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Edited version of private ruling
Authorisation Number: 1011766091499
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Ruling
Subject: Withholding on interest paid to a foreign institution
Question
Are interest payments made on a loan subject to withholding tax under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936)?
Answer
Yes.
This ruling applies for the following period:
Financial year ended 30 June 2010.
The scheme commences on:
1 July 2009.
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.
You are a resident of Australia for tax purposes.
You have a property overseas which is rented out. You have a loan with a financial institution located overseas. Your rental property located overseas acts as security for the loan.
You have received conflicting advice regarding your requirement to apply for an ABN to make a 10% withholding on interest paid to the foreign financial institution to the Australian Government and then reclaim the 10% from the institution.
As a result of the conflicting advice received, you have obtained an ABN and made the withholding payments for 4 quarters.
Your property is an apartment in a residential area which is not being used for business purposes. It is rented on an arm's length basis to a third party.
Relevant legislative provisions
Income Tax Assessment Act 1936 Section 128B and
Income Tax Assessment Act 1936 Section 128B(2).
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.
Liability to withholding tax is applicable under section 128B of the ITAA 1936 on interest derived by a non-resident unless an exemption applies.
Under the Pay As You Go (PAYG) withholding system, you must withhold tax under either of the following conditions:
· when you make dividend, interest or royalty payments to a payee with an address outside Australia; or
· when you are authorised to make the payments to a place outside Australia regardless of who you make the payments to.
Interest withholding tax is imposed at a flat rate of 10% on the gross amount of interest paid.
In your case, the property is an apartment that has been rented out at arm's length to a third party. Hence, you are not carrying on a business in relation to the interest expense you have incurred, which is paid to a foreign financial institution.
Hence, you are required to withhold 10% of the gross interest you pay to the foreign financial institution and remit the amounts withheld to the ATO.