When lending to borrowers | Australia | Asia Pacific Guide to Lending and Taking Security

1. Are there any restrictions in relation to the type of borrower who may borrow foreign currency or in relation to the term of foreign currency and/or the amount of foreign currency borrowed by local entities?

No, there are no restrictions of this type. However, the borrower should take into consideration the Australian thin capitalization rules — see the answer to question 6 of this section.

2. Are there any restrictions on the rate of interest or default interest that may be charged?

In principle, there are no restrictions of this type in the case of corporate borrowers (in contrast with individuals, who are protected by statutory usury provisions, and individuals and small businesses, who may be protected by unfair contract terms legislation). The interest or default interest is governed by the contractual arrangements between the parties and by common law. However, there may be circumstances in which the default interest may be considered an unenforceable penalty.

3. Are there any restrictions on particular lenders or classes of lender entering into credit transactions with borrowers?

Yes, certain restrictions apply in relation to lending in Australia.

Please refer to the answer to question 1 of the "When considering whether to lend" section for information in relation to when various regulatory regimes or licensing requirements apply.

Please refer to the answer to question 2 of the "When considering whether to lend" section for information in relation to when a lender may be required to be registered with the ASIC under the Corporations Act as it is carrying on business in Australia.

Please refer to the answer to question 3 of the "When considering whether to lend" section for information in relation to when a lender is a "registrable corporation" under the Financial Sector (Collection of Data) Act 2001 (Cth) and is required to be registered with the APRA.

Please refer to the answer to question 11 of this section for information in relation to consumer credit regulation.

Please also note that under the Foreign Acquisitions and Takeovers Act 1975 (Cth), certain lenders may have to obtain the prior approval of the Australian FIRB when taking or enforcing security over Australian land or assets. Certain exemptions apply, such as the moneylending exemption referred to in the answer to question 1 of the "When considering whether to lend" section. Please refer to that answer for more information in relation to the moneylending exemption.

4. Are there any exchange controls that will apply to payments to be made in foreign currencies or to foreign lenders?

No.

5. Is there any requirement to deduct or withhold tax from any amounts to be paid or repaid to a lender (whether domestic or foreign)? If so, at what rate must tax be deducted and from what kinds of payment?

Repayments of the principal of loans are not subject to taxation in Australia. However, interest withholding tax, at the rate of 10%, is payable on interest paid to a foreign resident lender not carrying on business through an Australian permanent establishment by an Australian resident borrower not operating through an offshore permanent establishment or a nonresident borrower carrying on business through an Australian permanent establishment. Certain exemptions and rate reductions apply, such as debts that qualify under the public offer test and situations where interest is paid to a foreign resident financial institution that qualifies for an Australian double tax treaty benefit.

6. Are there any “thin capitalization” or other rules that may limit the extent to which interest payments may be deducted for tax purposes?

The Australian thin capitalization rules may limit debt deductions for entities that are geared in excess of certain thresholds. Under the rules, debt deductions will be denied to the extent a taxpayer's debt level exceeds the "maximum allowable debt" threshold. Please contact our Australian tax group if you would like to receive more information in relation to the thin capitalization rules.

7. Are there any registration, notarization, translation or reporting requirements in relation to the loan documents?

No — see the answer to question 11 of the "If taking security" section for the requirements in relation to security documents.

8. Are there any stamp, documentary, registration, notarization or other taxes, duties or fees chargeable in relation to the loan documents? If yes, what are the amounts and when are they payable?

No — see the answer to question 13 of the "If taking security" section for the requirements in relation to security documents.

9. Does the law recognize the subordination of the debt that a debtor owes to one creditor to that which the debtor owes to another creditor? If yes, how is this usually effected?

Yes. The Corporations Act accepts subordination to which the subordinated creditor agrees. This is usually effected by contractual subordination, including intercreditor arrangements.

10. Are there any classes of unsecured and unsubordinated creditor whose claims against a debtor would rank equally with or above those of the debtor’s other unsecured and unsubordinated creditors (e.g., the claims of employees and tax authorities or the claims of creditors under particular kinds of instrument)? If yes, what classes of creditors are preferred?

All unsecured creditors rank equally, except for certain classes of claims that have priority. These classes include the following:

Costs and fees incurred by a liquidator or administrator.
Employees' (excluding directors and their relatives) unpaid wages, superannuation, leave entitlements, etc. — for more information, please refer to the answer to question 1 of the "If things go wrong" section under the sub-heading "Winding up".

11. Are there any consumer protection or similar laws that apply if credit is made available to individuals or other classes of debtor? If yes, what laws are applicable?

Yes, the Australian Consumer Law (ACL) is the national law in relation to fair trading and consumer protection. The full text of the ACL is set out in Schedule 2 of the Competition and Consumer Act 2010 (Cth). The protections in the ACL are generally reflected in similar provisions in the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") so that financial products and services are treated in the same way.

The ACL and the ASIC Act apply if the debtor is a "consumer" or a "small business" (both of which are defined terms).

The National Credit Code and the National Consumer Credit Protection Act 2009 (Cth) ("National Credit Act") apply if, when the credit contract is entered into or (in the case of pre-contractual obligations) is proposed to be entered into, the following all apply:

The debtor is a natural person or a strata corporation (a defined term).
The credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes or to purchase, renovate or improve residential property for investment purposes or to refinance credit that has been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes.
A charge is or may be made for providing the credit.
The credit provider provides the credit in the course of the business of providing credit carried on in Australia or as part of, or incidentally to, any other business of the credit provider carried on in Australia.

Similar to the extended jurisdiction in respect of financial services, offshore conduct that is intended to induce people in Australia is considered to be carried out in Australia and subject to this regime. This is stated by the Australian legislature to be intended to capture credit providers who do not have a physical presence in Australia but may use the internet or intermediaries to offer consumer credit products to persons in Australia.

However, unlike the financial services regime, there is no clear exemption for activities with no solicitation by the provider. Therefore, where a loan request is made to an offshore lender, there is a risk that the resultant provision of credit is still a credit activity that is carried out in Australia.

This is consistent with ASIC guidance that even if only one of the borrowers is in Australia, the loan and the lending business is considered to be carried out in Australia.

The National Credit Act imposes a credit licensing regime and responsible lending obligations.

12. Are there any prohibitions or limitations on the extent to which a company can give financial assistance for the purchase of: (a) its own shares or those of any affiliated company; or (b) assets owned by it or any affiliated company?

Yes, there are restrictions on a company giving financial assistance to a third party to acquire its shares or its holding company's shares, except where giving the financial assistance does not materially prejudice the interests of the company or its shareholders, the company's ability to pay its creditors, or where the assistance is approved by the shareholders under what is called a "whitewash" procedure, or the assistance is exempted. The "whitewash" procedure generally involves the following:

Having the shareholders of the company approve the details of the financial assistance; and
Filing certain notices with the ASIC.

Financial assistance cannot be given until at least 14 days after the lodgment with the ASIC of the notice informing it of the intention to give financial assistance. This means that financial assistance can typically only be given after an acquisition has been completed.

There are, however, no equivalent prohibitions or limitations on the extent to which a company can give financial assistance for the purchase of assets owned by it or any affiliated company.

Asia Pacific Guide to Lending and Taking Security

Australia

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