Edited version of your written advice

Authorisation Number: 1012931086721

Date of advice: 22 December 2015

Ruling

Subject: Non Resident Withholding Tax

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Question 1

Is Australian Branch required to withhold an amount under Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) from interest that accrues on funds deposited in a 'Client Segregated Account' that is then on-paid to the Client by Australian Branch?

Answer

No

Question 2

Is Australian Branch required to withhold an amount pursuant to Subdivision 12-F of Schedule 1 to the TAA 1953 from interest that it receives in a Client Segregated Account from an 'Offshore Permissible Investment' that is then paid to the Client by Australian Branch?

Answer

No

This ruling applies for the following periods:

Other/Substituted Accounting Period 1 January 2015 to 31 December 2015

Other/Substituted Accounting Period 1 January 2016 to 31 December 2016

Other/Substituted Accounting Period 1 January 2017 to 31 December 2017

Other/Substituted Accounting Period 1 January 2018 to 31 December 2018

The scheme commenced on:

1 January 2015

Relevant facts and circumstances

Description of the Scheme

1. Foreign Company carries on a business in Australia through its Australian Branch (Australian Branch). Foreign Company is a non-resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936) and Income Tax Assessment Act 1997 (ITAA 1997).

2. Australian Branch enters into a client agreement (Client Agreement) with non-resident clients (Clients). The Clients do not carry on business at or through a permanent establishment in Australia.

3. Pursuant to the Client Agreement, Clients provide funds to Australian Branch. These funds are segregated from the funds of Australian Branch (Client Segregated Account).

Client Returns - Segregated Client Accounts

4. The Client Segregated Account is an account in the name of Australian Branch, held with a non-resident entity. Clients can deposit funds directly into the Client Segregated Account.

5. The non-resident entity does not hold those funds as part of carrying on a business in Australia at or through a permanent establishment in Australia.

6. Interest accrues and is credited to the Client Segregated Account by the non-resident entity, which is then on-paid by Australian Branch to the Client.

Client Returns - Investments

7. Australian Branch can, in its absolute discretion, invest monies deposited in a Client Segregated Account in permissible investments.

8. Permissible investments are predominantly interest bearing instruments or accounts.

9. Australian Branch only invests funds in permissible investments offered by non-resident entities otherwise than in carrying on a business in Australia at or through a permanent establishment in Australia (Offshore Permissible Investments).

10. If an investment is made in an Offshore Permissible Investment by Australian Branch, then the Client will be entitled to any interest on the Offshore Permissible Investments.

Fees and other amounts payable

11. Australian Branch has absolute discretion to realise any permissible investment to meet any amounts, fees or charges owing to it under the Client Agreement and Australian Branch may deduct monies property due and owing to it under the Client Agreement. Any surplus following such deductions are paid into the Client Segregated Account.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 995-1(1).

Income Tax Assessment Act 1936 Division 11A of Part III

Income Tax Assessment Act 1936 Subsection 128A(1AB).

Income Tax Assessment Act 1936 Subsection 128A(2).

Income Tax Assessment Act 1936 Subsection 128A(3).

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 Subsection 128B(1A).

Income Tax Assessment Act 1936 Subsection 128B(2).

Income Tax Assessment Act 1936 Paragraph 128B(2)(a).

Income Tax Assessment Act 1936 Paragraph 128B(2)(b).

Income Tax Assessment Act 1936 Subparagraph 128B(2)(b)(i)

Income Tax Assessment Act 1936 Subparagraph 128B(2)(b)(ii)

Income Tax Assessment Act 1936 Subsection 128B(5).

Income Tax Assessment Act 1936 Paragraph 128B(3)(h).

Income Tax Assessment Act 1936 Subparagraph 128B(3)(h)(iv)

Income Tax Assessment Act 1936 Subsection 128GB(1).

Income Tax Assessment Act 1936 Subsection 128AE(1).

Income Tax Assessment Act 1936 Paragraph 128AE(1)(a)

Income Tax Assessment Act 1936 Subsection 128AE(12).

Income Tax Assessment Act 1936 Section 128GB.

Tax Administration Act 1953 Subdivision 12-F of Schedule 1

Tax Administration Act 1953 Section 12-245

Tax Administration Act 1953 Section 12-250

Tax Administration Act 1953 Section 12-300

Tax Administration Act 1953 Paragraph 12-300(a)

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

All legislative references that follow are to the ITAA 1936 unless otherwise stated.

Question 1:

Summary

Australian Branch is not required to withhold an amount under Subdivision 12-F of Schedule 1 to the TAA 1953 from interest that accrues on funds deposited in a 'Client Segregated Account' that is then on-paid to the Client by Australian Branch.

Detailed Reasoning

An entity is not required to withhold an amount from interest under Subdivision 12-F of Schedule 1 to the TAA 1953 (which includes sections 12-245 and 12-250), if no withholding tax is payable in respect of the interest (section 12-300 of Subdivision 12-F of Schedule 1 to the TAA 1953).

The definition of withholding tax in subsection 995-1(1) of the ITAA 1997 includes income tax payable pursuant to section 128B. Therefore, for withholding tax to be payable in respect of the interest accruing on funds deposited in a Client Segregated Account that is then on-paid to the Client by Australian Branch, it must be interest to which section 128B applies (subsection 128B(5)).

Section 128B is contained within Division 11A of Part III and sets out the circumstances in which interest income derived by non-residents is subject to withholding tax.

In order to apply section 128B in relation to the interest that accrues on funds deposited in a 'Client Segregated Account' that is then on-paid to the Client by Australian Branch, it is necessary to consider the nature of the relationship between Australian Branch and the Client.

It is considered that Australian Branch (that is, Foreign Company acting through its Australian Branch) holds the Client's money on trust for the Client.

The interest accruing on those funds is credited to the Client Segregated Account by the non-resident entity and is then on-paid by Australian Branch to the Client.

Subsection 128B(2) - Interest Withholding Tax - Interest received by Trustee

The Client Segregated Account is an account in the name of Australian Branch, held for the benefit of the Client. Interest derived in respect of the funds on deposit in the Client Segregated Account is derived by Australian Branch (that is, Foreign Company acting through its Australian Branch) as the holder of the account. Foreign Company is a non-resident for Australian Income tax purposes and therefore paragraph 128(2)(a) is satisfied.

Paragraph 128B(2)(b) requires that the interest be paid to the non-resident. When interest is credited to the Client Segregated Account by the non-resident entity with whom the account was established, the interest is deemed to have been paid to Australian Branch by subsection 128A(2).

However the interest:

1. is not paid by 'a person to whom [section 128B] applies' as defined in subsection 128B(1A); and

2. although it is paid by a non-resident, it is not an outgoing incurred by that person in carrying on business in Australia at or through a permanent establishment of the non-resident in Australia;

for the purposes of subparagraphs (i) and (ii) of paragraph 128B(2)(b).

Accordingly, the interest paid to Australian Branch in the circumstances does not satisfy paragraph 128B(2)(b) and is not subject to interest withholding tax.

Subsection 128B(2) - Interest Withholding Tax - Interest on-paid to the Client

Interest that is credited into the Client Segregated Account, in respect of Client funds on deposit in the Client Segregated Account, is distributed to the relevant non-resident client as directed by Australian Branch from the Client Segregated Account.

Subsection 128A(3) provides:

for the purposes of this Division, a beneficiary who is presently entitled to a dividend, to interest or to a royalty included in the income of a trust estate shall be deemed to have derived income consisting of that dividend, interest or royalty at the time when he became so entitled.

Paragraph 2 of Taxation Ruling IT 2680 says that subsection 128A(3) treats a non-resident beneficiary who is presently entitled to interest included in the income of a trust estate as deriving the interest when the present entitlement arises.

Paragraph 22 of IT 2680 sets out when a beneficiary will be presently entitled to income from the trust.

It is considered that the Client will be presently entitled to the interest income paid into the Client Segregated Account.

Pursuant to subsection 128A(3), a Client of Australian Branch is deemed to have derived interest income credited to a Client Segregated Account when the present entitlement arises.

Interest paid to the non-resident client by Australian Branch retains its character as interest for the purposes of subsection 128B(2). Paragraph 128B(2)(a) is satisfied as interest has been derived by a non-resident, the Client.

However:

1. subparagraph 128B(2)(b)(i) is not satisfied, because Foreign Company is not a resident and is therefore not 'a person to whom this section applies' as defined in subsection 128B(1A); and

2. subparagraph 128B(2)(b)(ii) is not satisfied, because the on-payment of interest by Australian Branch to the Client is a trust distribution and is therefore not an outgoing incurred in carrying on a business at or through a permanent establishment.

As subsection 128B(2) is not satisfied, the interest distributed to the Client is not subject to interest withholding tax.

Australian Branch is not required to withhold an amount from interest accruing on funds deposited in a Client Segregated Account that it then on-pays to the Client under subsection 128B(2) as no withholding tax is payable in respect of that interest (paragraph 12-300(a) of Subdivision 12-F of Schedule 1 to the TAA 1953).

Question 2:

Summary

Australian Branch is not required to withhold an amount pursuant to Subdivision 12-F of Schedule 1 to the TAA 1953 from interest that it receives in a Client Segregated Account from an 'Offshore Permissible Investment' that is then paid to the Client by Australian Branch.

Detailed Reasoning

As stated above, an entity is not required to withhold an amount from interest under Subdivision 12-F of Schedule 1 to the TAA 1953 (which includes sections 12-245 and 12-250), if no withholding tax is payable in respect of the interest: section 12-300 of Subdivision 12-F of Schedule 1 to the TAA 1953.

Withholding tax includes income tax payable pursuant to section 128B.

Client's funds paid to Australian Branch are held by Australian Branch on trust for the Client as explained above.

Subsection 128B(2) - Interest Withholding Tax - Interest received by Trustee

Australian Branch can invest Client funds in its absolute discretion in permissible investments. As stated in the Description of the Scheme, an Offshore Permissible Investment is an investment in a permissible investment with a non-resident entity in circumstances where that investment is offered by the non-resident entity otherwise than in carrying on a business in Australia at or through a permanent establishment of that entity in Australia.

The interest derived on Client funds invested by Australian Branch in an Offshore Permissible Investment is derived by Australian Branch (that is, Foreign Company acting through its Australian Branch). Foreign Company is a non-resident for Australian Income Tax purposes and therefore paragraph 128(2)(a) is satisfied.

Any earnings from an Offshore Permissible Investment will be interest for the purposes of subsection 128A(1AB) to the extent that it is interest, or an amount in the nature of interest.

Interest paid to the Client Segregated Account, in respect of an Offshore Permissible Investment, is paid by a person who is not a resident, and is not an outgoing incurred by that person (the non-resident) in carrying on business in Australia at or through a permanent establishment of that person in Australia.

Therefore the interest:

1. is not paid by 'a person to whom [section 128B] applies' as defined in subsection 128B(1A); and

2. although it is paid by a non-resident, it is not an outgoing incurred by that person in carrying on business in Australia at or through a permanent establishment of the non-resident in Australia;

for the purposes of subparagraphs (i) and (ii) of paragraph 128B(2)(b).

Accordingly, the interest paid to Australian Branch in the circumstances described above does not satisfy paragraph 128B(2)(b) and is not subject to interest withholding tax.

Subsection 128B(2) - Interest Withholding Tax - Interest paid by Australian Branch to the Client

As explained in the reasons for decision for Question 1, the payment of interest by Australian Branch to the Client is a trust distribution. As the payment of the interest is a trust distribution, it is not an outgoing incurred by the trustee in carrying on a business at or through a permanent establishment of the trustee in Australia. Subparagraph 128B(2)(b)(ii) is therefore not satisfied.

As subsection 128B(2) is not satisfied, the interest from an Offshore Permissible Investments paid to the Client from the Client Segregated Account is not income to which section 128B applies.

Australian Branch is not required to withhold an amount from interest that it receives in a Client Segregated Account from an Offshore Permissible Investment that is then paid to the Client as no withholding tax is payable in respect of that interest under subsection 128B(2) (paragraph 12-300(a) of Subdivision 12-F of Schedule 1 to the TAA 1953).

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).