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Edited version of your written advice
Authorisation Number: 1013089749387
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You cannot rely on this edited version in your tax affairs. You can only rely on the advice that we have given to you or to someone acting on your behalf.
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Date of advice: 13 September 2016
Ruling
Subject: Withholding tax
Question 1
Is entity A liable to withhold amounts under section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from amounts paid to entity B pursuant to an agreement (the agreement)?
Answer
No.
This ruling applies for the following periods:
Income years 20XX to 20YY
Relevant facts and circumstances
1. Entity A is an Australian tax resident company.
2. Entity B is a resident of another country for tax purpose.
3. Entity A and entity B entered into an agreement under which certain payments are required to be made.
4. Entity B entered into the agreement outside of Australia.
5. Entity B does not have a permanent establishment in Australia in respect of entering into, and performing its obligations under the agreement.
Relevant legislative provisions
Schedule 1 to the Taxation Administration Act 1953 section 12-245
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(1AC)
Income Tax Assessment Act 1936 subsection 128A(1AE)
Income Tax Assessment Act 1936 subsection 128A(1AF)
Reasons for decision
Section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA) requires an entity to withhold an amount from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936)) it pays to an entity if the recipient has an address outside Australia or the payer is authorised to pay the interest at a place outside Australia.
To come within section 12-245 of Schedule 1 to the TAA, the amount from which an entity has to withhold must be 'interest' as defined in Division 11A of Part III of the ITAA 1936.
For the purposes of Division 11A, 'interest' is defined in subsection 128A(1AB) of the ITAA 1936 to include an amount:
(a) that is in the nature of interest; or
(b) to the extent that it could reasonably be regarded as having been converted into a form that is in substitution for interest; or…
The definition in subsection 128A(1AB) of the ITAA 1936 is an inclusive definition. Therefore, interest under the general law (although not explicitly mentioned in the definition) is also interest for the purposes of Division 11A.
Further legislative clarification of the definition of 'interest' is provided by these subsections in section 128A of the ITAA 1936:
128A(1AC)
An example of an amount in the nature of interest is an amount representing a discount on a security.
128A(1AD)
An example of an amount in substitution for interest is a lump sum payment made instead of payments of interest.
128A(1AE)
For the purposes of this Division, if a lender assigns a loan, or the right to interest under a loan, any payment from the borrower to the assignee that represents an amount that would have been interest if the assignment had not taken place is taken to be a payment of interest.
128A(1AF)
For the purposes of this Division, if a person acquires a security, or the right to interest under a security, any payment from the issuer of the security to that person that represents an amount that would have been interest if the acquisition had not taken place is taken to be a payment of interest.
Subsections 128(1AE) and 128(1AF) are not relevant, as they deal with a change in the ownership of a loan or security, and deem any amount that would have been interest but for the change of ownership to be a payment of interest.
Therefore, the payment will be interest and as such subject to interest withholding tax if it is:
• interest under the general law;
• an amount that is in the nature of interest (paragraph (a) of the definition of 'interest' in subsection 128A(1AB)); or
• an amount to the extent that it could reasonably be regarded as having been converted into a form that is in substitution for interest (paragraph (b) of the definition of 'interest' in subsection 128A(1AB)).
Conclusion
On the particular facts of the present case, no part of the payment made by entity A to entity B under the agreement can be characterised as being a payment of 'interest' within the meaning of Division 11A of Part III of the ITAA 1936.
Accordingly, entity A will not have to withhold an amount pursuant to section 12-245 of Schedule 1 to the TAA from the payment.
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