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Edited version of your written advice
Authorisation Number: 1012744608808
Ruling
Subject: Non-resident withholding tax
Question and Answer
Does a resident company have a non-resident withholding tax obligation in respect of interest paid on monies owed for trade credit to a non-resident company?
Yes
This ruling applies for the following period
Year ended 31 December 2014
The scheme commences on
1 January 2014
Relevant facts and circumstances
The resident company was incorporated in Australia.
The resident company is wholly owned by the non-resident company.
The board of directors of the resident company is comprised of one Australian resident and two non-residents.
The non-resident company was incorporated outside Australia and distributes their product to various subsidiaries worldwide.
The non-resident company sells their product to resident company who on sells these products to mostly local customers.
The resident company owes the non-resident money for products supplied but not paid for under a 'trade credit'.
The non-resident company charges the resident company interest on the 'trade credit'.
Relevant legislative provisions
Section 26C of the Income Tax Assessment Act 1936
Section 128A of the Income Tax Assessment Act 1936
Section 128B of the Income Tax Assessment Act 1936
Reasons for decision
Interest derived by a non-resident
Under section 128B(2) of the ITAA 1936, interest derived by a non-resident is subject to withholding tax, if it is:
(i) paid by a person to whom the section applies, provided the interest is not wholly incurred by the payer in a business carried on in a country outside Australia at or through a permanent establishment of the payer in that country, or '
(ii) paid by a non-resident or non-residents, provided the interest is wholly or partly incurred by the non-resident payer in carrying on business in Australia at or through a permanent establishment of the payer in this country.
Under subsection 128A(1AB) of the ITAA 1936 interest is defined as follows:
interest includes an amount, other than an amount referred to in subsection 26C(1) of the ITAA 1936:
(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
(c) to the extent that it could reasonably be regarded as having been received in exchange for interest in connection with a washing arrangement; or
(d) that is a dividend paid in respect of a non-equity share; or
(e) if regulations under the Income Tax Assessment Act 1997 are made having the effect that instruments known as upper tier 2 capital instruments, or a class of instruments of that kind, are debt interests-that is paid on such a debt interest and is not a return of an investment;
but does not include an amount to the extent to which it is a return on an equity interest in a company.
The above definition includes the ordinary meaning of interest. On the ordinary meaning of interest, Hill J in Macquarie Finance Ltd v. FC of T said the following:
Interest has variously been described as a payment made by a borrower for the use of the money borrowed: FC of T v. Century Yuasa Batteries Pty Ltd 98 ATC 4380 at 4383; (1998) 82 FCR 288 at 291 or the price of money which is borrowed: Re Farm Security Act 1944 of the Province of Saskatchewan [1947] SCR 394 cited in FC of T v. Firth 2002 ATC 4346 at 4349-4350; (2002) 120 FCR 450 at 454 or as a recompense to the lender for being kept out of his money: Lomax (Inspector of Taxes) v. Peter Dixon & Co Ltd [1943] 2 All ER 255 (editorial note).
This represents 'a charge for the use of a credit facility or borrowed money; such a charge expressed as a percentage of the sum borrowed or used' to use the words of Cooper J in Century Yuasa Batteries Thus the Additional Amount is compensation to the Investors for being kept out of the Additional Payment and is interest under its ordinary meaning.
What these descriptions make clear is that there must be a borrowing before what is paid can be regarded as interest. At least ordinarily the concept of borrowing presupposes that the lender is entitled to a return of the money. Trade credit amounts paid on monies owed to the non-resident company by the resident company satisfy the definition of interest amounts payable to a non-resident.
Liability to non-resident withholding tax
A non-resident is liable to pay interest withholding tax under s 128B(5) ITAA 1936 and 128B(2)(b)(i) ITAA 1936 where:
(a) income to which section 128B applies consists of interest and is paid to the person by whom it is derived by a person to whom this section applies; and |
(b) the interest is, in part only, an outgoing incurred by that person to whom this section applies in carrying on business in a country outside Australia at or through a permanent establishment of that person to whom this section applies in that country; |
Where:
(a) income to which section 128B applies consists of interest and is paid to the person by whom it is derived by a person who, or by persons each of whom, is not a resident; and
(b) the interest is, in part only, an outgoing incurred by the person or persons by whom it is paid in carrying on business in Australia at or through a permanent establishment of that person or those persons in Australia;