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Administrative solution: proxy for Australian Dollar LIBOR

Proxy rate information on AUD LIBOR when applying section 160ZZZA of the ITAA 1936 for AUD notional intra-bank loans.

Last updated 18 December 2022

Withdrawal notice

This administrative solution for notional borrowings denominated in AUD will no longer apply from 1 January 2023.

This is relevant to both:

  • interest deductions on AUD notional borrowings under section 160ZZZA
  • withholding tax payments for interest paid on AUD notional borrowings as adjusted under section 160ZZZJ.

The decision to withdraw this administrative solution is in response to feedback from industry and advisers, along with consultation with the Australian Financial Markets Association (AFMA), following a letter sent to AFMA on 27 May 2022. This letter set out the ATO's administrative solution for the operation of section 160ZZZA for notional borrowings in response to the cessation of the London Interbank Offered Rate (LIBOR) across most LIBOR settings.

The ATO has determined the proxy rates outlined in the withdrawn administrative solution are outdated and no longer appropriate.

New administrative solution

The new administrative solution for taxpayers with AUD denominated loans follows the principles set out in the letter to AFMA on 27 May 2022, which allows you to use reasonable proxy rates in lieu of LIBOR for the purposes of section 160ZZZA for notional intra-bank loans.

The Reserve Bank of Australia (RBA) has indicated that regulators in Australia will be facilitating a ‘multi-rate’ approach. Australia’s local credit-based benchmark (the BBSW) will co-exist with Australia’s risk-free rate (the RBA Interbank Overnight Cash Rate, known as the Cash Rate or AUD Overnight Index Average (AONIA)), as the key benchmarks for the AUD.

For tenors where BBSW is quoted, being 1 to 6 month tenors, the ATO will accept the relevant BBSW rate as a reasonable proxy rate.

For tenors where BBSW is not quoted, being overnight, 1 week and 12 month tenors, the ATO will accept either BBSW or AONIA, adjusted as required for tenor and credit risk, as a reasonable proxy rate.

Taxpayers should maintain supporting documentation that explains and substantiates the appropriateness of any adjustments or of any proxy rates used that are not in line with the above.

About the withdrawn administrative solution

This administrative solution for notional borrowings denominated in AUD will no longer apply from 1 January 2023; see withdrawal notice.

Section 160ZZZA of the Income Tax Assessment Act 1936 (ITAA1936) enables the Australian branch of a foreign bank or foreign financial entity to claim a deduction on the notional interest payment arising from an intra-bank loan. The amount of the deduction is limited to the interest amount calculated by reference to the London Interbank Offered Rate (LIBOR).

Australian Dollar London Interbank Offered Rate (AUD LIBOR) is no longer quoted as of 31 May 2013. As a result, a proxy rate has been produced for the operation of section 160ZZZA of the ITAA 1936 in relation to Australian dollar notional intra-bank loans.

AUD LIBOR proxy rates for the purpose of section 160ZZZA

The ATO and AFMA have agreed upon the following proxy rates for AUD LIBOR for the tenors for which LIBOR continues to be published.

LIBOR

Proxy rate

Overnight LIBOR

1 month BBSW

1 week LIBOR

1 month BBSW

1 month LIBOR

1 month BBSW + 50 bp

2 month LIBOR

2 month BBSW + 50 bp

3 month LIBOR

3 month BBSW + 50 bp

6 month LIBOR

6 month BBSW + 50 bp

12 month LIBOR

6 month BBSW + 80 bp

For the purpose of this Administrative Solution, 'BBSW' represents the midpoint of the nationally observed best bid and best offer for AFMA Prime Bank Eligible Securities, calculated as per the Bank Bill Swap (BBSW) Benchmark Rate Conventions, as published on the AFMA websiteExternal Link.

Reliance on this administrative solution

1. This document is not a public ruling and therefore cannot offer protection to the taxpayer under the law. The Commissioner accepts that taxpayers may rely on this administrative solution in assessing the extent to which their practices present any compliance risk.

2. Where a taxpayer follows this administrative solution in good faith and the Commissioner subsequently changes his view or this administrative solution is altered or withdrawn (whether by the Commissioner, change of law or otherwise), he will apply the principles set out under PS LA 2011/27 and not take action to apply any changed view of the law to past years or periods. In these instances any action in terms of applying the new view of the law will only occur on a prospective basis.

3. Where a taxpayer departs from this administrative solution, the ATO’s view of the taxpayer’s level of compliance risk may increase.

Applicable period

This is an interim administrative solution that applies for income years starting on or after 1 January 2013 and until:

  • a legislative solution is effected, or
  • in consultation with the AFMA, the ATO reassesses this interim administrative solution, determines this approach no longer has application and an alternative administrative solution is put in place. This will not occur to income years commencing prior to 1 January 2015.

Implications on withholding tax

Interest withholding tax is payable under section 160ZZZJ of the ITAA 1936 on 50% of the amount of interest taken to be paid under section 160ZZZA of the ITAA 1936 (that is, withholding tax is payable on the section 160ZZZA [of the ITAA 1936] interest deduction amount capped at the LIBOR available in the same currency of the borrowing). On this basis, withholding tax is not payable on non-deductible amounts in excess of the relevant LIBOR cap.

Accordingly, in relation to Australian dollar loans, those taxpayers who limit their deduction to an interest amount calculated with reference to the above administrative solution will not be liable to pay withholding tax on non-deductible amounts in excess of the administrative solution.

Currencies for which LIBOR continues to be published

LIBOR will continue to be published for the following currencies: CHF, EUR, GBP, JPY and USD. For those currencies, LIBOR continues to be published for the following tenors: Overnight, 1 week, 1 month, 2 months, 3 months, 6 months and 12 months.

Section 160ZZZA of the ITAA 1936 continues to operate in its current form for all notional intra-bank loans in the above listed currencies.

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