Somewhere in every offshore lender’s facility agreement is a quiet clause that makes their tax problem yours. Interest paid by an Australian company to a non-resident lender generally attracts interest withholding tax (IWT) at a flat 10%, and the lender’s standard gross-up clause obliges you to pay extra so the lender still receives every dollar it priced. On a $5 million facility at 12%, that’s $60,000 a year of tax — closer to $67,000 once the gross-up compounds — pure friction, unless an exemption applies. The one everyone asks about is section 128F of the Income Tax Assessment Act 1936, and the honest news for founders is that it helps far less often than lenders’ marketing suggests.
The Default Position: 10% Off the Top, and You Wear It
Under Division 11A of the 1936 Act, IWT is a final tax of 10% on the gross interest, and the Australian borrower must withhold it and remit it to the ATO. A tax treaty can reduce the rate — several of Australia’s treaties, including those with the US and UK, reduce it to nil for interest paid to an unrelated financial institution — but a venture debt or private credit fund frequently doesn’t fit the treaty definition of a financial institution, so the 10% stands.
Commercially, the withholding rarely stays with the lender. Gross-up clauses are close to universal, which means a 12% offshore facility is really a ~13.3% facility once the gross-up is modelled — a point we flagged in our walkthrough of venture debt deal mechanics. And ignoring the obligation is not a plan: a borrower that fails to withhold faces penalties and, under section 26-25 of the Income Tax Assessment Act 1997, is denied the income tax deduction for the interest until the withholding is dealt with.
What Section 128F Actually Exempts
Section 128F switches off IWT entirely, but only where all of its conditions line up:
- the borrower is a company that was an Australian resident both when the debt was issued and when the interest is paid (s 128F(1));
- the instrument is a debenture (which includes notes, bonds, promissory notes and bills of exchange) or another qualifying debt interest — relevantly, a non-equity share or a syndicated loan; and
- the issue satisfies the public offer test.
That first structural point catches founders out immediately: an ordinary bilateral loan agreement with a single offshore fund is neither a debenture nor a syndicated loan. If the exemption is the goal, the deal has to be built for it from the start — usually as a note issuance — not relabelled afterwards.
The Public Offer Test: Five Ways In
Section 128F(3) offers five alternative limbs. The issue qualifies if the debentures were offered:
- to at least 10 financiers — persons carrying on a business of providing finance or investing or dealing in securities in financial markets, none of whom the company knew or suspected to be associates of one another;
- to at least 100 potential investors whom it was reasonable to regard as having acquired debt instruments in the past, or as likely to be interested in acquiring them;
- via listing on a stock exchange under a pre-agreed arrangement with a dealer, manager or underwriter;
- through negotiations initiated publicly on electronic platforms used by financial markets (the Bloomberg/Reuters screen route); or
- to a dealer, manager or underwriter who agrees to on-sell within 30 days using one of the first four methods.
There’s also a sixth door: a global bond (s 128F(4)), as defined by the detailed conditions in s 128F(10). In startup and growth-credit practice, limb one does nearly all the work — the arranger emails a genuine, acceptance-capable offer of the notes to ten or more unrelated institutional debt investors, and keeps the evidence. The word genuine matters: the ATO has publicly flagged that it has seen behaviour suggesting entities are incorrectly claiming the exemption without truly satisfying the test, ran a targeted consultation on public offer practices in 2025, and has foreshadowed updated guidance. Ten token emails to financiers who were never realistically going to participate is exactly the pattern under scrutiny.
The Syndicated Loan Route — and Its $100 Million Floor
Since 2007 a conventional loan (not just notes) can qualify, where the invitation to become a lender under a syndicated facility meets a parallel public offer test (s 128F(3A)). But the definition of syndicated loan facility has teeth: the agreement must describe itself as one, lenders must commit severally, and the amount the borrowers can access at first drawdown must be at least $100 million (s 128F(11)). A facility you can draw in $20 million instalments doesn’t aggregate its way over the line — the test looks at access at first drawdown.
For almost every startup venture debt facility, that floor puts the syndicated route out of reach. It exists for infrastructure and leveraged finance, not Series B growth capital.
Associates Can Poison the Well
Even a well-run offer fails if, at issue, the company knew — or had reasonable grounds to suspect — that the debt would end up with an offshore associate of the company (s 128F(5)), and interest isn’t exempt where the company knows or has reasonable grounds to suspect it’s being paid to an offshore associate, even if the test was otherwise passed (s 128F(6)). It’s an objective standard: what you should have suspected counts, not just what you actually knew. “Associate” picks up the broad definition in section 318 — which, for a company, reaches majority holders and anyone who sufficiently influences it, plus their related entities. If the offshore investor that controls or sufficiently influences your company is also writing the debt cheque, section 128F won’t save you, and the analysis belongs alongside the rest of your cross-border fundraising planning.
What Founders Should Actually Do
In practice the decision tree is short. If the lender is an offshore fund writing a bilateral facility under $100 million — the standard venture debt fact pattern — assume IWT applies: check whether a treaty financial-institution exemption genuinely fits, and otherwise negotiate the gross-up rather than ignore it, because a 10% gross-up you can see beats a facility priced as if the exemption applied until the ATO disagrees. If the raise is large enough to run as a genuine note programme offered to ten or more real financiers, section 128F is available — but it’s a structuring decision made before signing, with an evidence file to match. Comparing an offshore term sheet against a local one on a true after-tax basis is exactly the work our venture capital team does, and as startup lawyers in Sydney we’d much rather have this conversation before the term sheet is signed than after the first interest payment is due.
This article is general information only, not legal or tax advice — withholding tax outcomes depend on the lender, the instrument, the treaty position and how the offer is actually run. Viridian Lawyers advises Australian startups, founders and investors on debt raisings, cross-border facilities and the equity rounds they sit alongside. If there’s an offshore term sheet on your desk, get in touch before you sign.
