A general exemption under Section 66 of the Banking Act 1959 of Australia announced on September 23 1996 by the then Assistant Treasurer of Australia, senator Jim Short, has opened up the door for the first time for foreign banks wanting to issue securities on Australia's wholesale capital markets in their own time.
Section 66 provides that, except with the consent in writing of the Treasurer, a person not licensed under the Act may not, in Australia, assume or use a bank-related word such as 'bank', 'banker' or 'banking' in relation to a financial business carried on by that person (whether or not in Australia). One consequence of this restriction was that it previously prevented banks not licensed in Australia from issuing debt or other securities in their own name. Before the new exemption, foreign banks were required to issue their securities in Australia by way of a guaranteed subsidiary company that did not have the word 'bank' in its name. However, the high administrative costs and adverse tax implications associated with having to establish an Australian subsidiary made the issue of securities in Australia by foreign banks in the past relatively unattractive and has kept many foreign banks out of Australia's capital markets.
The new exemption, effective from September 25 1996, allows foreign corporations authorized as banks in their home countries to issue directly into Australia's wholesale capital markets subject to:
- the securities being offered and/or traded in parcels of not less that A$500,000 (US$395,000); and
- it being clearly stated on the securities and related information memoranda that the securities are being issued by a bank that is not authorized under the Banking Act 1959.
There is no mention in the exemption order of whether the securities need to be in registered form. However, an issue of debentures payable to bearer may result in an Australian tax liability for an offshore issuer. Section 126 of the Income Tax Assessment Act 1936 of Australia provides that where an amount of interest is paid or credited by a company in respect of a debenture payable to bearer the name and address of the holder of which is not supplied to the Commissioner of Taxation, the company is liable to pay income tax as imposed by the Income Tax (Bearer Debentures) Act 1971 of Australia, but may deduct the tax paid from the interest paid or credited to the bearer. Issues of securities in registered form are therefore likely to be more attractive from a tax perspective.
The new exemption will enhance access to Australia's wholesale capital markets and promote greater diversity and depth in the market for Australian dollar securities. This is consistent with continuing measures implemented to deregulate Australia's financial system and open up its capital and foreign exchange markets to foreign participants. The government's recent exemption will facilitate greater diversification of Australian investment portfolios and is expected to be well received by Australian fund managers and potential foreign bank issuers alike.