Legislation passed on 4 March 2003 exempts interest withholding tax (IWT) on nostro accounts held by Australian financial institutions with foreign banks. Exempting IWT liability from these nostro accounts will facilitate financial dealings between Australian financial institutions and non-residents. The amendment applies to interest paid or credited on nostro accounts held by financial institutions with foreign banks as of 29 August 2001. As the legislation is retrospective, it may be that refunds of overpaid IWT need to be claimed.
International accounting procedures between Australian banks and overseas banks often involve the use of nostro and vostro accounts. A nostro account is an account maintained by an Australian bank with a foreign bank that allows the Australian bank to buy foreign currency. A vostro account is an account maintained by an overseas bank with an Australian bank that allows the overseas bank to purchase Australian currency. The system of nostro and vostro accounts facilitates foreign exchange dealings and settlements and allows the settlement of currency transactions between Australian and foreign banks.
All Australian banks and authorised deposit-taking institutions (ADIs) and non-ADI financial institutions are affected by the changes, which are retrospective from 29 August 2001.
Two issues have tax implications:
- the debit of interest to the Australian bank's nostro account constitutes interest payable by the Australian bank and as such gives rise to IWT liability, and
- the interest charges associated with 'good value' adjustments on the nostro account also creates an interest payable by the Australian bank even though an overseas third party would make its payment.
Some banks have continued deducting IWT and are remitting these amounts to the Tax Office. As the legislation is retrospective, all amounts collected as interest withheld will be refunded.
In the first instance the refund of IWT would be to the Australian bank. In the second scenario, when the Tax Office refunds the Australian bank, that institution is obliged to pass the refund on to its overseas client. Alternatively, the overseas client may apply directly to the Tax Office for its refund.
Requests for retrospective refunds must be lodged in writing to Operations, Large Business Unit, PO Box Large, Sydney South, NSW, 1235.
Refund requests must include:
- details of the entity
- the entity's ABN or CAC if appropriate
- the reason for the refund request (for example, a reduction of IWT arising from legislation exempting nostro activities)
- the period or date the original amount withheld was remitted to the Tax Office
- the liability, being the amount on which interest withholding tax was originally charged, and
- the amount of the credit requested. Claimants should distinguish whether they are requesting a refund or a credit to be applied against amounts outstanding.
You must keep all documents evidencing these credit claims. We may require substantiation to process your refund claim.
If an overseas client wants to apply directly for a refund, we need:
- substantiation of the claim from the client
- evidence that exemption applies
- evidence that tax was withheld (when and the amount), and
- evidence that the tax withheld was remitted by the payer (company or financial institution).
We need a request in writing accompanied by supporting evidence. The request must clearly identify the recipient, address, tax file number (if applicable) and other relevant details. The financial institution or company must provide evidence to the client regarding remittance for the client to satisfy this evidentiary request.
Third party requests can be sent to Operations, Client Accounting, GPO Box 770G, Melbourne, VIC 3001.
A detailed explanation of the changes can be found in the Explanatory Memorandum to Taxation Laws Amendment Bill (No. 6) 2002.
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Proposed measures
The government is continually reviewing international tax arrangements. For information on how potential international legislative changes may affect you, see New legislation.
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If you need help in applying this information to your own situation, contact us by phone.
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Last Modified: Friday, 25 November 2005