activity”. In response,

industry has requested amending Division 9A so that any foreign entity with legal capacity to

enter into an OB activity be so recognised.

Furthermore, industry has observed that in some cases, due to a lack of information

(including because of a reticent counterparty), an OBU may not be able to establish with

absolute certainty that a counterparty is an offshore person. In response, industry has

requested that the offshore person requirement be deemed satisfied unless the OBU taxpayer

knows or could reasonably be expected to know, based on information available to it at the

relevant time, that the counterparty is not an offshore person.

6.3 Making the existing concession work

6.3.1 Deem the RBA to be an offshore person

A number of the OB activities require the OBU to have an A$ denominated bank account. As

OBUs can only lend A$ to offshore persons, this creates practical difficulty for OBUs that are

needing to place A$ on deposit with an offshore person for a very short time frame (such as

where, in many cases, same day settlement is required). In response, industry has requested

that the RBA be deemed to be an offshore person. This measure would be particularly

important in times of financial/liquidity crisis when OBUs need to access the RBA’s liquidity.

6.3.2 Borrowing and lending

An OBU can generally only borrow A$ from an unrelated offshore person. Industry has

observed that this restriction makes it difficult for an OBU to borrow A$. Whilst, as a practical

matter, OBUs can use cross currency swaps to affect a similar economic outcome, this

practice causes additional borrowing expense which increases cost of funds and may use up

credit lines. In addition to increasing the cost of funds, both credit risk and operational risk,

increase.

53 This might include certain foreign general partnerships or trusts.



Furthermore, the restrictions on A$ ignores the increasingly globalisation of the A$. In this

regard, it is now the fourth largest currency traded (by volume) against the US$ and is the fifth

most traded currency overall. To put this in perspective, the ASX comprises only 1.9% of the

MSCI index.

The restrictions around the use of A$ with respect to certain OB activities is explained in the

Replacement Explanatory Memorandum to the Bill that introduced Division 9A (Taxation Laws

Amendment Bill (No. 4) 1992). In this regard, the revised EM states:

“The Bill will extend the tax concession to OBU's dealings with foreign branches of

Australian residents. As a revenue-protection measure and to restrict domestic

funding of offshore banking, the borrowing and lending transactions with branches of

Australian residents are limited to non-AUD transactions.” [emphasis added]

In response, industry has requested that the restrictions around an OBU borrowing and

lending A$ to related parties be removed.

The general provisions relating to borrowing and lending of money and gold are silent on what

happens in the event of a defaulting loan and the complication where that loan is secured by

Australian property/security which would be ineligible. What happens where the OBU needs

to foreclose and take and sell that ineligible asset to someone who is likely to be an Australian

resident?

Again, why is it only money and gold that are contemplated by the regime as regards

borrowing and lending? Why can’t an OBU borrow or lend anything that an offshore entity

wants to borrow or lend? What of other things such as property, technology, commodities

etc.? What of leasing and hire purchase arrangements? What of Bitcoins?

Global markets have evolved hugely since the legislation was originally drafted and

subsequent amendments have done little (especially in comparison to the Singaporean FSI

Scheme discussed earlier in this paper) to encompass the new world where pretty much

anything and everything can be, and is, bought, sold, traded, collateralised, borrowed or lent,

in either physical or derivative forms on markets that are increasingly global in scale.

6.3.3 Efficient hedging

Industry has observed that in some cases an OBU cannot efficiently hedge certain exposures,

particularly in relation to A$ derivative exposures. For example, an OBU may not be able to

fully hedge its exposure under an A$ interest rate swap given that such swaps are commonly

hedged by a combination of A$ securities and A$ interest rate futures – both of which are

excluded from being OB activities under s.121D(4)(a)(i) and s.121D(4)(d) respectively.54

The

existing s.121D(8), see section 3.3.1 above, only addresses hedging activities in limited

circumstances. First, it only covers interest rate and currency exposures and not other risks,

e.g. equity and commodity and credit price risks. Secondly, the primary or hedged position

has to be a borrowing or lending activity: e.g. it cannot be a derivative.

54 Whilst an OBU can enter into those types of transactions, under the relevant sections, these transactions must not be

A$ denominated.



In response, industry has requested consultation with Treasury to consider solutions to

address this shortcoming. Possible solutions include introducing a TOFA style of hedging into

Division 9A.

6.3.4 Interaction with foreign income tax offset (FITO) rules

As discussed in more detail above, where an OBU taxpayer incurs withholding tax in excess

of 10% in a foreign jurisdiction, then industry has observed that the relevant OBU is

disadvantaged because an OBU taxpayer’s FITO entitlement is effectively capped at 10%

because of s.121EG(3A). In response, industry has requested that the policy underpinning

s.121EG(3A) be reviewed.

6.3.5 Multi-jurisdictional lending arrangements

Industry has observed that certain issues arise where an OBU syndicates a stand-by loan

facility to specified borrowers (in various jurisdictions, including Australia) within a

multinational group. These issues include:

whether providing a stand-by loan facility (where no funds have yet been drawn down)

can be an eligible “OB activity”;

whether the payment of a commitment/stand-by fee by an Australian parent of the

borrowing group (which is paid to the OBU on behalf of the specified borrowers that are

located offshore) can be recognised as a payment from an offshore person; and

the way in which this commitment/stand-by fee should be apportioned between the

specified borrowers that are located on and offshore.

In response, industry has requested that the ATO and Treasury consult with industry with a

view to ensuring that Division 9A can appropriately deal with multi-jurisdictional lending

arrangements.

6.3.6 Section 121EB

Industry has also observed that Division 9A does not deem an OBU and its overseas

permanent establishments to be separate legal persons. Given that this is the intended effect

of s.121EB, industry has requested that this omission be remedied.

Furthermore, industry has observed that s.121EB is predicated on the artificial notion that

distinct permanent establishments within the OBU carry on OB activities whilst other

permanent establishments carry on non-OB activities. In response, industry has requested

that s.121EB be amended to recognise that a “part” of an OBU may carry on both OB and

non-OB activities.

Another issue is the limited scope of the deeming that is provided by s.121EB, i.e. being for

the purposes only of s.121D to s.121EA. Are internal dealings meant to also be relevant and



taken into account in determining the taxable income of the OBU, DBU and foreign branches?

If not, why not? If so, why wasn’t this made clear, e.g. by extending the deeming in s.121EB

to cover the operative provisions in s.121EG (dealing with assessable OB income and

allowable deductions) etc?

6.4 OBUs and the funds management industry

6.4.1 Introduction

As noted earlier, the scope of eligible OB activities was expanded in the 1990s, with the

objective of better encapsulating certain activities undertaken by participants in the funds

management industry. Most notably, s.121D(6A) was inserted (and s.121D(6) was amended)

in 1996 to accommodate OBU taxpayers undertaking funds management activities “for the

benefit of a non-resident”. Further, s.121ELB, dealing with adjustments of capital gains and

losses from the disposal of units in OBU offshore investment trusts, was enacted in 1999. The

amendments to the OBU regime coincided with the rapid expansion of Australia’s funds

management industry. It is evident that Australia has become a significant funds management

player. In this regard, Australian funds management industry participants (retail and

wholesale funds management businesses, superannuation funds, life insurers and financial

advisory networks) are currently responsible for investing some $2 trillion. To put this in

perspective, that amount exceeds Australia’s annual Gross Domestic Product (GDP) as well

as the ASX’s aggregate market capitalisation.

Given the depth and maturity of Australia’s funds management industry, it is surprising (and

rather disappointing) that the OBU regime seems not to have been widely used by industry

participants. To that end, there appears to subsist a range of significant issues/problems with

the rules. We endeavour to outline some, but by no means all, of these issues below.

At a most basic level, even the name of our regime, Offshore Banking Unit, is no longer (if it

ever was) reflective of the broader types of potentially “mobile” financial services (including

but not only funds management) that we should be seeking to attract to Australia. Singapore

understood this in 2004, when it repackaged and rebranded a number of disparate

concessions into their Financial Sector Incentive Scheme.

As noted earlier, it is not obvious why, despite the MIT and IMR reforms, there should not also

be amendments to make the OBU rules work more effectively for the funds management

sector.

6.4.2 Making vs. managing vs. advising

In broad terms, s.121D(6) deals with the “making (but not managing)” of offshore non-A$

investments on behalf of certain non-residents. In contrast, s.121D(6A) deals with “managing”

predominantly offshore non-A$ investments on behalf of non-residents.



The distinction, and policy rationale therefor, between making and managing is not at all self-

evident. “Making” appears to focus on circumstances where the OBU is merely acting on

behalf of a non-resident investor (in the OBU’s capacity as broker, agent or trustee) by

acquiring the relevant foreign asset.

However, does subsection (6) also cover a custodian? Does a custodian “make” an

investment for the benefit of an offshore person as, say, their agent? If the answer is yes,

then this position should be made explicit. If the answer is no, then why not? It is not self-

evident from a policy perspective why custodial services should not be within the ambit of

s.121D(6) – indeed, it is evident that they should be! As noted earlier, the Singaporean FSI

Scheme clearly includes custodian and nominee services.

Further, it is not clear whether portfolio administration services (such as an Investor Directed

Portfolio Services, and wholesale wrap products) involve that service’s administrator/operator

making or managing the relevant investment portfolio, or neither. Again, if this activity is

covered as an eligible OB activity, then this position should be made explicit. If it is not

covered, then why, from a policy perspective, should this be the case?

Subsection 121D(7) broadens the scope of eligible activities beyond making and managing by

covering “giving investment or other financial advice to an offshore person where, if the

advice is about the making of a particular investment, the investment is of a kind referred to in

subsection (6)”. The scope of this “advisory activity” category appears to cover situations

where the OBU acts only as an investment advisor rather than in a manager/trustee capacity.

That is, the scope appears not to cover situations where the OBU is authorised to transact or

hold investments on behalf of an offshore person.

The ATO has issued several Taxation Determinations which observe that s.121D(7) has been

drafted widely.55

6.4.3 Portfolio investments (s.121D(6A))

Paragraph 121D(6A)(a)

Paragraph 121D(6A)(a) requires that the OBU manages the relevant portfolio investment “as

broker, agent or custodian for, or trustee for the benefit of, a non-resident”. There has been

some conjecture as to whether an OBU is capable of acting as an investment manager for a

trust having an Australian trustee (other than the OBU itself). In this regard, previously there

have been some instances where the ATO has argued that an OBU investment manager is

acting as an agent of the Australian trustee (rather than as agent for the non-resident

beneficiaries) with the consequence that s.121D(6A)(a) is not satisfied.

55 For example, refer to TD 93/208 and TD 93/209. In TD 93/209, the Commissioner expressed the view that subsection (7)

was intended to apply to fee income in relation to financial advice generally so long as the relevant matter has no connection

with Australia.



Paragraph 121D(6A)(b)

Paragraph 121D(6A)(b) requires that the relevant portfolio investment be made by the OBU or

the non-resident. A number of separate entities are involved in a typical managed fund (e.g. a

trustee, manager and custodian). Pinpointing which of these entities “makes” the portfolio

investment is not always obvious.

Whilst the manager may select a particular investment, it may be the custodian that actually

executes the buy order and legally acquires and holds the relevant asset. In that case, is it the

custodian that makes the investment? If so, it would appear that s.121D(6A) is defective.

Instead, does the trustee or the investment manager make the relevant portfolio investment?

If it is necessarily one or the other, then, whether an OBU can access s.121D(6A) depends on

whether that OBU is acting as the trustee or investment manager.

The position here should be clarified. Given the interconnectedness of the roles of the trustee,

investment manager and custodian in making an investment (that is to say, each, from their

own perspective, may say that they make the investment), then the correct approach should

be that the word “make” be broad enough to encapsulate all of these activities. This position

should be made explicit to provide industry with the necessary certainty.

The other limb in s.121D(6A)(b) is where the portfolio investment is “made by” the non-

resident. Whilst clearly an investment in a portfolio is made for the benefit of the relevant non-

resident, situations where it could be concluded that the non-resident itself made the

investment appear very limited.

Paragraph 121D(6A)(c)

Paragraph 121D(6A)(c) requires that portfolio investments be made with a non-resident

(except, in the case of making a loan or purchasing an “Australian thing”). This requirement

appears to relate to the identity of the counterparty – for example, the vendor of the

investment assets that form part of the portfolio investment.

Given the separate restriction on the holding of non-Australian investments within the portfolio,

why then is the restriction in s.121D(6A)(c) necessary? For example, where is the mischief in

an Australian resident selling shares in Google Inc. to an OBU that manages an overseas

equities fund on behalf of non-residents?

Paragraph 121D(6A)(d)

Paragraph 121D(6A)(d) requires that the currency in which the portfolio investment is made is

not A$. In the Authors’ view, this condition appears to relate to the currency in which the

relevant investment asset is contracted/acquired, rather than the currency in which that

investment may itself be denominated. If that were not the case, then the provision dealing

with the ability for a portfolio to hold some Australian assets (i.e. in accordance with the 10%

Australian asset limit) would be unworkable.



However, this interpretation nonetheless creates some practical difficulties for a portfolio

wishing to hold Australian assets where those assets must be acquired on a market that

operates in A$ only. For example, ASX listed shares are acquired through the ASX (via the

ASX’s settlement and clearing systems) and almost invariably will be acquired in A$.

A similar requirement to s.121D(6A)(d) is contained in s.121D(6)(a). The same practical

difficulties would apply in that context.

Paragraph 121D(6A)(f)

Paragraph 121D(6A)(f) provides that where the portfolio consists of more than one “thing”,

then the average Australian asset percentage of the portfolio investment must not be more

than 10%.

Industry has observed that the 10% Australian asset limit in s.121D(6A)(f) is too restrictive

and can be difficult to maintain, especially but not only because of foreign exchange rate

movements.

For example, let’s say an OBU manages a portfolio of assets which, on day 1, has an A$

value of A$130 million, where on that day, there are:

US$95 million of US$ denominated assets (e.g. securities listed on the NYSE) and the

relevant FX rate on that day is A$1=US$0.80 (therefore, the A$ value is approximately

$119 million); plus

A$11 million of A$ denominated assets (e.g. shares listed on the ASX).

On that day, based on the then prevailing exchange rate, Australian assets comprise only

about 8.5% of the total portfolio investment.

All other things being equal, if the FX rate moved against the US$, so that A$1=US$1.06,

then the US$95 million of US$ denominated assets would now have a value of approximately

A$90 million (about 89% of the portfolio). Consequently, the A$11 million of Australian assets

would (at least for that day!) exceed the 10% threshold merely because of FX movements.

Whilst such a large fluctuation in FX rates is unlikely in the short term, this example does not

factor in relative movements between the NYSE and the ASX – both of which are also out of

the control of the OBU managing this portfolio.

Furthermore, industry has observed that the 10% limit in s.121D(6A)(f) is an “all-or-nothing”

rule. That is, if the 10% limit is exceeded, then s.121D(6A) does not apply at all, meaning that

all amounts of income received by an OBU from managing that fund are ineligible for the OBU

concession.

In response to the above concerns, industry has requested an increase in this limit – the quid

pro quo for which would be that the 10% concessional tax rate only apply to so much of the

fees from the OBU’s investment management activities as is equal to the proportion of foreign

assets in the relevant portfolio being managed.



An apportionment rule instead of the current all-or-nothing test would reflect a more

reasonable and flexible approach that, in the Authors’ view, should not tread on the toes of

the policy intent of s.121D(6A).

6.4.4 Offshore person vs. non-resident

The investment activities and portfolio investment activities in s.121D(6) and s.121D(6A) have

different tests:

In s.121D(6), it is necessary inter alia that an investment be made for the benefit of an

offshore person, with an offshore person.

However, in s.121D(6A), it is necessary inter alia that an investment be managed for the

benefit of a non-resident.

The policy reason for the use of different concepts in these sections is unclear.

6.4.5 Trading

Some trading activities constitute an eligible OB activity under s.121D(4), which can be

relevant in certain funds management situations. However, the Commissioner has previously

expressed a narrow view on when an asset is held for trading (for example, refer to ATO ID

2011/27 and edited Private Binding Rulings 85192 and 9264856

). The definition of trading is

uncertain and, as evidenced by these ATO documents, appears to depend on dictionary

definitions and old case law.

One of the difficulties in practice is that an OBU may not know, at the time they acquire an

asset, for just how long they will ultimately hold that asset. That will depend on a range of

factors, some of which are outside of the OBU’s control, including the prevailing market price

of the asset at relevant points in time.

Additional comments on the limitations of the existing OBU trading activity definition are set

out further below.

6.4.6 Hedging

Industry has observed that the current definition of hedging activities in s.121D(8) only covers

an OBU hedging its own interest rate or currency exchange rate exposure, but only where

that exposure arises in respect of borrowing or lending activities. Given that funds

management participants generally do not engage in borrowing or lending activities then,

consequently, participants are unable to use this particular OB activity in their OBUs.

56 See also the minutes of the National Tax Liaison Group’s Finance and Investment Subcommittee meeting held on 8 August

2006.



Participants in the funds management industry do undertake hedging in association with

various equity, currency, liquidity and other market risks. Whilst in some cases it may be

possible for an OBU taxpayer undertaking funds management activities to hedge in their OBU

using some other head of OB activity in s.121D (especially eligible contract activity in

s.121D(4), which includes entering into certain derivatives) a viable alternative to a specific

hedging activity category will not always be self-evident.

Accordingly, industry has requested that the scope of the hedging activity in s.121D(8) be

expanded to hedge its exposure to other types of risks.

6.4.7 OBU investment funds

Broadly, s.121EL provides that any income and gains of a trust estate where the OBU is the

trustee (or central manager and controller) of that trust estate will not be taxable in Australia,

to the extent of the non-Australian portion of the portfolio. However, this concession only

applies if the only persons who can benefit under that trust estate are non-residents.

The comments above regarding the all-or-nothing nature of exceeding the 10% Australian

asset test in s.121D(6A)(f) apply equally here. In the Authors’ view, there is no policy reason

for this requirement that can so easily negate application of the concession to an OBU

investment fund.

Industry has observed that there are practical difficulties in determining at all times the identity

and the residency of all of the persons who benefit under the OBU investment fund. To

practically comply with this condition requires prohibitions on Australian residents investing

into the OBU investment fund. However, such a prohibition is practically difficult to enforce.

For example, it is practically difficult for an OBU taxpayer to determine whether an ostensible

non-resident actually invests in the OBU investment fund through an Australian permanent

establishment. In this regard, an unrelated investor is unlikely to want to share this type of

information with the OBU taxpayer.

Industry has also questioned to what extent an OBU taxpayer is required to look through

entities, including custodians and nominees, to their ultimate beneficial owners. In the case of

limited liability partnerships, other types of partnerships and trusts, should the OBU taxpayer

seek to confirm the identity and residence of the underlying investors?

In the situation where a non-resident company is the beneficial owner of some/all interests in

the trust estate, but the company has some/all Australian shareholders can the test in

s.121EL(1)(b) nonetheless be satisfied? Presumably the answer should be yes, on the

grounds that the tracing of who benefits under a trust should stop with an entity (such as a

company) which is clearly a beneficial owner of the interest in question. (A company need not

of course be the beneficial owner of interests in the trust – it may itself be holding as a trustee

for others.)



6.4.8 Related party transactions

The former Government’s 2013/14 Budget proposal to prohibit related party transactions is

discussed in detail in section 7 below.

The proposal, if it were to proceed, would have a significant adverse impact on the funds

management industry. In particular, it is common for an OBU investment fund to engage

related parties to provide services to the OBU investment fund. For example, this might

include services provided to the OBU investment fund by a trustee, general partner or a

broker.

Industry has observed that because there are various unrelated stakeholders in a typical OBU

investment fund (such as unrelated offshore investors), then the commercial reality is their

presence will ensure that fees paid by the OBU investment fund to related parties of the OBU

fund manager will be struck at arms’ length and no prohibition on related party dealings is

either appropriate or necessary.

6.5 Other improvements

6.5.1 Non-operating holding companies

A non-operating holding company57

(NOHC) is not included in the list of types of “persons”

who can be declared by the Treasurer as an OBU.58

In response, industry has requested that

NOHCs be added to the list. Industry has argued that this is an impediment to financial

groups converting to a NOHC structure. In saying that, it is noteworthy that a NOHC would be

deemed to be an OBU because of s.717-710, where (as could be expected) that NOHC had

one or more subsidiary members that were registered OBUs.

6.5.2 Making of a financial derivative: ATO ID 2004/962

In ATO ID 2004/962, the Commissioner concluded that the making of a financial derivative

contract as broker on behalf of an offshore person, with another offshore person, only

qualifies as an eligible investment activity under s.121D(6) if the derivative contract is entered

into “with an expectation of receiving income or making a gain”. In response, industry has

requested that Division 9A should be amended to clarify that entering into derivatives as

broker for offshore persons will be an investment activity irrespective of whether the derivative

is for hedging or speculative purposes.

57 The Financial Sector (Business Transfer and Group Restructure) Act 1999 facilitates the interposition of a non-operating

head company between a financial group that has an ADI as its head company and that group’s shareholders. The Macquarie

Group and the Suncorp Group each undertook a NOHC interposition in 2007 and 2010 respectively. 58

Refer to the list in s.128AE(2).



6.5.3 Issues with trading

Industry has observed that “trade with a person” in s.121ED59

should not be restricted to

“things” that are trading stock and should include an OBU’s revenue assets. In fact, almost all

of the 9 provisions under the trading activity head in s.121D(4) require amendments to

provide for past and future innovation, evolution and growth of global trading.

When the OBU rules were drafted, commodity trading in Australia by banks was embryonic,

and hence the omission of traded products such energy, carbon, or soft commodities (a $20

billion p.a. industry) such as wheat, corn and sugar. Indeed, under the precious metals

banner, Rhodium and Iridium were omitted while silver, platinum and palladium did get a

mention. Mysteriously non-AUD denominated gold can be traded with an onshore person but

not the other mentioned precious metals.

Other examples abound such as trading Non Deliverable Forwards (which never include

AUD) not falling into the “Trading of FX” category which is clearly the substance and use of

the instrument but (per ATO ID 2011/27) into the “eligible contract “activity which is more

restrictive. Indeed, the eligibility of forward contracts within the eligible contract head seems to

envisage that price risk must be an element of the contract, whereas these contracts can

include no price risk but are used to hedge delivery risk.

6.5.4 Issues with managing A$ risks

Swap activity also falls under the eligible contract activity head, making the hedging of fixed

rate loans by use of futures more complex and risky to the extent that some banks simply

refuse to book eligible fixed rate loans to their OBU. More generally, OBU rules do not allow

for the use of Australian bonds or bank bills, either physicals or futures, which makes hedging

of Australian interest rate risk problematic to say the least. As mentioned earlier, our currency

is now global and heavily traded and yet while an OBU can trade in our currency with offshore

persons, it is not able to trade in the interest rate instruments that underpin our financial

markets! In response, industry has requested that amendments be made to s.121ED and

s121D to remedy these anomalies.

6.5.5 Guarantee-type activity

The guarantee-type activity provisions in s.121D(3) appear quite restrictive particularly when

looking at trade finance activities. Modern trade finance structures range from the vanilla to

the complex and Australia, being a commodity nation (our currency is termed a commodity

currency) is heavily involved in these arrangements. It appears highly restrictive that a credit

intermediation transaction which involves no domestic parties, but where the goods being

shipped are either imported to or from Australia cannot by entered into by an OBU as not all

events occurred outside of Australia. Indeed, does this mean that an OBU cannot provide a

59 This definition is relevant for the purpose of what constitutes trading with an offshore person in s.121D(4). In this regard, the

Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 4) 1992 (which introduced Division 9A) states: “trade with

a person" “is a drafting technique to facilitate the meaning of 'trading activities' in section 121D”.



guarantee-type activity, as regards a fleet of planes, one of which might land in Australia?

This surely cannot have been the intended outcome.



7 What changes (good and bad) to the

OBU rules are likely to emerge from

the (former) Government’s 2013/14

Budget announcements?

7.1 Budget Announcement

The (then) Assistant Treasurer’s 2013/14 Budget press release60

addressed measures aimed

at “protecting the corporate tax base from erosion and loopholes” and included the following

announcement:

“Closing loopholes in the Offshore Banking Unit regime

The Government will improve the Offshore Banking Unit (OBU) regime to address integrity issues with the current regime and to better target the concession to genuinely mobile banking business.

The policy intent of the OBU regime is to encourage the development of highly mobile financial sector activity in Australia where it would otherwise take place abroad. The concession taxes banking activity in an OBU at a low 10 per cent, rather than the 30 per cent company tax rate.

Key Features

This measure will improve the OBU regime to ensure its integrity and encourage genuinely mobile banking activity to take place in Australia. The measure will:

treat dealings with related parties, including the transfer of transactions between

the OBU and the domestic bank, as ineligible for OBU treatment;

treat transactions between OBUs, including between unrelated OBUs, as

ineligible for OBU treatment; and

refine the current list of eligible OBU activity.

The Government will consult with industry to develop recommendations to address concerns with the allocation of expenses between OBU and non-OBU activities and on issues raised by the Johnson report.

Commencement Date

These changes will apply to income years commencing on or after 1 July 2013.

60 Press Release on 14 May 2013 by The Hon David Bradbury MP, Assistant Treasurer and Minister Assisting for Deregulation,

Protecting the Corporate Tax Base from Erosion and Loopholes – Measures and Consultation Arrangements.



Why the change is needed

It has become apparent that stronger integrity rules are needed to prevent banks from shifting their domestic banking activities and profits into OBUs, rather than attracting new mobile activity.

In the most egregious examples, some banks have used complex arrangements to shift ineligible income into the OBU to attract the concessional 10 per cent tax rate, while at the same time seeking to ensure any losses or deductions remain in the domestic operations to be deducted at the normal 30 per cent company tax rate.

Consultation

A discussion paper will be issued in June 2013.”

A few observations before considering the Discussion Paper:

The proposals to treat related party and OBU to OBU transactions as ineligible activities

would seek to overturn a well-established OBU practice, and limit the ability to enter into certain

transactions (e.g. futures). To assert that these proposals merely “close loopholes” is misleading.

Caution should be had before a Government uses terms such as “loophole” which is patently

pejorative. The inference that Parliament never intended Division 9A to permit related party and

OBU to OBU transactions is fallacious.

The press release suggests that the purpose of the OBU regime is to promote “genuinely

mobile banking business” in Australia. It is interesting that this descriptor has been adopted in the

place of the more historical and wider descriptor of promoting “offshore banking”.61

The originally proposed commencement date of 1 July 2013 was unrealistic and unfair. As

noted above, the proposals sought to overturn several long standing OBU practices. To give 30

June balancers only a matter of weeks to adapt their practices was unreasonable. Ultimately, the

then Government realised this and on 28 June 2013 (some three days before the original

proposed commencement date) the then Assistant Treasurer (the same one!) announced that the

measures proposed in the Budget would be deferred to income earned on or after 1 October 2013

(cf. income years commencing on or after 1 October 2013 – discussed in section 7.9 below. As

discussed in section 7.9, the start date has now been deferred again to 1 July 2015.

7.2 Discussion Paper

The Discussion Paper reflects the same ambivalence that captivates the entire OBU regime and

seeks comments on seven particular issues. Some of the proposed changes likely to emerge from the

Discussion Paper are good, in the sense it is apparent from the Discussion Paper that Treasury

understands some of the difficulties/limitations with the current regime and is looking for ways to

rectify them. At the same time, some of the changes likely to emerge are bad in the sense that they

will further limit and complicate the OBU regime (OK, they might also be good if they address genuine

integrity issues).

61 For example, refer to items 4 to 6 of Appendix A.



These issues are discussed in sections 7.3 to 7.9 below.

7.3 Inappropriate access to the OBU concession

The Discussion Paper identifies several types of arrangements that concern the Government. These

include the following.

7.3.1 Related party transactions that convert non-OB income into OB income

In the course of industry consultation, the ATO provided a number of examples of “washing”

arrangements where an offshore related party is funded by an OBU via an eligible OB activity (e.g. a

loan) to undertake an ineligible activity – i.e. either a non-OB activity with an onshore or offshore

person or a type of OB activity with an onshore person. This is shown diagrammatically as follows:

Treasury’s initial proposed solution was to make all related party dealings ineligible for concessional

OBU treatment. In response to that proposal (and specifically to consultation questions 1 and 2

included in the Discussion Paper), industry raised the following issues:

The ability for OBUs to access funds is especially important in times of liquidity constraints.

The prohibition on related party transactions would have the effect of withdrawing “lender of last

resort” facilities for OBUs. In this regard, in times of severe stress in financial markets (as

witnessed both in the GFC and a few times subsequently), inter-bank lending markets effectively

shut down as banks seek to limit their exposure to other banks – as well as to shore up their own

funding needs. In these circumstances, banks cease third party transactions and borrow or lend

between branches consolidating net funding surpluses/deficits in the location with the best access

to external funding (normally from their central bank).

Under the proposed changes an OBU would not be able to transact with its offshore branches

and, given it cannot transact with its central bank (the RBA being a resident), then there is a

strong possibility that an OBU would not be able to meet its liquidity requirements in any future



financial crisis, forcing it to either default on its obligations or breach the proposed new rules.

Indeed, there is a possibility that banks’ internal treasury departments might choose to close their

OBUs, rather than run this reputational risk. Allowing an OBU to borrow either from a single

branch (i.e. London or New York - the “following the sun” rule) at arms’ length or, indeed the RBA,

would greatly reduce this genuine risk.

Financial institutions often use related parties to hedge the group’s overall risk. In this regard,

financial institutions increasingly centralise different types of risk (funding, credit and market, etc.)

in different entities in different jurisdictions. Accordingly, preventing related party transactions

would interfere with the risk management practices of financial institutions - ultimately,

undermining the OBU regime.

There appeared to be an underlying assumption from Government that organisations would

otherwise provide funding to offshore subsidiaries through their DBUs. Most large financial

institutions also have offshore branches which may be better placed to provide that funding and

therefore have the effect of eroding the Australian tax base.

In the Authors’ view, the extent to which related party transactions should be a concern for the

Government depends on the circumstances as to how the subsidiary came to provide the particular

ineligible activity. That is to say:

Where a non-resident initiates a transaction by approaching an overseas subsidiary of a

multinational financial institution and requests that that financial institution provides the relevant

activity (let’s say a leasing transaction), then there seems no mischief in an OBU related to that

overseas subsidiary funding that subsidiary. In this regard, typically the Australian parent will

compete with its own subsidiaries in the more established “money centres” for the lending

business (to fund the subsidiary’s leasing transaction). In such a case, the financial institution/its

OBU has not sought to interpose the overseas subsidiary so as to convert ineligible activity to

eligible activity.

Where that non-resident instead approaches the Australian parent and an arrangement is

reached whereby the overseas subsidiary provides the leasing transaction and the OBU and

overseas subsidiary effectively split the margin on the leasing transaction, then arguably there is

some mischief that should be countered.

Possible changes

On 6 November 2013, the (current) Assistant Treasurer, together with the new Treasurer, issued a

press release to provide the Coalition’s initial response to 92 previously announced but unenacted tax

and superannuation measures. In this regard, the Government confirmed that it will proceed with

amending the OBU regime, but will not proceed with the “blanket” prohibition against related party

transactions. Relevantly, the release stated:

“The Government will not proceed with the part of this measure that excludes all related party

transactions but have a targeted integrity measure to provide certainty for the industry. It will

help Australian banks compete on a level playing field overseas, through access to a

competitive tax rate, and attract activity to their Australian operations.



The Government will continue to work closely with stakeholders to develop targeted rules to

address the integrity issues with the current rules. Consultation will begin soon.”

According to the press release, we can expect legislation sometime in the first part of this year.

Industry consultation has continued. Also on 6 November 2013, a meeting between representatives

from Treasury, the ATO and industry was held to discuss certain possible approaches to some of the

issues canvassed in the Discussion Paper. Before that meeting, Treasury circulated a document titled

“Offshore Banking Units: Consultation meeting with business, 6 November 2013” (Consultation

Document). That document listed four issues and provided a possible approach (or, in one instance,

several possible approaches) to address each issue.62

These possible approaches are set out and

considered below.

In response to the issue (as described in the Consultation Document) “Related party transactions

which have the effect of converting ineligible income to eligible income”, Treasury provided the

following possible approaches:

Introduce a purpose test to deny OBU treatment for income from arrangements entered into for the purpose of converting ineligible income to eligible income.

- dominant purpose(?)

- less than a ‘dominant purpose’ requirement(?)

Introduce a rule that looks through the related party with which the OBU is dealing.

- For income from a related party to be treated as OB income:

: The transaction between the OBU and the related party must be an eligible activity; and

: all transactions between the related party and third parties must also be eligible transactions.

- Income which would otherwise be treated as OB income is reduced to the extent that the transactions of the related party with third parties are ineligible transactions.

Introduce an activity test for the related party.

- for income from a related party to be treated as OB income:

: the primary business activity of the entity (that is the related party) must be the provision of financial services; and

: the transactions of the entity are predominantly eligible transactions.

Treasury’s possible approaches – some comments

Introduce a purpose test

62 The Consultation Document contains the following note:

“This note has been prepared for the purpose of consultation between the Treasury, the Australian Taxation Office

and business representatives. The ‘possible approaches’ listed below include, but are not necessarily limited to,

approaches suggested in submissions to the earlier discussion paper. These approaches do not necessarily

represent Treasury’s position on the issues and should not be taken as representing the view of the Government.”

The possible approaches provided by Treasury in their Consultation Document and extracted in this section of the paper must

be read having regard to the above.



Purpose tests are inherently uncertain, fact-intensive and inevitably difficult to apply, as is evident

from their use (and resultant litigation) in Part IVA and elsewhere in tax law. Ideally, some other

solution needs to be found!

Introduce a rule that looks through the related party

This approach appears to assume that most related party transactions are of a tailored or structured

or indeed bespoke nature. This approach works if related party activity comprises only back-to-back

transactions where the OBU deals with a related party and then that related party deals on very

similar terms (amount, currency, tenor, etc.) with a third party. However, an active OBU will do many

transactions with active related parties and those related parties will often operate to warehouse risk

and pool funds rather than back everything out to market on a matched basis. At some stage

obviously the risk and cash flows do get “turned out” to the market. However, it would usually be

impossible to trace individual transactions emanating from the OBU and match each transaction with

an eventual third party transaction – as well as ensuring that the particular third party transaction

meets the eligibility criteria, as flows get transformed in terms of tenor, currency and, indeed, product.

Further, this proposal on its own would restrict genuine businesses in offshore subsidiaries from

sourcing matched funding from related party OBUs.

Introduce an activity test for the related party

It is not obvious why the related party must be in the business of providing financial services and it is

even less obvious why the transactions of the related party should be predominantly OBU eligible

transactions. There will inevitably be considerable ongoing compliance difficulties in having to collect

data so as to ascertain whether or not the second requirement has been met in any given year. Even

in relation to the first point there will likely be definitional issues in adequately defining, and keeping

up to date, a notion of “financial services”. The now highly antiquated and inadequate definition of

“financial intermediary business”, and related concepts, in the controlled foreign companies rules in

Part X of the ITAA36 is a case in point.

A more reasonable and preferable test would be to enquire whether the related party was an entity of

substance, carrying on its own business activities (whether financial services or otherwise), and not

merely acting as a conduit for its parent/OBU.

7.3.2 Transactions transferred between an OBU and DBU

Treasury’s concern here is that the transfer of transactions between an OBU and a DBU (where

actually permitted by the OBU rules) are being structured so that gains are attributed to the OBU

(taxable at 10%) while losses (deductions) are attributed to the DBU (deductible at 30%).

It is not self-evident the types of transactions that are of concern here. Perhaps what is at issue here

is the concern that an OBU taxpayer might transfer a deteriorating loan book or an out of the money

swap from their OBU to their DBU.



Possible changes

In response to the issue (as described in the Consultation Document) “Moving transactions between

OBU and other parts of the entity” [underlining added], Treasury provided the following possible

approach:

“Make any necessary amendments to the OBU provisions to ensure that:

- a transaction of an OBU which has been treated as an eligible transaction cannot be

subsequently treated as ineligible for OBU treatment;

- a transaction of an OBU which has been treated as an ineligible transaction cannot be

subsequently treated as eligible for OBU treatment;

- that an internal transaction which would have the effect so that:

: a transaction of an OBU which has been treated as an eligible transaction is

treated as ineligible for OBU treatment; or

: a transaction of an OBU which has been treated as an [sic] ineligible for OBU

treatment;

is not recognised for the purposes of calculating the income of the OBU.”

7.3.3 Trading in shares or securities issued by a related party

Treasury’s concern here is that the trading in shares/securities issued by a related party to an OBU

can have the effect of converting non-OB income to OB income.

For example, an overseas subsidiary of an OBU taxpayer (and at the direction of the OBU) might

acquire assets/a business that would not be covered by eligible OB activities. The OBU, by buying

and subsequently selling the shares in the subsidiary, hopefully at a profit, could seek to come within

the “trading” head of eligible OB activities.

Possible changes

In response to the issue (as described in the Consultation Document) “Trading in shares in

subsidiaries”, Treasury provided the following possible approach:

“Treat income from trading in shares as eligible income only if:

- the share was acquired (held) for trading purposes and is recorded in the financial

accounts as held for trading or for resale

- the OBU does not hold non portfolio interest in the issuer of the share.”



7.3.4 OBU to OBU transactions

The Discussion Paper notes that permitting OBU to OBU transactions “is not consistent with the policy

intent of the regime as OBU to OBU transactions are essentially domestic transactions”. According to

Treasury, this is the case even where the OBUs are not related parties.

The diagram below shows a simple OBU to OBU transaction:

It is not clear what the mischief is in the above example. In the course of industry consultation

following the Discussion Paper, neither the ATO nor Treasury have been able to articulate any strong

policy, revenue or other concern that arises from OBU to OBU transactions.

In response to the Budget announcement (and specifically as regards consultation question 3

included in the Discussion Paper), industry has made the following submissions:

OBU to OBU transactions generate liquidity for OBUs as well as providing economies of

scale. Where a financial group has more than one OBU, then each OBU can undertake a

specialised function which generates efficiency and ultimately provides an incentive for more

transactions to be undertaken in Australia.

OBU to OBU transactions enable surplus OB money to stay in Australia at least temporarily.

In this regard, generally an OBU with excess OB money must deposit that money with another

OBU or a foreign financial institution (i.e. an offshore person) pending some other use of the

funds. If OBU to OBU transactions were prohibited, then the excess funds would necessarily

leave Australia. This is contrary to the policy intent of the OBU regime. It also reduces the

quantum of money in the OBU network which ultimately impacts the capacity of OBUs to

undertake eligible OB activities.

Prohibiting transactions between OBUs could technically prohibit transactions between an

OBU and an overseas branch of a (related or an unrelated) banking group with an OBU. For

example, where ABC has a subsidiary that is an OBU, then because of s.717-710, ABC itself is

deemed to be an OBU. ABC could also itself be registered as an OBU. Where ABC has branches

overseas, those branches would also be considered to be part of ABC’s OBU (because they are

the same legal entity). Therefore, (unless the scope of s.121EB covered the proposed prohibition)

technically, XYZ’s OBU could not transact with ABC’s overseas branches.



Possible changes

Whilst it is not clear from the Government’s 6 November 2013 press release whether this aspect of

the Budget announcement has been abandoned, the Authors consider it likely that, ultimately, this will

be the case.

7.4 The “choice” principle

The Discussion Paper proposes that the “choice principle” in the lore of the OBU regime be formally

legislated.

7.4.1 Background

In Tax Determination 93/135, the Commissioner indicated that an OBU taxpayer can effectively

choose to treat a transaction which falls within the definition of an “offshore banking activity” as a

domestic transaction “so long as it is recorded in the domestic book (DB) at the time it was entered

into”. For many years industry construed this TD as conferring a “choice” for an OBU taxpayer to book

a particular eligible transaction to either its DBU or OBU.

In 2007, the ATO considered withdrawing TD 93/135. In this regard, an industry consultation paper

published by the ATO at that time questioned the legal basis for the conclusions in TD 93/135, and,

more importantly, the implication that followed – i.e. that Division 9A supports some sort of “choice”

principle.

An OBU taxpayer needs the ability to make this “choice” for at least two important reasons.

Purity test

As discussed in section 3.5 above, s.121EH contains the so called “purity test” which, briefly stated, is

triggered when more than 10% of an OBU’s assessable income for an income year is attributable to

activities that used non-OB money. The DBU of an OBU taxpayer is likely (often, and indeed

generally, on an inadvertent basis) to undertake a variety of activities that would constitute eligible OB

activities. Absent being able to choose to book a transaction to its DBU, an OBU taxpayer is likely to

inadvertently fail the purity test.

“Clawback” of interest withholding tax exemption

As discussed in section 3.6 above, s.128GB provides an exemption from interest withholding tax that

would otherwise be imposed under s.128B on “offshore borrowings”. However, this exemption is

effectively clawed back with penalties where the funds are used in the OBU taxpayer’s DBU (i.e. the

funds are not used for eligible OB activities). Accordingly, being able to choose not to claim the

s.128GB exemption is critical where an OBU taxpayer raises funds overseas for its DBU operations.



7.4.2 Industry submissions

In response, industry has for many years now requested that a statutory “choice” rule be introduced

into Division 9A. Under this rule, an OBU’s record keeping treatment at the time a transaction is

entered into would determine whether it sits in its OBU or DBU. Some six years since the proposed

withdrawal of TD 93/135, industry is still waiting.

7.4.3 Possible changes

It is likely that this choice will ultimately be legislated. However, such a rule may be caveated and

subject to integrity provisions. Central to this is the concern that an OBU taxpayer could

opportunistically book an in the money transaction to their OBU, but then, transfer that transaction to

its DBU should the transaction later fall out of the money.

The Discussion Paper proposes to address the integrity concern by requiring a choice be made at the

time of entering into the transaction. That choice would be irrevocable, subject to rectifying genuine

mistakes. However, this integrity concern should be weighed up against the need for flexibility in the

way OBU taxpayers manage their transactions throughout their tenure.

7.5 List of eligible activities

7.5.1 Background

The prescriptive nature of the list of eligible OB activities in s.121D means that OBU taxpayers

wanting to undertake new and innovative financial transactions through their OBUs are often left

trying to fit square pegs into round holes.63

This has manifested itself in OBUs needing to seek private

rulings to test the boundaries of the list in s.121D.

Industry has for many years sought not only a broadening and updating of the list of eligible activities

but also that processes be put in place so that the list can be reviewed and updated more quickly to

respond to product innovation. The Discussion Paper noted that whilst the Johnson Report also

recommended that the list be regularly reviewed and updated, the Johnson Report did not include a

recommendation as to how to refine the list of eligible activities.

Accordingly, consultation question 6 in the Discussion Paper asks how the current list of eligible

activities can be refined to better serve the policy intent of the regime.


Over a number of years (i.e. not just in response to this consultation question), industry has made a

number of submissions, including the following:

63 Refer to page 58 of the Johnson Report.



To the greatest extent possible, principles based drafting should be used to avoid the current

exhaustive laundry list approach. Where principles based drafting is not appropriate, and a new

activity is added to the “laundry list”, then the activity should be defined by way of concise, market

accepted financial terminology.

To the greatest extent possible, the current list of OB activities should not be substantially

amended, so that the body of precedent regarding the interpretation of these activities (developed

through successive public and private rulings) is preserved.

Transactions involving instruments that are financial arrangements (for Division 230 TOFA

purposes) should be eligible OB activities.

Further additions to the list should be made by way of Regulations.

A comprehensive peer review should be undertaken of the list of eligible activities included

under Singapore’s Financial Sector Incentive Scheme (refer to section 5.1 above). This should be

undertaken approximately every three years.


The Authors of this paper are eternal optimists. Therefore, we hope that the Discussion Paper will

provide impetus for the new Government to take up industry’s long standing requests regarding the

list of eligible activities.

7.6 Allocation of expenses between OB income and non-OB income

7.6.1 Background

The 2013/14 Budget announcement regarding OBUs noted that the Government would consult with

industry regarding whether expenses are appropriately allocated between OB income and non-OB

income. In this regard, the Discussion Paper cited concerns from industry regarding the treatment of

general OB deductions and the treatment of deductions that do not relate to the OBU taxpayer

deriving either OB or non-OB income.

The expense allocation methodology in Division 9A

The provisions addressing the allocation of an OBU taxpayer’s expenses between its OBU and DBU

are set out in sections 3.4 above. In summary, the expenses of an OBU are generally classified into

three categories: the first two are the exclusive expense categories (exclusive OB deductions and

exclusive non-OB deductions).

Where an OBU taxpayer’s expenses do not fit into one of these exclusive expense categories, then

the expense is generally classified as a “general OB expense”.



The formula contained in the definition of a “general OB expense” apportions each of the OBU

taxpayer’s “general” expenses so that part of each is included in the OBU taxpayer’s “allowable OB

deductions” (and therefore reduced by two-thirds when calculating the OBU taxpayer’s overall taxable

income) and the other part is included in the OBU taxpayer’s ordinary tax deductions. In this regard,

the formula compares the OBU taxpayer’s OB assessable income (i.e., broadly, the assessable

income of an OBU taxpayer that relates to the OBU’s activities) against the OBU taxpayer’s total

assessable income – that proportion is applied to the amount of general OB deductions to determine

the amount included in the OBU taxpayer’s allowable OB deductions. The remaining amount of

general OB deductions is left to the ordinary deduction rules outside of Division 9A.

Former administrative practice

The ATO has previously had the practice of accepting that the components of expense items relating

to OB and non-OB activities can be regarded as “exclusive” OB and non-OB costs respectively - as

ascertained by relying on the OBU taxpayer’s financial and management accounting records. In this

regard, it is evident that over a number of years a practice developed where some (but not necessarily

all) OBU taxpayers adopted this methodology.

It is beyond the scope of this paper to consider all of the reasons why this practice developed.

However, central to this, is Tax Determination 93/211. TD 93/211 states that where there are records

that identify the time spent by employees on OB activities, their employment related costs can be

treated to that extent as exclusive OB deductions. It is only if there are no such records available that

such costs must be treated wholly as general OB deductions for the purposes of the statutory formula.

More recent administrative practice

It is understood that the ATO no longer accepts an allocation of expenses based on accounting and

financial records. Instead, an OBU taxpayer must follow the ATO’s interpretation of the statutory

formula.

One OBU taxpayer caught up in this issue is the Macquarie Group. In Macquarie Bank Limited v

Commissioner of Taxation [2013] FCA 887, Edmonds J heard an application for interlocutory

injunctive relief under s.5 of the Administrative Decisions (Judicial Review) Act 1977 and under s.39B

of the Judiciary Act 1903 for the Federal Court to review a decision made by the Commissioner.

The decision involved the Commissioner refusing to apply his view of the law on the allocation of OBU

expenses solely on a prospective basis. In this regard, during the course of a Large Business Audit of

Macquarie Bank Limited (MBL) and Macquarie Group Limited (MGL) (together Macquarie)64

for their

2006 to 2008 income years, the Commissioner had expressed his intention to apply the ATO’s

interpretation of the statutory formula in s.121EF(4) to Macquarie’s expenses rather than permitting

Macquarie to rely (quite reasonably in the circumstances, especially in light of its understanding of

practices accepted by the ATO at relevant times) on accounting expense methodologies. Relevantly

64 As previously noted in this paper, MGL replaced MBL as the head company of the Macquarie income tax consolidated group

pursuant to a “non-operating holding company” (NOHC) reorganisation in 2007.



for this hearing, the Commissioner sought to apply this decision retrospectively – i.e. to each of those

income years under audit.

Macquarie contended that, amongst other things, “the decision was one that no decision-maker

reasonably could have made”. Macquarie also sought relief based on a number of other

administration law remedies.65

To that end, Macquarie sought (again, amongst other things) a writ of

certiorari to quash the decision.66

Edmonds J at first instance

As Edmonds J remarked at paragraph 27 of his judgment, “at the heart of the applicants’ grievance”

was an ATO Practice Statement: PS LA 2011/27 (Practice Statement). The Practice Statement sets

out the circumstances to be considered when determining whether the ATO should apply its view

prospectively only. Relevantly, those circumstances include:

“[36](i) whether the ATO became aware of the position adopted by taxpayers or an industry

practice in applying the law (for example, through compliance activity) but did not challenge it

within a reasonable timeframe having regard to the size of the risk

[46] If there was evidence of the ATO being aware of a particular industry practice and it did

not alert taxpayers or the industry to its contrary view and it did not finalise its view for a

lengthy period of time, then this would be a case in which it would be expected that the ATO

would apply its view only on a prospective basis.

[47] For example, where the ATO was aware of the practice (as evidenced in ATO

publications, transcripts of speeches or minutes of ATO forum meetings) and had conducted

a series of audits in that industry and determined not to take compliance action in relation to

that issue, then it would be more likely that the ATO would be considered to have facilitated or

contributed to the practice.”

It was contended by Macquarie that the ATO had previously accepted an expense allocation

methodology for expenses of an OBU based on accounting and financial records where this

methodology produced a reasonable outcome.67

It was further contended by Macquarie that the Commissioner’s reasoning (for the purposes of

applying the Practice Statement) had “hinged on the ATO’s statement of its views at the IBSA meeting

in December 2004 as effectively correcting any earlier impression its conduct had created”.68

Contrary

to this, Macquarie contended that the views expressed at that meeting were not:

65 Refer to paragraph 28 of Justice Edmonds’ judgment.


67 Refer to paragraph 29 (third paragraph) of Justice Edmonds’ judgment.

68 Refer to paragraph 29 (fourth paragraph) of Justice Edmonds’ judgment. It is understood that at that meeting, the

International Banks and Securities Association of Australia (IBSA) was verbally advised that the Tax Counsel Network (TCN)

had determined the ATO’s previous stance should change because TCN had formed a different view of the relevant provisions

which did not support using apportionment based on management or financial accounting methodologies.



“expressed as a final or definitive statement of the ATO’s view and that the ATO was to come

back and indicate its final views at a subsequent date (which did not occur until some 7 years

later)”.69

Edmonds J found it unnecessary to consider Macquarie’s substantive grounds upon which it sought

the review of the Commissioner’s decision on the basis that:

Macquarie’s application under the Administrative Decisions (Judicial Review) Act 1977 was

“incompetent”; and

Macquarie had no reasonable prospect of obtaining the final relief sought and therefore the

proceeding should be summarily dismissed under the Federal Court of Australia Act 1976.

In making that decision, Edmonds J accepted the Commissioner’s submissions that the decision was

not “a decision made, proposed to be made or required to be made under an enactment”. In making

this decision, Edmonds J applied Griffith University v Tang (2005) 221 CLR 99 in which the High

Court held that a decision is only made “under an enactment” if the decision is expressly or impliedly

required or authorised by the enactment and the decision confers, alters or otherwise affects legal

rights or obligations and derives that legal effect from the enactment.70

In this regard, Edmonds J held

that the Practice Statement was not an “enactment” in the required sense.71

Further, the

Commissioner’s decision did not:

“as a matter of law ... affect the operation of relevant substantive taxing provisions or the

existence of power to take action under the Act (such as issuing an amended assessment)”.72

Edmonds J made some interesting observations regarding the function and significance of a practice

statement in the way the ATO administers the tax law. In particular, Edmonds J remarked:

“71. Read with the references to the legal framework within which the Commissioner must

operate, and obligations arising under the FMA Act, the references in PS LA 2011/27 at [21]

and [23] to taking “action” (or “compliance action”) are to be read as referring to

circumstances where there are resource allocation decisions to be made – e.g. whether to

initiate an audit or some other form of investigation. PS LA 2011/27 does not purport to

require that, in assessing the tax due for past years or periods (e.g., at the completion of an

audit), officers are to make a decision about whether to make that assessment on the basis of

the ATO’s current understanding of the law or on the basis of some other understanding.

72. To the extent that any guideline or practice statement did purport to instruct an officer to

act in that way, compliance with that instruction would be inconsistent with fundamental

requirements of the Acts.…”

Full Federal Court

Following Justice Edmonds’ decision, Macquarie sought leave to appeal to the Full Federal Court

(FFC) on the question of whether the primary judge had erred in holding that the applicant had no

69 Refer to paragraph 29 (sixth paragraph) of Justice Edmonds’ judgment.






reasonable prospect of obtaining a declaration that the Commissioner had not made a decision in

accordance with the Practice Statement. Before the FFC, Macquarie submitted that the power of the

general administration of tax legislation conferred upon the Commissioner (general administration

power) provides him with:

a discretion in making compliance decisions to reassess and “in relation to evidence he is

willing to accept to ascertain the taxable facts”; and

a permission “to decline to consider re-assessing, or to decline to in fact re-assess a

taxpayer”.

Justices Middleton, Pagone and Davies refused to grant leave on the basis that Edmonds J was

correct in dismissing Macquarie’s application. In this regard, the FFC held that “Macquarie’s case was

bound to fail and, or alternatively, has no utility” because “there is no basis upon which Macquarie

could seek to enforce any adherence to the practice statement”.73

In making its decision, the FFC held that the general administration power conferred by provisions

such as s.8 of the ITAA36 (amongst others) does not permit the Commissioner to dispense with the

operation of the law. In this regard, the FFC held that the general administration power is not:

"a discretion to modify, or which modifies, the liability to tax imposed by the statute: the power

in such provision for general administration … affects the administration of the Acts and not

the Commissioner’s duty to act according to law and to assess taxpayers to the correct

amount of liability imposed by the legislation.”74

Furthermore, the FFC remarked that, having formed the view that the statute imposes a liability

contrary to some view he may have held previously, the Commissioner has a duty to apply the law as

he understands it to be.

Decision impact statement

The ATO issued a Decision Impact Statement on the FFC’s decision in January this year. In that

statement, the Commissioner said:

“The Full Court's decision confirms our understanding that when the Commissioner has

formed the view that the tax law imposes a liability on a particular taxpayer, the Commissioner

has a duty to assess the taxpayer in accordance with that view. This typically occurs, for

example, when an audit is completed.

As the Full Court's decision notes, we were conscious when drafting the Practice Statement

of this obligation. We confirm that the Practice Statement applies only to resource allocation

decisions, including resource allocation decisions made during the conduct of an audit.

However, in light of the Full Court's comments that a reading of the Practice Statement could

suggest otherwise, we will review the wording of the Practice Statement with a view to

identifying any changes that should be made to clarify its intended operation. Any such

changes are not expected to alter the practical operation of the Practice Statement.

73 Refer to the end of paragraph 7 of the FFC’s judgment.

74 Refer to paragraph 11 of the FFC’s judgment.



In the meantime, the Practice Statement continues to apply as an instruction to ATO staff

about resource allocation decisions, with the intended practical effect of not disturbing

assessments for years where the factors outlined in the Practice Statement are present. The

ATO will seek to ensure that ATO officers carry out the research required by the Practice

Statement at the earliest practical time.”

Interpretation of exclusive non-OB deductions – A BIG PROBLEM AREA!

The definition of an “exclusive non-OB deduction” in s.121EF(6) is set out in this paper in section

3.4.3 above. In the course of his judgment, Edmonds J noted that in addition to the various position

papers issued by the ATO regarding the expense allocation methodology adopted by Macquarie, the

ATO also expressed the position that deductions claimed under s.25-90 (deductions for interest and

like expenses incurred in deriving dividends that are non-assessable non-exempt income due to

s.23AJ) are necessarily general OB deductions. According to Edmonds J, the ATO put its position as

follows:

“Sub Issue 1 – Are allowable deductions claimed under section 25-90 of the ITAA 1997

general OB deductions for the purposes of subsection 121EF(4)?

35. Yes. Allowable deductions claimed under section 25-90 of the ITAA 1997 are general OB

deductions as they were incurred in relation to non-assessable non-exempt OB

deductions as they were incurred in relation to non-assessable non-exempt (“NANE”)

income. Accordingly, deductions claimed under section 25-90 of the ITAA 1997 must be

apportioned using the formula in subsection 121EF(4)”75

The (absurd and clearly unintended) implication here is that even if a s.25-90 deduction does not in

any way relate to a taxpayer’s OBU, nonetheless, that taxpayer must apportion that expense using

the statutory formula in s.121EF(4). That outcome is inevitably disadvantageous to a taxpayer

because the portion of the s.25-90 deduction that is allocated to their OBU is not deductible at the full

30% tax rate.

Clearly, the advent/enactment of the concept of non-assessable non-exempt income, and the

deduction allowed in s.25-90 were not contemplated when s.121EF was enacted in 1992. There can

be no clearer example of the need for a legislative amendment having prospective and retrospective

effect so as to prevent such nonsensical results arising.

The same problems and need for amendment would apply equally to s.230-15(3) (which is the TOFA

equivalent of s.25-90) and s.40-880.

7.6.2 Industry submissions – allocation of expenses

Over a number of years (i.e. not just specifically in response to the Discussion Paper), industry has

made a number of submissions regarding this issue, including the following:




On the ATO's current view of the law, the current statutory general expense allocation formula

is complex and cumbersome and can deliver distorted and arbitrary results (which may

disadvantage either the taxpayer or the tax revenue, depending on the circumstances). In this

regard, assessable income is used as a proxy to allocate expense. This as a proxy is unreliable

because:

o the intensity of input factor usage (i.e. staff, working capital, etc.) may be different as

between the OBU and the DBU;

o the types of business conducted by the OBU versus the DBU may differ; and

o “adjusted assessable income” (in the s.121EF(4) formula) is unreliable because it

includes both gross and net income concepts.

The expense allocation methodology should explicitly permit the allocation of actual costs of

the resources used by the OBU in producing its income.

The rules for apportioning expenses should seek to allocate on a fair and reasonable basis

having regard to the relevant efforts involved (for example, head count, proportionate to income,

balance sheet usage, etc.).

7.6.3 Possible changes – allocation of expenses

It is unclear at this time where this issue will end up. For some OBU taxpayers, the ATO's current

view of the law may be advantageous and they would not be agitating for change. For others, the

ATO view provides an arbitrary and unfair result where an inappropriately large proportion of

expenses are treated as “general” and are deductible at a reduced rate.

A solution to this issue might be to simply provide OBU taxpayers with the choice of either method.

However, offering this may not sit comfortably with Treasury and the ATO lest this choice elicit

opportunistic behaviour.

7.6.4 Industry submissions – exclusive non-OB deductions

Industry has observed that the interaction of s.25-90 and other similar provisions with s.121EF(6) (per

the interpretation adopted by the ATO) is anomalous. This outcome arises due to the fact that Division

9A was drafted well before ss.25-90, 230-15(3) and s.40-880.

Whilst not explicitly addressed in the Discussion Paper, industry has requested that Division 9A be

amended to make it clear that statutory deductions which do not have a nexus with deriving

assessable income and are not related to OBU, be treated as exclusive non-OB deductions.

7.6.5 Possible changes – exclusive non-OB deductions

In the Authors’ view the position regarding clarifying the definition of exclusive non-OB deductions is

quite straightforward. The position adopted by the ATO is clearly not what was intended by Parliament

when drafting that definition. Accordingly, an amendment to s.121EF(6) clarifying that it applies to



deductions that “relate exclusively” to assessable income as well as exempt income and non-

assessable non-exempt income (where in each case that income is not assessable OB income) is

likely to be forthcoming at some point.

7.7 Streamlining the OBU application process

7.7.1 Background

Recommendation 3.2 of the Johnson Report stated:

“A streamlined process for vetting new OBU applications be put in place:

with a requirement that an application be approved or denied within six months of its

receipt, subject to all the appropriate application material being lodged;

with revised administrative changes for the ‘other company’ category. The Forum

proposes that the guidelines 4(g), 4(r) and 4(s) in the Income Tax Assessment

(Determination of Offshore Banking Activities) Guidelines 1999 be satisfied by an

external auditor (or equivalent) verification; and

that these new arrangements be reviewed by Treasury 18 months after their adoption

to ensure they are working effectively.”

Consultation question 10 of the Discussion Paper seeks comments on the main concerns with the

application process and how the application process can be improved.


In response to this consultation question, industry has previously identified several concerns with the

current OBU application process. These include the following:

The length of time that it takes for an application to be processed and accepted (i.e. between

initial application and the gazettal).

The lack of clarity around the application process, including which statutory bodies assess an

OBU application.

The fact that there is no mechanism by which an OBU can be deregistered/“de-gazetted”.

However, this appears to now be possible. On 4 July 2013, the then Assistant Treasurer David

Bradbury issued a gazettal notice declaring that Société Générale was no longer an OBU from

the Gazettal date.


Again, the Authors hope that the Discussion Paper provides impetus for the new Government to

address industry’s submissions regarding the OBU application process.



7.8 Ensuring other provisions interact appropriately with the OBU

regime

7.8.1 Background

The Discussion Paper notes that the OBU rules rely on other provisions in the income tax law to

determine the amounts of assessable income and allowable deductions. The OBU rules are then

overlayed on those rules to reduce the assessable/deductible amounts.

The Discussion Paper also notes that the income tax consolidation rules result in the head company

of a consolidated group being deemed to be an OBU (even if not itself gazetted as one) where a

member of that group is an OBU (refer to section 6.2.4 above).

Consultation question 11 asks whether there are any inappropriate outcomes that arise as a result of

the interaction of the OBU regime and other provisions in the income tax law, and how these might be

resolved.


In response to this consultation question, industry has observed that the interaction of s.121EB (which

deems an OBU and its overseas permanent establishments to be separate persons) and Australia’s

rules and practices regarding profit attribution and intra-entity dealings needs to be clarified to ensure

the proper recognition of those intra-entity dealings.

Furthermore, industry has referred to a number of outstanding submissions previously made

regarding the interaction of Division 9A and other income tax provisions, including the following:

The high effective tax rate (even above 30%) that can arise because an OBU taxpayer’s FITO

entitlement is reduced by two thirds under s.121EG(3A) (refer to section 6.3.4 above).

The interaction of s.128GB (the “offshore borrowing” interest withholding tax exemption) and

s.128NB (which effectively claws back the exemption in some cases) (refer to sections 3.6 and

6.2.4 above).

The interaction between s.25-90 (and similar statutory deduction provisions) and the meaning

of exclusive non-OB deduction in s.121EF(6) (refer to section 7.6 above).


Once more, the Authors hope that the Discussion Paper and the renewed consultation efforts

between Treasury and industry stimulate refinements in this area to address industry’s concerns.



7.9 Treatment of existing transactions

7.9.1 Background

The Discussion Paper noted that the proposed changes to the OBU rules were to apply from 1

October 2013. The Discussion Paper also said that there was to be no “grandfathering” of existing

transactions within an OBU that became ineligible OB activities following the commencement of the

proposed amendments. The Discussion Paper then observed that this could have the unintended

consequence of an OBU breaching the purity test in s.121EH.

Whilst the urgency of addressing this issue fell away when the new Assistant Treasurer announced

that the Government would not proceed with the 1 October 2013 start date and has now announced a

start date of 1 July 2015,76

this issue remains relevant. That is, if the new Government does ultimately

proceed with legislative amendments that make a hitherto eligible OBU transaction ineligible, then the

impact of this on an OBU taxpayer’s ability to satisfy the purity test remains a critical issue.

The new Assistant Treasurer’s initial announcement was made on 29 September 2013 (only two days

before the revised proposed commencement date). In the lead up to that announcement, industry

participants undertook the complicated task of attempting to unwind/extricate and re-document soon-

to-be ineligible transactions from their OBUs. This process was extensive (Legal, Tax, and Front,

Middle and Back Office), expensive and, in some cases, potentially involved reputational damage to

them because OBU participants required the cooperation of third party counterparties and, indeed,

clients. This undertaking was ultimately unnecessary and represents a large waste of resources (dead

weight loss).

Consultation question 12 asks how taxpayers could be adversely affected through the operation of the

purity test and the proposed changes to the OBU provisions. Consultation question 13 then asks how

these unintended consequences could be addressed.


In response, industry has observed that OBU taxpayers may encounter practical/contractual

difficulties and increased costs (such as break costs, and as noted above, reputational damage) in

attempting to remove ineligible transactions from their OBUs.

Accordingly, industry has submitted that a transitional rule is required. Under that transitional rule,

ineligible transactions could remain in the OBU without affecting the purity test (or other integrity

measures). However, assessable income relating to ineligible transactions would not receive the 10%

OBU concessional rate. For this transitional rule to be effective, the rule would also need to ensure

that the:

ineligible transactions do not result in the OBU holding non-OB money; and




interest withholding tax exemption in s.128GB continues to apply to interest paid by the OBU

in respect of ineligible transactions.


In response to the issue (as described in the Consultation Document) “Purity test transitional measure

(for transactions entered into before commencement date)”, Treasury provided the following possible

approach:

“Eligible transactions held prior to the commencement date and which are ineligible following the

amendments will not be taken into account for the purposes of the purity test.”

7.9.4 Treasury’s possible approach – some comments

This “possible approach” is promising. A robust transitional rule is a critical part of any legislative

amendments aimed at tightening the OBU rules. However, presumably under this approach income

from ineligible transactions would be taxed at 30%. Consequently, dual tax rates in a single “entity”

would be necessary resulting in manual work-a-rounds and a greater compliance burden.

* * * * *



Appendix A Chronological summary of major developments in

the OBU regime

Date Measure/Press Release/Act/Other Material

Key features Stated policy objectives

1. 20/3/1984

OBU Working Party

Treasurer Press Release, 20 March 1984

Establishment of a working party to develop proposals for a legislative framework for offshore banking in Australia

“In principle, the Government is favourably disposed towards the facilitation of offshore banking in Australia …” (Press Release)

2. Announcement:

1/7/1986

Offshore banking IWT exemption

Treasurer Press Release No.64 1986

Interest withholding tax (IWT)

exemption for “pure” offshore banking

Exemption limited to interest paid by OBUs where on-lent to non-residents

“… the Working Party considered that taxation was the sole area of official policy limiting further growth of offshore banking.” (Press Release)

3. Further announcement:

9/4/1987


Treasurer Press Release No.27 1987

Treasurer to issue Gazettal notices specifying eligibility to establish an OBU

ATO to enforce compliance

Application of penalties for loans made by OBUs that do not attract the IWT exemption

No specific reference made to policy

4. Enabling legislation:

Applies to interest on borrowings contracted


Taxation Laws Amendment Act 1988 (No.11 of 1988) and Income Tax

Inserted s.128GB which provides for an IWT exemption for interest paid by an OBU in respect of a defined

“… the interest withholding tax exemption is basically intended to encourage offshore transactions and in particular on-lending only to non-residents…” (page 7,





for after 1/7/1986 (Offshore Banking Units) (Withholding Tax Recoupment) Act 1988 (No.12 of 1988)

Royal Assent: 26/4/1988

“offshore borrowing”

Explanatory Memorandum to Taxation Laws Amendment Bill (No.5) 1987)

“… measures to encourage the development of offshore banking in Australia through a withholding tax exemption …” (page 1, Second Reading Speech to Bills)

5. 26/2/1992 Reduction in corporate tax rate to 10% for qualifying OBU activities

One Nation Economic Statement

Reduction of tax rate to 10% for income derived from pure offshore banking transactions by OBUs

“To help establish Offshore Banking Units (OBUs) in Australia, the industry requested a number of concessions from the Commonwealth. After careful examination, the Government decided that its contribution to the industry’s efforts would take the form of a favourable company tax rate for OBUs. …

This decision recognises the unique character of offshore banking as a highly specialised activity distinct from the core business of the banking sector. …

A 10 per cent tax rate for profits from offshore banking will provide further stimulus to the development of offshore banking in Australia at a time when such activity might be shifted from Hong Kong to elsewhere in the Asia Pacific region. … Development of offshore banking in Australia would help to integrate Australia more closely with the Asia Pacific growth economies by becoming an expanding financial centre of the region.” (page 77 of One Nation Statement)

6. Enabling legislation:

Commenced from 1/7/1992

Introduction of OBU regime in Div.9A

Taxation Laws Amendment Act (No.4) 1992 (No. 191 of 1992)


Inserted Division 9A which provides for a 10% tax rate on OB activities undertaken by OBUs

“The aim of the OBU tax concessions

The tax concessions for OBUs are designed to facilitate the growth of Australia as a viable offshore banking centre.

The existing withholding tax concessions have not





promoted any significant offshore banking.

After the announcement in the One Nation Economic Statement, extensive consultations were held with the banking and finance industry. An objective evaluation was made of the scope of the tax concessions needed to achieve the desired outcome.” (pages 23-24, Explanatory Memorandum to Taxation Laws Amendment Bill (No.4) 1992)

“Industry strongly argued that viability of an Australian offshore banking regime depended on Australia’s ability to compete on an even footing with other countries in our region that already provide a broad range of concessions.

The Government is in general agreement with this view…” (page 2, Second Reading Speech to Bill)

7. 8/7/1993 OBU “choice” principle

Taxation Determination 93/135

Confirmed that where a transaction which falls within an offshore banking activity which is entered into by the DBU and is accounted for in the domestic books will be treated as a domestic transaction

“3. Where this is done, the income will not be considered as attributable to non-offshore banking (OB) activities for purposes of the 10% of gross income test for the OBU (the 'purity test'). Under that test where more than 10% of the assessable income from OB activities was derived by using non-OB money, the tax concession will not be available.

4. If the transaction is entered in the OB books and later transferred to the DB books, the 'purity test' will still apply. The fact that the transaction is ultimately recorded in the DB books is not relevant. To avoid the application of the 'purity test', the transaction must be entered in the DB books at the time of making the transaction. This does not mean, however, that where details of a transaction are entered into the wrong set of books by mistake that the error cannot be rectified.”





8. 28/10/1993 OBU expense allocation methodology


Confirmed that where an OBU provides the services of its employees to a non-resident subsidiary (to assist that subsidiary in advising non-resident clients) the expenses can constitute defined “exclusive OB deductions”

“An OBU makes available the services of an employee to an offshore subsidiary to assist in advising offshore clients. The OBU charges the subsidiary a fee of $5 000 based on a rate per hour, plus a success fee of $15 000.

The assessable OB income would include fee income of $20 000.

If the records of the OBU clearly identify the employment related costs of providing the advice - for example, the number of hours worked on the activity, it would be entitled to claim an exclusive OB deduction. However, if the records do not clearly identify the actual costs the OBU must treat the expense as a general OB deduction calculated in accordance with the formula in subsection 121EF(4).” (TD 93/211)



Confirmed that an OBU is entitled to a defined “exclusive OB deduction” where expenses relate exclusively to OB activities, irrespective of whether defined “OB assessable income” is ultimately derived from those activities

“An OBU incurs salary, travel and other expenses on developing the following projects:

Project 1 tendering for an advisory role to the Malaysian government. Costs incurred $100 000

Project 2 researching the viability of advising Japanese institutions on investment in a Chinese infrastructure project. Costs involved $150 000.

The OBU is only successful with project 2 with a fee of $500 000 being derived.

The OBU is entitled to claim an exclusive OB deduction of $250 000.” (TD 93/213)


Confirmed that an OBU must enter details of defined “exclusive OB deductions” and defined “exclusive

“An OBU derives a fee of $100 000 for providing advice to an offshore person in accordance with subsection 121D(7). It incurred exclusive OB expenditure of $30 000





Taxation Determination 93/214 non-OB deductions” into its books of account at the time of incurring the expenditure. However, this is not necessary for defined “general OB deductions”

and general expenditure of $10 000.

The fee and exclusive OB expenditure should be entered in the separate OB books of account at the time the moneys were derived and incurred respectively. The general expenditure may be recorded separately, perhaps in a special register kept for this purpose, or in the company's general ledger and then apportioned in the tax return.” (TD 93/214)

11. Amending legislation

Commenced from 23/6/1994

Extensions to OBU regime in Div. 9A

Taxation Laws Amendment Act (No.2) 1994 (No. 82 of 1994)


Extended the meaning of defined “borrowing or lending activities” to include gold lending or borrowings

Clarified when a guarantee type activity qualifies as a defined “OB activity”

“Given that there is now an established market for gold loans and gold borrowings as an alternative means of finance and trading, the Government has decided to extend OB borrowings and lending activities to include gold loans and borrowings.” (paragraph 19.5, Explanatory Memorandum to Taxation Laws Amendment Bill (No.2) 1994)

“The offshore banking unit, OBU, concessional tax regime has now been in operation for over 18 months. While the government does not yet know precisely how successful the new measures have been in establishing Australia as an offshore banking centre, the number of registrations and requests for advice suggest a reasonably high level of interest.

… the government has now decided to extend the scope of possible borrowing and lending activities to include gold borrowings and gold loans. The measure will further promote Australia as a viable offshore banking centre.” (Second Reading Speech to Bill)






Commenced from an OBU’s 1997 income year

Extensions to OBU regime in Div.9A

Taxation Laws Amendment Act (No.2) 1996 (No.76 of 1996)


Inserted s.121D(6A) which extended the meaning of defined “investment activity” (which is an “OB activity”) to permit OBUs undertaking funds management to invest in Australian assets subject to a 10% limit

Extended the meaning of defined “borrowing or lending activities” to include borrowing/lending in AUD between related OBUs

Introduced IWT exemption for gold fees paid by OBUs in respect of gold borrowings

“To allow OBUs to more fully diversify their global portfolios the Government has decided to allow OBUs undertaking funds management to invest in Australian assets…” (paragraph 1.8, Explanatory Memorandum to Taxation Laws Amendment Bill (No.2) 1996)

“The Government considers that this will be appropriate to meet the requirements of most global fund managers by enabling them to offer more balanced global portfolios with a small component of Australian assets.

These amendments have the potential to bring about a large increase in the level of offshore funds managed by Australian banks and enhance the development of Australia as a financial centre in the Asia Pacific region.”

(Second Reading Speech – House of Representatives to Bill)

“The Government has decided to remove the current restriction on the borrowing or lending in Australian dollars between related OBUs in order to allow greater flexibility in dealings between companies within a group given the fact that the money must originally have been borrowed offshore.” (paragraph 1.15, Explanatory Memorandum to Taxation Laws Amendment Bill (No.2) 1996)

13. 8/12/1997 Extensions to OBU regime in Div.9A

Australia – A Regional Financial Centre – Investing for Growth

Proposals to:

extend OBU regime to fund managers and life insurance companies

extend the range of eligible OB activities in relation to trading and

“Provision of financial services for transactions between offshore parties is a very competitive business as the funds involved are highly mobile. Therefore many countries provide low tax rates for the profits derived through engaging in such activities.

For several years, Australia has provided a special Offshore Banking Unit (OBU) taxation regime intended to





hedging activities

ensure “comprehensive coverage” of IWT exemption by removing uncertainties and extending to “conduit” arrangements

reduce OBU penalty amounts

lower OBUs’ administration costs

facilitate such activity in Australia. …

The Government will make a number of changes to increase the attractiveness of the tax regime for OBUs.” (pages 3-4 of Paper)


Commenced from 2 July 1998

Extensions to OBU regime in Div.9A

Taxation Laws Amendment Act (No.2) 1999 (No.93 of 1999)

Royal Assent:16/7/1999

Implemented proposals contained in the Australia - A Regional Financial Centre statement, including:

inserted s.121D(6B) which extended the meaning of defined “investment activity” (which is an “OB activity”) to permit OBUs to undertake funds management for the benefit of overseas charitable institutions

extended the scope of a defined “offshore banking unit” to include life insurance companies and fund managers

“This bill also honours a commitment made by the Prime Minister on 8 December 1997 when he announced, as part of the ‘Investing for Growth’ statement, a package of measures which are aimed at making Australia a more attractive regional financial centre by building on Australia’s existing advantages to ensure its participation in the increasing global trade in financial services.” (Second Reading Speech to Taxation Laws Amendment Bill (No.2) 1992)


Private Binding Ruling (Authorisation

Ruled that:

where an item is acquired upon exercise of an option and a loss is subsequently made upon the

“It is not necessary for the loss or outgoing to be an exclusive OB deduction to produce assessable OB income in that year provided it relates exclusively to an 'OB activity'.





Number 85013) disposal of that item, then that loss is a defined “exclusive OB deduction”

where an option is exercised such that an OBU is required to make a payment to a defined “offshore person” under the options agreement, then that outgoing is a defined “exclusive OB deduction”

The term 'relates exclusively' is not defined in the ITAA 1936 or ITAA 1997. Furthermore, the Explanatory Memorandum to the Taxation Laws Amendment Bill (No.4) 1992 (Cth) (EM) that introduced the OBU measures in Division 9A of the ITAA 1936 does not provide any further guidance. Therefore the ordinary meaning needs to be used. … The term 'exclusive' is defined in The Australian Oxford Dictionary, 1999, Oxford University Press, Melbourne to mean:

excluding other things….restricted or limited to…excluding all but what is specified.

From the above definitions, for something to 'relate exclusively' to another thing, there must be an established connection between the two that is restricted or limited to those two things and excludes everything else. In the context of the applicant's OBU, losses made on the sale of the item/s to a third party offshore person will be an 'exclusive OB' deduction to the extent it has an established connection to the OBU's 'assessable OB income' and not anything else.

In the event that an option is exercised such that there is a required payment to the offshore person under the terms of the options agreement, this amount will be an 'exclusive OB' deduction to the extent it has an established connection to the OBU's 'assessable OB income' and not anything else.” (PBR 85013)

16. November 2009 Johnson Report: recommitment to OBU regime

Australia as a Financial Centre –

Recommendation 3.2 included:

“To give full effect to the Government’s policy intentions for

“The Forum believes that an effective OBU regime is a key element in ensuring that Australia’s financial sector takes full advantage of opportunities to participate in international transactions. The recommendation below is





Building on our Strengths (the Johnson Report)

OBUs, the Forum recommends that:

The Government, in its response to the Forum’s Report, include a statement of support for, and commitment to, the OBU regime. Such a statement could also refer to arrangements to ensure the ongoing competitiveness of OBUs.” (page 61, the Johnson Report)

designed to ensure our OBU regime and its objectives are well understood and that the regime is effective. It is significant that, despite over 20 years of that regime being in place in Australia, OBU usage has been relatively limited.” (page 61, the Johnson Report)

17. 11/5/2010 Government recommitment to OBU regime

Assistant Treasurer Media Release No.087 (Joint Media Release with the Minster for Financial Services, Superannuation and Corporate Law)

In response to The Johnson Report, the former Labor Government stated its “support in principle” for the OBU regime

Government’s response to Recommendation 3.2: Offshore Banking Units:

“Support in principle.

… “ (Assistant Treasurer Media Release)

18. 31/8/2012 Government recommitment to the Johnson Report recommendations

Minister for Financial Services Media Release No.055 (Joint Media Release with the Deputy Prime Minister and the Treasurer and the Minister for Finance and Deregulation)

The former Labor Government reconfirmed its commitment to implementing the recommendations in The Johnson Report

“Australia's financial services industry is a significant part of our economy and currently employs more than 400,000 people across Australia.

It also follows the 2009 Australian Financial Centre Forum report, Australia as a Financial Centre: Building on Our Strengths, which focused on opportunities of a more competitive, efficient and internationally engaged financial industry with increased cross-border activities within the Asia Pacific region and beyond. The Government has supported all 19 recommendations of the report.” (Minister for Financial Services Media Release)





19. 14/5/2013 Addressing compliance concerns

Assistant Treasurer Press Release 14 May 2013

The former Labor Government announced the “closing of loopholes” in the OBU regime with changes to apply from 1 October 2013

“This measure will improve the OBU regime to ensure its integrity and encourage genuinely mobile banking activity to take place in Australia. The measures will:

treat dealings with related parties, including the transfer of transactions between the OBU and the domestic bank, as ineligible for OBU treatment;

treat transactions between OBUs, including between unrelated OBUs, as ineligible for OBU treatment; and

refine the current list of eligible OBU activity.

The Government will consult with industry to develop recommendations to address concerns with the allocation of expenses between OBU and non-OBU activities and on issues raised by the Johnson report.”


Treasury Discussion Paper: Improving the Offshore Banking Unit Regime, June 2013

The Discussion Paper canvassed seven particular issues with the current OBU regime

“Following on from the Government’s announcement, this paper outlines and seeks comments on the following issues:

inappropriate access to the OBU concession;

the ‘choice’ principle;

list of eligible OB activities;

allocation of expenses between OB income and non-OB income;

streamlining the OBU application process;

ensuring other provisions interact appropriately with the OBU regime; and

treatment of existing transactions.”






Assistant Treasurer Press Release 29 September 2013

The new Assistant Treasurer announced the Coalition Government would not proceed with the start date of 1 October 2013 for the reforms to the OBU regime

“Consultation on this measure has indicated that the reforms as announced could affect commercial transactions that should still be eligible for offshore banking unit treatment.

We will ensure that an announcement on the content of the measure is made in a timely way, including a potential commencement date, so that business can make any necessary adjustments.”


Treasurer and Assistant Treasurer Joint Media Release 6 November 2013

The Treasurer and Assistant Treasurer announced the Coalition Government’s intention to proceed with only some of the measures announced in the 2013-2014 Budget (approved measures)

“The Government will not proceed with the part of this measure that excludes all related party transactions but have a targeted integrity measure to provide certainty for the industry.

…

The Government will continue to work closely with stakeholders to develop targeted rules to address the integrity issues with the current rules. Consultation with industry will begin soon.”


Assistant Treasurer Media Release 30 January 2014

The Assistant Treasurer announced that the start date for the approved measures and for additional reforms to the OBU regime arising from the Johnson Report will be 1 July 2015

“Offshore Banking Unit reforms

The Assistant Treasurer, Senator the Hon Arthur Sinodinos AO, today announced that 1 July 2015 will be the start date for reforms to the Offshore Banking Unit regime that were originally announced in the 2013-14 Budget.

“This step will provide business with certainty by allowing targeted integrity rules together with other Offshore





Banking Unit reforms, including recommendations by the Johnson Report, such as reviewing the activities eligible for the OBU concession, to be fully considered and implemented in one complete package,” said Senator Sinodinos.

The Offshore Banking Unit regime provides a concessional tax rate to encourage genuine offshore banking activity in Australia.

“While the Government is committed to ensuring that the integrity of our business tax system is maintained, reforms that modernise the Offshore Banking Unit regime will contribute to Australia’s development as a financial services centre,” said Senator Sinodinos.””



Appendix B The Financial Institution

Directory of Singapore as at 16 January

2014

Type of Institution Number of Institutions

Commercial Banks 124

Local Banks

5

Foreign Banks

119

Foreign Full Banks

28

Wholesale Banks

54

Offshore Banks

37

Financial Holding Companies 5

Merchant Banks 41

Representative Offices of Banks 37

Institutions with Asian Currency Units 161

Money Changers 386

Remittances 72

Finance Companies 3

Money Brokers 9

Singapore Government Securities Market - Primary

Dealers

13

Singapore Government Securities Market - Secondary

Dealers

19

Approved Holding Companies 3

Approved Exchanges 3

Approved Clearing Houses 3

Recognised Clearing Houses 0

Licensed Trade Repositories 1

Licensed Foreign Trade Repositories 0

Recognised Market Operators 25

Holders of Capital Markets Services Licence 424

Dealing in Securities

116

Securities Members

24

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/All+Banks?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Local+Banks?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Foreign+Banks?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Foreign+Full+Banks?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Wholesale+Foreign+Banks?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Offshore+Banks?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Financial+Holding+Companies?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Merchant+Banks?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Rep+Offices+of+Banks?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Institutions+with+ACU?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Money+Changers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Remittances?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Finance+Companies?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Money+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/SGS+Market+Primary+Dealers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/SGS+Market+Primary+Dealers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/SGS+Market+Secondary+Dealers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/SGS+Market+Secondary+Dealers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Approved+Holding+Companies?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Approved+Exchanges?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Approved+Clearing+Houses?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Recognised+Clearing+Houses?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Licensed+Trade+Repositories?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Licensed+Foreign+Trade+Repositories?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Recognised+Market+Operators?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/CMS+Licence+Holder+Br?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Dealing+in+Securities?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Securities+Members?OpenView#top1



Non-Member Companies of SGX-ST

92

Trading in Futures Contracts

58

Derivatives Clearing Members

22

Derivatives Trading Members

6

Non-Member Companies of SGX-DT

30

Leveraged Foreign Exchange Trading

24

Advising on Corporate Finance

39

Fund Management

271

Securities Financing

17

Providing Custodial Services for Securities

36

Real Estate Investment Trust Management

31

Providing Credit Rating Services

3

Holders of Financial Adviser's Licence 60

Advising others, either directly or through publications or

writings, and whether in electronic, print or other form,

concerning the following investment products, other than -

(i) in the manner specified in paragraph 2 of the Second

Schedule to the Financial Advisers Act (Cap. 110); or

(ii) advising on corporate finance within the meaning of the

Securities and Futures Act (Cap. 289)

53

Futures contracts

1

Contracts or arrangements for the purposes of foreign

exchange trading

1

Contracts or arrangements for the purposes of

leveraged foreign exchange trading

0

Life policies

46

Securities other than collective investment schemes

24

Collective investment schemes

44

Structured deposits

5

Advising others by issuing or promulgating research

analyses or research reports, whether in electronic, print

or other form, concerning the following investment

products

35

Futures contracts

2

Contracts or arrangements for the purposes of foreign

exchange trading

3

Contracts or arrangements for the purposes of 2

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Non-Member+of+SGX-ST?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Trading+in+Futures+Contracts?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Clearing+Member+of+SGX-DT?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Derivatives+Trading+Members?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Non-Member+of+SGX-DT?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Leveraged+Foreign+Exchange+Trading?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Advising+on+Corporate+Finance?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Fund+Management?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Securities+Financing?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Providing+Custodial+Services+for+Securities?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Real+Estate+Investment+Trust+Management?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Providing+Credit+Rating+Services?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/FA+Licence+Holder+Br?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Advising+on+Investment+Products?OpenView#top1







https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/AFutures+Contracts?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/AContracts+Arrangement?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/AContracts+Arrangement?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/AContracts+Arrangement+Leveraged+FX?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/AContracts+Arrangement+Leveraged+FX?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/ALife+Policies?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/ASecurities+Excluding+Collective+Investment+Schemes?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/ACollective+Investment+Schemes?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/AOther+Investment+Products?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Issuing+Reports+on+Investment+Products?OpenView#top1




https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/IFutures+Contracts?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/IContracts+Arrangement?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/IContracts+Arrangement?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/IContracts+Arrangement+Leveraged+FX?OpenView#top1



leveraged foreign exchange trading

Life policies

19

Securities other than collective investment schemes

27

Collective investment schemes

32

Structured deposits

4

Marketing of any collective investment scheme

39

Arranging of any contract of insurance in respect of life

policies

46

Registered Fund Management Companies 225

Exempt Financial Advisers 363

Persons exempted from the requirement to hold a

Capital Markets Services licence under Section

99(1)(a),(b),(c) and (d)

118

Exempt Financial Advisers - Companies providing

financial advisory services to not more than 30

accredited investors

96

Exempt Fund Managers - Companies providing fund

management services to not more than 30 qualified

investors

104

Exempt Corporate Finance Advisers - Companies

advising on corporate finance to only accredited

investors

83

Exempt Leveraged Foreign Exchange Traders -

Companies carrying on business in leveraged foreign

exchange trading for the purpose of managing

customer's funds to only accredited investors

0

Holders of Trust Business Licence 51

Exempt Persons Carrying on Trust Business 36

Banks

21

Merchant Banks

9

Advocates and Solicitors

6

Registered Insurers 168

Direct Insurers

76

Life Insurers

16

Including Life Insurers with defined market segments

6

General Insurers

56

Including General Insurers with defined business lines

14

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/IContracts+Arrangement+Leveraged+FX?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/ILife+Policies?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/ISecurities+Excluding+Collective+Investment+Schemes?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/ICollective+Investment+Schemes?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/IOther+Investment+Products?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Marketing+of+Any+Collective+Investment+Scheme?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Arranging+of+Life+Contracts+of+Insurance?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Arranging+of+Life+Contracts+of+Insurance?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Exempt+Financial+Advisers+Br?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Exempt+SFA?OpenView#top1



https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Holders+of+Trust+Business+Licence?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Exempt+Persons+Carrying+on+Trust+Business?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Registered+Insurers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Insurance+-+All?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Life+Insurers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Life+Insurers+with+defined+market+seg?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/General+Insurers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/General+Insurers+with+defined+buz+line?OpenView#top1



Composite Insurers

4

Reinsurers

30

Life Reinsurers

3

General Reinsurers

19

Composite Reinsurers

8

Captive Insurers

62

Authorised Reinsurers 6

Life Reinsurers

1

General Reinsurers

4

Composite Reinsurers

1

Lloyd's Asia Scheme 27

Representative Offices of Insurers and Reinsurers 2

Insurance Brokers 71

Direct Insurance Brokers

44

General Reinsurance Brokers

12

Life Reinsurance Brokers

0

Direct and General Reinsurance Brokers

12

General Reinsurance and Life Reinsurance Brokers

3

Insurance Brokers Licensed To Place Business With

Lloyd's

6

Exempt Insurance Brokers Carrying on Business as

Direct Insurance Brokers

22

Other Relevant Organisations 1777

77 Available on the Monetary Authority of Singapore website at: https://secure.mas.gov.sg/fid/

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Composite+Insurers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Reinsurance+-+All?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Life+Reinsurers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/General+Reinsurers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Composite+Reinsurers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Captive+Insurers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Reinsurance+-+All_AR?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Life+Reinsurers_AR?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/General+Reinsurers_AR?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Composite+Reinsurers_AR?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Lloyds+Asia+Scheme?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Rep+Offices+of+Ins+&+Reins?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Brokers+-+All?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Direct+Insurance+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/General+Reinsurance+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Life+Reinsurance+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Direct+and+General+Reinsurance+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/General+Reinsurance+and+Life+Reinsurance+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Lloyds+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Lloyds+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Exempt+Insurance+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Exempt+Insurance+Brokers?OpenView#top1

https://masnetsvc.mas.gov.sg/fin/findir/SDWFIDIR.NSF/Other+Institutions?OpenView#top1

https://secure.mas.gov.sg/fid/

updated 2014 financial services conference - obus - frost, mac

Documents