Explanatory Memorandum.(Circulated by the Treasurer, the Hon. B.M. Snedden)
The purpose of this memorandum is to explain the provisions of three income tax Bills relating to interest paid to non-residents of Australia. The main purpose of the legislation is to provide two exemptions from withholding and other tax on interest on certain borrowings from overseas.
Under the present law, interest paid by companies on bearer debentures the names and addresses of the holders of which are not supplied to the Commissioner is liable to tax at a special rate which is high enough to effectively preclude the use of this type of security. Interest paid to non-residents in other cases is, with some exceptions, liable to withholding tax at the rate of 10%.
The first Bill - the Income Tax Assessment Bill (No. 2) 1971 - proposes to amend the existing law to exempt from these taxes -
- interest paid by an Australian resident company - whether Australian owned or foreign owned - on an overseas issue of bearer debentures if the issue is a public or widely distributed one and the loan moneys are for use in, or in connection with, a business carried on in Australia by a resident of Australia; and
- interest paid by an Australian-owned-and-controlled borrower on moneys borrowed overseas if the funds are for use either in an enterprise with substantially preponderant Australian ownership and control, or in an enterprise in which Australian participation is substantial and the borrowing is to support the Australian participation.
The Bill will also repeal a provision which exempts from withholding tax interest on money lodged at interest outside Australia with a resident bank and which has been viewed as conferring unintended exemption from the tax. The repeal will have effect in relation to money lodged after the date of introduction of the Bill into Parliament, except where lodged in pursuance of a contractual obligation entered into with the bank before that date.
The second Bill - the Income Tax (Withholding Tax Recoupment) Bill 1971 will impose a tax of 10 per cent on interest on loans which initially qualify for the second type of exemption referred to (borrowings supporting Australian ownership), but which subsequently cease so to qualify. (For example, the company that uses the money may cease to be Australian-owned-and-controlled within the meaning of the Bill.) In such cases a special tax (equal to the withholding tax that, but for the exemption, would have been payable) will be payable, by the borrower, on the interest on so much of the loan as is not being employed for a qualifying use.
The third Bill - the Income Tax (Bearer Debentures) Bill 1971 will impose tax payable in accordance with section 126 of the Income Tax Assessment Act in respect of interest payable by a company on bearer debentures. The existing rate of 41.65066 per cent will be maintained but a rate of 10 per cent will be introduced for interest on certain overseas-issued bearer debentures that do not qualify for the proposed exemption.