Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation – Federal Court finds against taxpayer on transfer pricing interest deductions

On 17 December 2021, the Federal Court (Moshinsky J) handed down a decision which found against the taxpayer on transfer pricing interest deductibility issues (see related TT Article). This is case involving the group that owns Optus, where interest deductions totalling almost $895m were denied.

The facts were these.

1. The Taxpayer and SAI were ultimately 100% owned by SingTel (at all material times, a publicly listed company resident in Singapore, principally engaged in the operation and provision of telecommunications systems and services.).
   1. On 1 May 2001, SAI was incorporated in the British Virgin Islands. It was resident in Singapore.
   2. On 3 May 2001, the Taxpayer was incorporated in Australia. It is, and was at all material times, an Australian resident.
2. The interest was incurred under a Loan Note Issuance Agreement (Loan Agreement).
3. The immediate commercial context of the Loan Agreement included the following.
   1. In June 2002, SAI sold 100% of the issued capital of Singtel Optus Pty Ltd (SOPL) to the Taxpayer (the corporate embodiment of the Australian ‘Optus’ Telecommunications operation), in consideration for approximately $14.2 billion.
   2. The consideration was satisfied (as to $9 billion) by the Taxpayer issuing ordinary shares to SAI and (as to approximately $5.2 billion) by the Taxpayer issuing loan notes under the Loan Agreement to Singtel Australia Investment Ltd (SAI).
   3. As a result, the interest incurred under the Loan Agreement, was income producing and, prima-facie, deductible.
   4. As a result of the transaction, and another transaction on 28 June 2002, the Taxpayer became a wholly-owned subsidiary of SAI.
4. 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).
5. 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%.
6. 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 ATO, in October 2016, made transfer pricing determinations under Subdiv 815-A of the ITAA 1997 for the income years ended 31 March 2010, 2011, 2012 and 2013, denying interest deductions totalling almost $895m. This reduced deductions, which initially reduced losses but then created taxable income and amended assessments for the income years ended 31 March 2011, 2012 and 2013.

The Federal Court concluded that:

• conditions were operating between the taxpayer and SAI in their commercial and financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another; and
• 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 LNIA.
• As a result, the taxpayer failed to demonstrate that the amended assessments were excessive.

CATCHWORDS

TAXATION – transfer pricing – interest deductions – where the applicant was resident in Australia – where the applicant entered into a loan note issuance agreement (the LNIA) with a company (the subscriber) that was resident in Singapore – where the applicant and the subscriber were ultimately 100% owned by the same company – where the applicant issued loan notes totalling approximately $5.2 billion to the subscriber – where the applicant and the subscriber amended the terms of the LNIA on three occasions – where the first amendment and the second amendment were expressed to have effect as from the date when the LNIA was originally entered into – where the applicable rate under the LNIA as amended by the third amendment was 13.2575% – where the Commissioner made determinations under the transfer pricing provisions the effect of which was to deny interest deductions totalling approximately $894 million in respect of four years of income – whether conditions operated between the applicant and the subscriber in their commercial or financial relations which differed from those which might be expected to operate between independent enterprises dealing wholly independently with one another – whether, but for any such conditions, an amount of profits might have been expected to accrue to the applicant and, by reason of those conditions, the amount of profits has not so accrued

(Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2021] FCA 1597; 17 December 2021; Moshinsky J) [LTN 244, 17/12/21]

[Tax Month – December 2021 – Previous 2021] 1.1.22