The taxpayer has filed a notice of appeal to the Full Federal Court against the decision of Moshinsky J in Singapore Telecom Australia Investments Pty Ltd v FCT [2021] FCA 1597. In that decision, the ATO won a transfer pricing case involving the group that owns Optus, where interest deductions totalling almost $895 million were denied (see related TT article). The key aspects of the decision at first instance, was as follows.

Key facts relating to the interest rates were as follows.

  1. The interest rate under the Loan Agreement as originally entered into was the 1-year Bank Bill Swap Rate (Bank Rate) plus 1% per annum, grossed up by 10/9 (ie. net of 10% withholding tax).
  2. The Loan Agreement was amended 3 times.
    1. The Second Amendment in March 2003 amended the Loan Agreement by making the accrual and payment of interest contingent on certain benchmarks being met.
    2. The amendment also increased the applicable interest rate by adding a premium of 4.552%.
    3. The Third Amendment in March 2009 changed the interest rate by replacing the 1-year Bank Rate with a fixed rate of 6.835%.
  3. The applicable rate therefore became: (a) the interest rate (6.835% plus 1%) multiplied by 10/9; plus (b) the premium (4.552%). This produced an applicable rate of 13.2575%.

The Federal Court concluded that:

  • a reliable hypothesis was that independent parties in the positions of SAI and the taxpayer would not have agreed to make the changes contained in the Second or Third Amendments.
  • It followed that, the original interest rate (the 1-year BBSW plus 1%, grossed-up by 10/9) would have (or might be expected to have) continued through the whole life of the Loan Agreement.

[Tax Month – April 2022 – Previous Month, 1.5.22] [LTN 73, 20/4/22]