(1) Each of the following things done by an OBU is an OB activity (offshore banking activity) of the OBU (subject to sections 121EA and 121EAA):
(a) a borrowing or lending activity described in subsection (2); or
(b) a guarantee‑type activity described in subsection (3); or
(c) a trading activity described in subsection (4) (subject to subsection (4A)); or
(d) an OB eligible contract activity (see section 121DB); or
(e) an investment activity described in subsection (6), (6A) or (6B); or
(f) an OB advisory activity (see section 121DC); or
(g) a hedging activity described in subsection (8); or
(ga) an OB leasing activity (see section 121DD); or
(h) any other activity involving an offshore person, being an activity declared by regulations for the purposes of this paragraph to be an OB activity.
Borrowing or lending activity
(2) For the purposes of paragraph (1)(a), a borrowing or lending activity is:
(a) borrowing money from an offshore person where, if that person is a related person or a person to whom paragraph 121E(b) applies and is not an OBU, the money is not Australian currency; or
(b) lending money, or making commitments to lend money, to an offshore person where, if that person is a person to whom paragraph 121E(b) applies and is not an OBU, the money is not Australian currency; or
(c) borrowing gold from an offshore person; or
(d) lending gold to an offshore person; or
(e) acting as an arranger in a syndicated lending arrangement that includes a borrowing or lending activity to which paragraph (a), (b), (c) or (d) applies.
Guarantee‑type activity
(3) For the purposes of paragraph (1)(b), a guarantee‑type activity is:
(a) providing a guarantee or letter of credit to an offshore person in relation to activities that are, or will be, conducted:
(i) wholly outside Australia; or
(ii) in Australia to an extent that is not material; or
(b) underwriting a risk for an offshore person in respect of:
(i) offshore property; or
(ii) an event, if the likelihood of the event happening in Australia is not material; or
(c) syndicating a loan for an offshore person; or
(d) issuing a performance bond to an offshore person in relation to activities that are, or will be, conducted:
(i) wholly outside Australia; or
(ii) in Australia to an extent that is not material;
where, if the offshore person is a related person, any money payable under the guarantee, letter, underwriting, loan or bond is not Australian currency.
Trading activity
(4) For the purposes of paragraph (1)(c), a trading activity is:
(a) trading with an offshore person in:
(i) securities issued by non‑residents; or
(ii) eligible contracts, under which any amounts payable are payable by non‑residents; or
(aa) trading with any person in non‑deliverable forward foreign currency contracts; or
(b) trading with an offshore person in:
(i) shares in non‑resident companies; or
(ii) units in non‑resident trusts; or
(c) trading with an offshore person in options or rights in respect of securities, eligible contracts, shares or units referred to in paragraph (a) or (b); or
(d) trading (including on behalf of an offshore person) on the Sydney Futures Exchange in futures contracts, or options contracts, under which any money payable is not Australian currency; or
(e) trading in currency, or options or rights in respect of currency, with any person, where the currency is not Australian currency; or
(ea) trading in currency, or options or rights in respect of currency, with an offshore person; or
(f) trading in gold bullion, or in options or rights in respect of such bullion:
(i) with an offshore person where the money or moneys payable or receivable is or are in any currency; or
(ii) a person other than an offshore person where the money or moneys payable or receivable is or are in a currency other than Australian currency; or
(g) trading with an offshore person in silver, platinum or palladium bullion, or in options or rights in respect of such bullion; or
(h) trading with an offshore person in base metals; or
(i) trading with an offshore person in commodities, or in options or rights in respect of commodities, if:
(i) the commodities, options or rights are not mentioned in another paragraph of this subsection; and
(ii) the trading is incidental to an OB eligible contract activity.
(4A) However, paragraph (1)(c) does not apply to a trading activity done by an OBU if:
(a) the thing traded in affected the OBU’s total participation interest (within the meaning of the Income Tax Assessment Act 1997) in another entity; and
(b) just before the trading activity:
(i) the OBU’s total participation interest in the other entity was at least 10%; or
(ii) any of the thing traded in was held by the OBU, and was not recorded in the OBU’s accounting records as held for trading in accordance with accounting standards (within the meaning of that Act).
(4B) For the purposes of subsection (4A), disregard rights on winding‑up.
Investment activity
(6) For the purposes of paragraph (1)(e), an investment activity is making (but not managing), as broker or agent for, or trustee for the benefit of, an offshore person to whom paragraph 121E(a) applies, an investment with an offshore person to whom that paragraph applies, where:
(a) the currency in which the investment is made is not Australian currency; and
(b) if the investment involves the purchase of any thing:
(i) if the thing is a share in a company—the company is a non‑resident company; or
(ii) if the thing is a unit in a unit trust—the unit trust is a non‑resident trust; or
(iii) if the thing is land or a building—the land or building is not in Australia; or
(iv) in any other case—the thing is located outside Australia.
Investment activity—portfolio investment
(6A) For the purposes of paragraph (1)(e), an investment activity is also the managing by an OBU of a portfolio investment (see subsection 121DA(1)) for the whole or part (the investment management period) of a year of income, where:
(a) the portfolio investment is managed as broker, agent or custodian for, or trustee for the benefit of, a non‑resident; and
(b) the portfolio investment was made by the OBU or the non‑resident; and
(c) the portfolio investment was made with a non‑resident (except to the extent that making the investment consisted of making a loan or purchasing an Australian thing); and
(d) the currency in which the portfolio investment was made was not Australian currency; and
(e) if the portfolio investment consists of only a single thing—the thing is not an Australian thing (see subsection 121DA(5)).
Investment activity—portfolio investment for overseas charitable institutions
(6B) For the purposes of paragraph (1)(e), an investment activity is also the managing by an OBU of a portfolio investment (see subsection 121DA(1)) for the whole or part (the investment management period) of a year of income, where:
(a) the portfolio investment is managed as broker, agent or custodian for, or trustee for the benefit of, an overseas charitable institution; and
(b) the portfolio investment was made by the OBU or the overseas charitable institution.
Hedging activities
(8) For the purposes of paragraph (1)(g), a hedging activity is entering into a financial arrangement (within the meaning of the Income Tax Assessment Act 1997) with an offshore person for the sole purpose of eliminating or reducing the risk of adverse financial consequences that might result to the OBU from:
(a) interest rate exposure of the OBU in respect of borrowing or lending activities (described in subsection (2)) of the OBU; or
(b) currency exposure of the OBU in respect of borrowing or lending activities (described in subsection (2)) of the OBU.
Effect of subsection (8)
(9) Subsection (8) does not limit the scope of any other OB activity of the OBU (for example the trading activity mentioned in paragraph (4)(e)).
121DA Meaning of expressions relevant to investment activity
Portfolio investment
(1) If, under a contract or trust instrument, an OBU manages one or more investments as broker an agent or custodian for, or trustee for the benefit of, a non‑resident, the investment, or all of the investments, constitute a portfolio investment.
Average Australian asset percentage
(2) The average Australian asset percentage of a portfolio investment is the average, for all months that wholly or partly fall within the investment management period (see subsection 121D(6A) or (6B)), of the monthly Australian asset percentages (see subsection (3)) of all of the things comprising the portfolio investment.
Monthly Australian asset percentage
(3) For the purposes of subsection (2), the monthly Australian asset percentage of the things for a month is the percentage of the total value of all of the things comprising the portfolio investment, for the month, that is represented by the value of Australian things.
Basis for working out percentage
(4) The percentage in subsection (3) must be worked out according to reasonable accounting practice that applies on the same basis for all months falling wholly or partly within the investment management period.
Australian thing
(5) A thing is an Australian thing at a particular time if:
(a) where the thing is a share in a company—the company is a resident company at the time; or
(b) where the thing is a unit in a unit trust—the unit trust is a resident trust (within the meaning of section 102Q) in relation to the year of income in which the time occurs; or
(c) where the thing is land or a building—the land or building is in Australia; or
(d) where the thing is a loan—the loan was made to an Australian resident; or
(e) in any other case—the thing is located in Australia at the time.
121DB Meaning of OB eligible contract activity
An OB eligible contract activity is entering into an eligible contract (other than a loan contract that is not a securities lending or repurchase arrangement) with:
(a) an offshore person; or
(b) if the eligible contract is a non‑deliverable forward foreign currency contract—any person.
121DC Meaning of OB advisory activity
(1) An OB advisory activity is giving investment or other financial advice to an offshore person, including advice about disposing of an investment.
(2) Giving advice about the making of a particular investment is not an OB advisory activity unless the investment is of a kind mentioned in subsection 121D(6) (Investment activity).
(3) Subsection (2) does not exclude giving advice about a particular investment of a different kind if doing so is incidental to advising on an investment of a kind mentioned in subsection 121D(6) (for example for the purpose of comparison or because the investments are commercially related).
(4) To avoid doubt, for the purposes of this section, advice about disposing of an investment is not advice about the making of the investment.
121DD Meaning of OB leasing activity
(1) An OB leasing activity is leasing activity with an offshore person involving offshore property.
(2) Without limiting subsection (1), OB leasing activity includes entering into:
(a) any arrangement (within the meaning of section 51AD) under which a right to use offshore property is granted by the owner to another person; or
(b) any arrangement (within the meaning of that section) under which a right to use offshore property, being a right derived directly or indirectly from a right mentioned in paragraph (a) in relation to the property, is granted by a person to another person;
with an offshore person.
121E Meaning of offshore person
A reference to an offshore person, in relation to the doing of any thing by an OBU (the first OBU), is a reference to:
(a) a non‑resident whose involvement in the doing of the thing does not occur in carrying on business in Australia at or through a permanent establishment of that person; or
(b) a resident whose involvement in the doing of the thing occurs in carrying on business in a country outside Australia at or through a permanent establishment of the person; or
(c) another OBU (the second OBU), where, if the doing of the thing involves the payment of any money (for example a loan of money) by the second OBU to the first OBU, the second OBU gives, at or before the time of the payment, a statement in writing to the first OBU to the effect that none of the money is non‑OB money of the second OBU.
121EA OBU requirement
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.
121EAA Activities recorded in domestic books not OB activities
(1) An OBU may, when it does a thing that would otherwise be an OB activity of the OBU, choose to have the thing not be an OB activity.
Accounting records
(2) The OBU recording the thing in the OBU’s non‑OB accounting records is sufficient evidence of the making of the choice, if the OBU uses money in the thing.
Note 1: The OBU must maintain accounting records, separate from its non‑OB accounting records, in respect of money used in its OB activities: see subsection 262A(1A).
Note 2: Subsection (2) of this section and subsection 262A(1A) do not apply if the OBU does not use money in the thing, but the OBU must keep documents containing particulars of the choice: see paragraph 262A(2)(b).
Note 3: Subsection (2) does not prevent the OBU from correcting a mistake in its accounting records.
(3) The OBU’s non‑OB accounting records are the OBU’s accounting records, other than the accounting records maintained in respect of money used in the OBU’s OB activities under subsection 262A(1A).
Grouping
(4) The OBU is treated as having chosen under subsection (1) to have a thing (the transaction) done by the OBU not be an OB activity if:
(a) it is reasonable to regard the transaction and one or more other things done by the OBU as constituting a single scheme (within the meaning of the Income Tax Assessment Act 1997); and
(b) the OBU chooses under subsection (1) to have any of those other things done by the OBU not be an OB activity.
(5) For the purposes of subsection (4), whether the transaction and one or more other things constitute a single scheme is a question of fact and degree determined having regard to the following (whichever are applicable):
(a) the nature of the transaction and the other things;
(b) their terms and conditions (including those relating to any payment or other consideration for them);
(c) the circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purposes of one or more of the entities involved);
(d) whether they can be dealt with separately or must be dealt with together;
(e) normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole).
(6) In applying subsection (5), have regard to the matters mentioned in paragraphs (5)(a) to (e) both:
(a) in relation to the transaction and other things separately; and
(b) in relation to the transaction and other things in combination with each other.
121EB Internal financial dealings of an OBU
Permanent establishments treated as separate persons
(1) If an OBU consists of:
(a) one or more permanent establishments in Australia at or through which the OBU carries on what are OB activities apart from this section; and
(b) one or more other permanent establishments either in Australia or outside Australia;
then sections 121D to 121EAA (inclusive) apply as if:
(c) the OBU consisted only of the permanent establishments referred to in paragraph (a); and
(d) the permanent establishments referred to in paragraph (b) were separate persons.
Head office can be permanent establishment
(2) For the purpose of determining under subsection (1) whether something is a permanent establishment, it does not matter whether it is a head office or not.
(3) To avoid doubt, this section applies for the purposes of applying Subdivision 230‑A of the Income Tax Assessment Act 1997 to a financial arrangement (within the meaning of that Act).
Note: This means that it is possible for financial arrangements to be entered into between the bank and the branch and for the bank or the branch to have a gain or loss from such an arrangement dealt with under Division 230 of the Income Tax Assessment Act 1997.
Arm’s length pricing
(4) For the purposes of this Division, treat an amount that, because of subsections (1) to (3):
(a) is included in the OBU’s OB income; or
(b) is an allowable OB deduction of the OBU;
as being the amount that would be so included, or that would be the amount of the allowable OB deduction, were the OBU and the permanent establishments mentioned in paragraph (1)(d) dealing with each other at arm’s length.
(5) For the purposes of determining the effect subsection (4) has in relation to the amount that is included or allowable, work out the arm’s length dealing so as best to achieve consistency with:
(a) the documents covered by section 815‑235 of the Income Tax Assessment Act 1997 (Guidance); and
(b) subject to paragraph (a), the documents covered by section 815‑135 of that Act.
121EC Meaning of OBU resident‑owner money
Money is OBU resident‑owner money of an OBU if it is paid to the OBU by a resident owner of the OBU by way of a subscription for, or a call on, shares in the OBU, except if the shares are redeemable preference shares.
121ED Meaning of trade with a person
A person (the trader) is said to trade with another person in a thing if: