ATO Interpretative Decision
ATO ID 2005/356
Income tax
Deductibility of interest payments by a foreign resident to another foreign resident where no withholding tax has been deducted from the paymentsFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
If a foreign resident (the payer) pays interest to another foreign resident, and deducts no withholding tax from the payment as the payer is not required to withhold under Subdivision 12-F of the Taxation Administration Act 1953 (ITAA 1953), will the payer be denied a deduction for that interest under section 26-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. Where a foreign resident pays interest to another foreign resident and deducts no withholding tax from the payment, as the payer is not required to withhold under Subdivision 12-F of the TAA, section 26-25 of the ITAA 1997 will not operate to deny the payer a deduction for the interest.
Facts
The taxpayer is a foreign resident.
The taxpayer pays interest to another foreign resident.
The taxpayer does not incur interest in carrying on a business at or through a permanent establishment in Australia.
Reasons for Decision
Section 26-25 of ITAA 1997 provides that a taxpayer cannot claim a deduction for interest expenses if the taxpayer fails to withhold an amount under Subdivision 12-F of Schedule 1 to the TAA 1953 when required to do so.
Section 12-245 of Subdivision 12-F of the Schedule sets out the circumstances requiring an entity to withhold an amount from an interest payment it makes to an overseas entity.
However, section 12-300 of Subdivision 12-F of the Schedule provides that there is no requirement to withhold if no withholding tax is payable on the interest. Thus it is necessary to consider whether withholding tax is payable on the interest in question.
Sub-paragraph 128B(2)(b)(ii) of the ITAA 1936 imposes withholding tax on interest paid to a non-resident by another non-resident if the interest is an outgoing incurred by the payer in carrying on a business at or through a permanent establishment in Australia.
As the taxpayer does not incur interest in carrying on a business at or through a permanent establishment in Australia, there is no withholding tax obligation under subparagraph s128B(2)(b)(ii) and no amount is required to be withheld under Subdivision 12-F of Schedule 1 to the TAA 1953.
As a result, section 26-25 will not operate to deny the payer a deduction for the interest.
Date of decision: 29 November 2005Year of income: Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008 Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1997
section 26-25
sub-paragraph 128B(2)(b)(ii) Taxation Administration Act 1953
section 12-245
section 12-300
Keywords
Interest expenses
Non resident interest withholding tax
Permanent establishment
ISSN: 1445-2782
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