This fact sheet deals with the translation of an interest withholding amount into Australian currency where an Australian company pays interest in foreign currency to an overseas entity.
Australia Co, an Australian resident company, pays USA Co, a non-resident company, a US$10,000 interest payment on 1 May 2005. USA Co is liable, under subsection 128B(5) of the Income Tax Assessment Act 1936 (ITAA 1936), to withholding tax on the interest payment. The exchange rate on that date is assumed to be A$1.00 = US$0.50.
Assume Australia Co is required to withhold 10% of the gross interest paid pursuant to:
- section 12-245 of the Taxation Administration Act 1953 (TAA 1953)
- regulation 41 of the Taxation Administration Regulations 1976, and
- Article 11 of Schedule 2 of the International Tax Agreements Act 1953 (the United States Convention).
The amount withheld is therefore US$1,000.
Subsection 960-50(1) of the Income Tax Assessment Act 1997 (ITAA 1997) requires an amount of foreign currency to be translated into Australian currency. Item 10 of subsection 960-50(6) of the ITAA 1997 requires amounts that are withheld under Division 12 of Part 2-5 in Schedule 1 of the TAA 1953 to be translated into Australian currency at the exchange rate applicable when the amount is required to be withheld under that Division. Section 16-5 of Part 2-5 in Schedule 1 of the TAA 1953 requires an entity to withhold an amount from a withholding payment when the entity makes the payment.
As Australia Co pays USA Co the interest on 1 May 2005, Australia Co is required to withhold 10% of the interest paid on that date. Australia Co is also required to translate the withheld amount into Australian currency at the exchange rate applying on that date.
The Australian dollar equivalent of the amount withheld is therefore A$2,000 (US$1,000/0.50).
Last Modified: Friday, 17 June 2005