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Ruling

Subject: TFN withholding obligations

Question

Do you have a Pay As You Go (PAYG) obligation to withhold from payments in circumstances where a tax file number (TFN) has not been provided?

Answer

Yes

This ruling applies for the following period:

Year ending 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are a company as defined in subsection 117(1) of the Income Tax Assessment Act 1936 (ITAA 1936). You have many members and each member holds a minimum number of your shares.

Your rules provide that interest may be paid on your paid-up share capital at such rate as shall be recommended by the board from time to time and approved by the members at a general meeting. At the annual general meeting an interest rate is agreed and ratified by the members concerning interest payable on share capital for the proceeding year.

Normally ninety eight percent of your members received a nominal interest payment for the year.

Your board also determines the interest rate applicable to accumulated member rebates. These are member rebates which have been declared and credited to member accounts but not yet taken in cash or offset against future purchases.

All interest payments and accumulated rebate interest payments are entirely discretionary from year to year.

Relevant legislative provisions

Taxation Administration Act 1953 subsection 12-140(1)

Taxation Administration Act 1953 section 12-150

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 974-20(1)

Income Tax Assessment Act 1997 subsection 974-135(3)

Income Tax Assessment Act 1936 subsection 117(1)

Income Tax Assessment Act 1936 section 202D

Reasons for decision

Under subsection 12-140 (1) of Schedule 1 to the Taxation Administration Act 1953 (TAA), an investment body must withhold an amount from a payment it makes to another entity in respect of a Part VA investment if:

(a) all or some of the payment is ordinary income or statutory income of the other entity; and

(b) if the investment is non-transferable - the other entity did not quote its tax file number in connection with the investment before the time when the payment became payable; and

(c) if the investment is transferable - the other entity did not quote its tax file number in connection with the investment before the time when the other entity had to be registered with the investment body as the investor to be entitled to the payment.

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an investment body for a Part VA investment has the meaning given by section 202D of the ITAA 1936. Subsection 202D(1) lists those Part VA investments in the following table:

You identify yourself as an investment body that may potentially fit the description provided in the above table as a body corporate (item 3) and a company (item 6).

Body corporate (item 3) is defined in Taxation Ruling IT 2634 as having the meaning of a group of persons legally incorporated in a corporation and therefore for the purposes of subsection 202D(1) of the ITAA 1936 you may be considered to be a body corporate.

To identify the investment under item 3, the interest generated is considered under the debt/equity considerations under Division 974 of the ITAA 1997. This division determines whether the interest is a debt interest or an equity interest. If the interest could be characterised as both, it will be treated as a debt interest. To be classed as a debt interest, the debt test of subsection 974-20(1) is satisfied if amongst other things:

the entity has, or the entity and a connected entity of the entity each has, an effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when…

A non-contingent obligation is explained at subsection 974-135(3) of the ITAA 1997 as:

An obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or a connected entity of that entity), other than the ability or willingness of that entity or connected entity to meet the obligation.

In your circumstances the rate of interest payable is entirely discretionary from year to year and contingent on the recommendation of the board and approval by the members, therefore you do not have a non-contingent obligation. Consequently a Part VA investment has not been made under item 3 of subsection 202D(1) of the ITAA 1936 as a 'loan to a body corporate'.

A public company includes a co-operative company as defined in section 117 of the ITAA 1936. A co-operative company is one that either has no share capital or has rules that limit the number of shares which may be held by any one shareholder… Therefore for the purposes of subsection 202D(1) item 6 of the ITAA 1936 you are a public company.

Schedule 1 subsection 12-150(1) of the TAA limits the extent to which section 12-140 applies to a payment in respect of a Part VA investment if the investment is a qualifying security and:

(a) is of a kind mentioned in item 1 or 2 of the table in subsection 202D(1) of that Act; or

(b) is of a kind mentioned in item 3 of that table and is non-transferable.

Notwithstanding the requirements to be classified as a qualifying security, item 6 of subsection 202D(1) of the ITAA 1936 is not listed in the items for exemption under subsection 12-150(1) of the TAA. Therefore public companies have an obligation to withhold where no TFN is provided.

Conclusion

Item 3 of the table at subsection 202D(1) of the ITAA 1936 does not apply to your circumstances as the money paid to the co-operative by the members in return for shares is not a 'loan to a body corporate'. Item 6 is not an item that allows an exemption from withholding as it is not an item identified for exemption in Schedule 1 subsection 12-150(1) of the TAA. Therefore you are obliged to withhold from interest payments made to your members where they have not provided a TFN.

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