Edited version of private ruling

Authorisation Number: 1011763340146

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Ruling

Subject: Interest withholding tax exemption

Question

Is X exempt from Australian interest withholding tax on income derived in Australia under the Country Y Convention of the International Tax Agreements Act 1953 (Agreements Act)?

Answer

Yes. X is exempt from Australian interest withholding tax on income derived in Australia under the country Y Convention of the Agreements Act.

Relevant facts and circumstances

X is an overseas government department responsible for the collection of taxes etc. It has opened bank accounts in Australia from which it derives interest income.

Reasons for decision

Interest withholding tax is payable under subsection 128B(5) of the Income Tax Assessment Act 1936 (ITAA 1936) on interest derived by non-residents that falls within subsection 128B(2) of the ITAA 1936. Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 sets the rate of withholding tax on interest payments to non-residents to which subsection 128B(2) of the ITAA 1936 applies at 10%.

This liability to Australian withholding tax is subject to any applicable tax treaty provisions in the Convention contained in the International Tax Agreements Act 1953 (Agreements Act).

The Convention provides that Australia may not tax interest derived by the contracting party or by a political or administrative subdivision or a local authority or by any other body exercising governmental functions, or by a bank performing central banking functions.

In relation to the Convention, the phrase 'any other body exercising governmental functions' is not defined. The Convention provides that any term not defined shall, unless the context otherwise requires, have the meaning it has under the law relating to taxes of the country applying the Convention.

Australian domestic tax law does not statutorily define what governmental functions are. Taxation Ruling TR 2005/8 interprets the terms 'governmental functions' and 'in discharge of governmental functions' in the Government Service Article (Article 19) of the US Convention.

Therefore, in determining the meaning for Article 11 of the Convention purposes, it is necessary to examine the words of the provision itself (Thiel v. Federal Commissioner of Taxation (1990) 171 CLR 338; 90 ATC 4717; (1990) 21 ATR 531). The term 'any other body exercising governmental functions' in Article 11(3)(a) of the Convention in concert with the other types of bodies listed indicates that denial of the taxing right in Article 11(3)(a) is limited to bodies exercising government functions, being those that are identifiable as being government or that are a statutory authority (that is, an entity of public character created by the laws of a Contracting State in which no other person other than the State itself, or a subdivision thereof, has an interest).

The foreign government entity satisfies the condition of being a contracting party within the terms of the Convention and is beneficially entitled to interest paid by Australian borrowers.