| Disclaimer This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law. You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4. |
Edited version of your written advice
Authorisation Number: 1051307993967
Disclaimer
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.
The advice in the Register has 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.
Date of advice: 1 December 2017
Ruling
Subject: Interest rates on a loan and Australian transfer pricing
Question 1
Is the proposed interest rate of 5% an acceptable interest rate on a loan for Australian transfer pricing purposes?
Answer
Yes
This ruling applies for the following period:
1 July 2017 to 30 June 2018
The scheme commences on:
July 2017
Relevant facts and circumstances
Background facts
1. Company A is an Australian private company incorporated early in the 2017 calendar year.
2. Its shares are held by two separate non-Australian resident discretionary trusts. The corporate trustees are registered in Country 1, and each corporate trustee is controlled separately by two individuals who are tax residents of Country 2.
3. The trusts, with funds originating from the two individuals, loaned approximately AUD$Xm to Company A to finance the acquisition of a commercial property in Australia.
4. The $Xm funded the purchase price of the property, as well as stamp duty and other associated fees and taxes. The purchase was settled in June 2017 and the property is currently deriving rent through a lease. Gross rental income is expected to be $X per annum, with X% annual increases until the expiry of the lease in 20XX.
5. In September 2017, Company 1 submitted, through their tax agent, a private ruling request regarding guidance on the interest rate that would be acceptable on the loan for transfer pricing purposes.
6. The taxpayer proposed an interest rate of 5%, claiming that this presented a conservative approach relative to that permitted by Practical Compliance Guideline (PCG) 2017/2 Simplified Transfer Pricing Record Keeping Options (PCG 2017/2).
7. Regarding low level inbound loans, the PCG permits a maximum interest rate equal to the Reserve Bank of Australia’s indicator lending rate for “small business; variable, residential-secured term”. At the time of the property being settled, and of writing, this rate was 6.45%.
8. By virtue of the funds originating from Country 1, however, the taxpayer is not eligible for the PCG’s safe harbours. Despite this, the tax agent’s view is that the 5% interest rate represents a conservative approach relative to that permitted by PCG 2017/2.
Relevant legislative provisions
Income Tax Assessment Act 1997 815-B.
Reasons for decision
Based on materiality, prior case work, prior benchmarking, informed judgement and PCG 2017/2’s guidance, the ATO’s Economist Practice (EP) considers a 5% interest rate on debt used to fund the purchase of a commercial property in Australia appropriate and unlikely to deliver a transfer pricing benefit to the Company A’s offshore related parties.
The EP informed the taxpayer, however, that we do not believe an independent financial institution financing the purchase of the property would extend funds at a gearing level that was effectively 100% (or in excess of 100% if the transaction costs are ‘capitalised’ as part of the debt).
That is, an independent financial institution would demand some internal or external credit enhancement. Indeed, the most commercially realistic scenario would involve Company A providing a portion of the purchase price in the form of equity.
Later in September 2017, the tax agent submitted an amended private ruling request. X% of the inbound $Xm would be reclassified and used to purchase an equity holding in the Company A. This would reduce the incoming funds in the form of debt to $Xm, and the interest charge to $X.
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).
