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Edited version of your written advice
Authorisation Number: 1051230574434
Date of advice: 6 June 2017
Ruling
Subject: Foreign interest withholding tax
Question 1
Will Company A be required under section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to withhold an amount from interest it will pay to Company B under the terms of the loan agreement dated 1st February 2016 (the Loan) between those same parties?
Answer
No.
This ruling applies for the following period:
Year ended 30 June 2017
The scheme commences on:
1 February 2016
Relevant facts and circumstances
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.
All references are to the Income Tax Assessment Act 1997 (ITAA1997) unless otherwise stated.
Company A
Company A is a non-resident for tax purposes. It does not have any offices in Australia.
Company A’s business is investing and developing residential and commercial properties. It has five properties outside of Australia.
Company B
Company B is a non-resident for tax purposes. It does not have any offices in Australia.
Company B’s business is investing and developing residential and commercial properties. It operates outside of Australia only.
Trust
The Trust is an Australian resident unit trust. All units in the Trust are directly owned by Company A.
Company C is a company incorporated in Australia and acts as the trustee for the Trust. All shares in the Trust are directly held by Company A.
The Trust is in the business of investing in Australian commercial properties and predominantly derives rent from the five commercial properties it owns. The combined book value of these properties is approximately $x million.
The Trust engaged Company D to manage the purchase of some of the commercial properties. Person A, who is a director of Company D, is also a director of Company C.
The Trust has borrowed $y million from an Australian bank to fund its investments while Company A has invested $z million in equity through the purchase of units in the Trust.
Loan agreement dated 1st February 2016
To invest in the Trust, Company A borrowed $z million from Company B in accordance with the loan agreement dated 1 February 2016 (the Loan). The interest rate applicable on this loan is 12% p.a.
The schedule of the Loan sets out that repayment of the principal loan by Company A is required when requested by Company B, with three months’ notice, or by full repayment before 1 July 2022.
The schedule of the Loan also provides that interest is to be paid yearly in arrears.
Relevant legislative provisions
Taxation Administration Act 1953 Schedule 1 section 12-245
Taxation Administration Act 1953 Schedule 1 section 12-300
Income Tax Assessment Act 1936 subsection 6(1)
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 1997 subsection 995-1(1)
Reasons for decision
Pursuant to section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), an entity must withhold an amount from interest it pays to another entity if the recipient has an address outside Australia according to any record in the payer’s possession or if the payer is authorised to pay the interest at a place outside Australia.
However, paragraph 12-300(a) of Schedule 1 to the TAA 1953 provides that an entity is not required to withhold an amount from an interest payment if no withholding tax is payable in respect of the interest.
Company A is not required to withhold an amount from any interest paid to non-resident lender if no withholding tax is payable in respect of those interest payments.
Interest withholding tax liability
The definition of withholding tax for the purposes of paragraph 12-300(a) of Schedule 1 of the TAA 1953 is found in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997). The definition of 'withholding tax’ in subsection 995-1(1) of the ITAA 1997 includes income tax payable under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936).
Subsection 128B(2) of the ITAA 1936 imposes a liability to withhold tax on certain income that consists of interest. Subsection 128B(2) provides that:
128B(2) Subject to subsection (3), this section also applies to income that: (a) is derived, on or after 1 January 1968, by a non-resident; and |
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(b) consists of interest that: (i) is paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country; or (ii) is paid to the non-resident by a person who, or by persons each of whom, is not a resident and is, or is in part, an outgoing incurred by that person or those persons in carrying on business in Australia at or through a permanent establishment of that person or those persons in Australia. | |
Paragraph 128B(2)(a) ITAA 1936
Company B entered into a Loan Agreement dated 1 February 2016 (the Loan) with Company A. Based on the terms of the Loan, Company A is required to pay interest yearly in arrears.
This means that interest income is derived by Company B, a non-resident, after 1 January 1968 and paragraph 128B(2)(a) of the ITAA 1936 is satisfied.
Paragraph 128B(2)(b) ITAA 1936
Paragraph 128B(2)(b)(i) of the ITAA 1936 requires:
a. interest to be paid to a non-resident by a person to whom section 128B applies; and
b. interest is not an outgoing wholly incurred by the payer in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country.
A 'person to whom this section applies’ is defined in subsection 128B(1A):
128B(1A) In this section, a reference to a person to whom this section applies is a reference to the Commonwealth, a State, an authority of the Commonwealth or of a State or a person who is, or persons at least 1 of whom is, a resident. |
For the present facts, a 'person to whom this section applies’ in subsection 128B(1A) of the ITAA 1936 refers to a person who is a resident.
Although Company A will be paying interest to Company B (a non-resident) according to the Loan, paragraph 128B(2)(b)(i) will only apply if Company A is a resident. As Company A is a non-resident for tax purposes, paragraph 128B(2)(b)(i) does not apply.
Paragraph 128B(2)(b)(ii) of the ITAA 1936 requires:
a. Interest to be paid to a non-resident by a person who is not a resident; and
b. The interest is an outgoing incurred by the payer in carrying on business in Australia at or through a permanent establishment in Australia.
As it is determined that interest is paid to Company B by Company A, a non-resident for tax purposes, it is necessary to decide whether Company A will incur the interest payment in carrying on its business in Australia at or through a permanent establishment in Australia.
Whether Company A is carrying on a business in Australia at or through a permanent establishment is a question of fact.
Business
According to subsection 6(1) of the ITAA 1936, 'business’ is defined in subsection 995-1(1) of the ITAA 1997. Business has its ordinary meaning and includes 'any profession, trade, employment, vocation or calling, but does not include occupation as an employee’.
Whether a company carries on business in Australia is a question of fact to be decided on the particular facts of the case under consideration. The nature and extent of activities conducted in Australia are relevant.
In the present case, Company A has no interests in Australia other than holding units in the Trust. Company A also has no offices in Australia. Hence, it is not carrying on a business in Australia at or through a permanent establishment in Australia.
This means that subparagraph 128B(2)(b)(ii) of the ITAA 1936 is not met even though Company A will be incurring interest as an outgoing, but not through carrying on a business in Australia at or through a permanent establishment in Australia.
Conclusion
While interest income will be derived by a non-resident entity (Company B) and will be paid to that entity by a non-resident (Company A), Company A does not carry on a business in Australia at or through a permanent establishment in Australia.
Therefore, the withholding tax in subsection 128B(2) of the ITAA 1936 does not apply. This means withholding tax is not payable on interest paid by Company A to Company B, on the loan used to finance the purchase of units in the Trust.
Hence, Company A will not be required under section 12-245 of Schedule 1 to the TAA 1953 to withhold any amount from interest it will pay on the Loan to Company B.
The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.
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