Edited version of private advice

Authorisation Number: 1051662462107

Date of advice: 13 March 2020

Ruling

Subject: Withholding tax

Question 1

For the purpose of the changes to section 128B made by The Tax Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019, will the 20XX Loan be classified as an asset acquired before 27 March 2018?

Answer

Yes.

Question 2

Will the amendments to Section 128B enacted by the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 apply to the interest payments from 1 July 2019 or 1 July 2026?

Answer

1 July 2026.

This ruling applies for the following periods:

Income years ending 30 June 20XX to 30 June 20XX.

The scheme commences on:

XX February 20XX.

Relevant facts and circumstances

Background

XX is an Australian resident unit trust, settled in 20XX.

The current Trustee of XX, which is an Australian resident (the Current Trustee).

XX qualifies as a foreign resident superannuation fund, and was established in Switzerland on X.

X is exempt from income tax in Switzerland.

X owns 100% of the X units in X.

The 20XX Loan

On X, X and the X in its capacity as trustee of X entered an intercompany loan agreement (the 20XX Loan), whereby:

·         $ X AUD was loaned from X to X at an interest rate of X% per annum which was accrued and paid X.

·         With a maturity date of the earlier of the 10th Anniversary of the date of execution (X February 20XX and any other date on which the Principal Outstanding becomes due and payable under the 20XX Loan.

Clause X provides that "A variation of any term of this agreement must be made in writing and signed by the parties."

The 20XX Agreement

On X 20XX, X and the Current Trustee entered an agreement amending the 20XX Loan (the 20XX Agreement), whereby:

·         The principal amount was increased from $X to $X.

The February 20XX Agreement

On X February 20XX, X and the Current Trustee entered an agreement amending the 20XX Loan, as subsequently amended by the 20XX Agreement (the February 20XX Agreement), whereby:

·         The remaining principal amount is stated to be $X.

·         The parties agreed to modify and extend the Maturity Date to X May 20XX, in consideration for modifying certain terms of the 20XX Loan.

The February 20XX Agreement states that "It is the intention of the parties... that this Agreement shall act as an extension... and they will work to replace the extended Loan with a new loan agreement with new terms".

The June 20XX Agreement

The 20XX Loan, as amended by the 20XX Agreement and February 20XX Agreement, did not come to an end on 20 May 20XX.

On X June 20XX, X and the X entered an Amending Deed which amends the 20XX Loan (as amended by the 20XX Agreement and February 20XX Agreement) to be the same as the form set out in Annexure X (the June 20XX Agreement), whereby:

·         The remaining principal amount is stated to be $X.

·         The effective date is X May 20XX.

·         The interest rate was reduced from X% per annum to X% per annum.

·         The parties agreed to modify and extend the Maturity Date to the earlier of XX March 20XX and any other date on which the Outstanding moneys become due and payable under this agreement.

·         Other minor changes were made, including, but not limited to, X.

Withholding tax

Foreign resident withholding tax (WHT) has not been remitted on interest payments from X to X, on the basis that section 128B(3)(jb) of the Income Tax Assessment Act 1936 (ITAA 1936) provides an exception from WHT on interest payments to foreign residents where it is received by a superannuation fund and that income is exempt from income tax in the country in which it resides.

Relevant legislative provisions

Section 128B of the Income Tax Assessment Act 1936.[1]

Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019.

Reasons for Decision

Summary

The 20XX Loan as amended by the 20XX Agreement, February 20XX Agreement and June 20XX agreement, would be classified as an asset acquired before X March 20XX.Accordingly, the transitional provisions of The Tax Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019 (WHT Amending Legislation) will apply, such that interest payments from X to X will be subject to WHT from the later date of 1 July 2026 not 1 July 2019.

Detailed reasoning

Question 1

On the basis that the 20XX Loan did not come to an end on XX May 20XX, the June 20XX Agreement is an amendment of an existing loan asset rather than giving rise to a new loan asset. Accordingly, for the purpose of the changes to section 128B implemented by the WHT Amending Legislation, the 20XX Loan as amended by the 20XX Agreement, February 20XX Agreement and June 20XX agreement, would be classified as an asset acquired before 27 March 20XX.

Question 2

Section 128B(3)(jb) provides an exception from WHT on interest payments to foreign residents where it is received by a superannuation fund where that income is exempt from income tax in the country in which it resides.

The primary purpose of this section was to limit the WHT exemption for interest payments derived by superannuation funds for foreign residents after income years beginning on 1 July 2019.

Section 128B(3CA), introduced by the WHT Amending Legislation, now requires that for interest payments to foreign superannuation funds to be exempt from WHT under section 128B(3)(jb), it must also satisfy the portfolio interest test in section 128B(3CC) and not have influence over the decisions of the Australian entity.

As the foreign superannuation fund (X) does not pass the portfolio interest test (i.e. as it owns 100% of X, it has a non-portfolio holding "participation interests" of 10% of more), it does not meet the requirements to be exempt, and is therefore now prima facie subject to WHT on interest it receives from the Australian entity, X.

However, the transitional provisions of the WHT Amending Legislation provide that if the superannuation fund acquired the asset (i.e. the loan receivable) on or before 27 March 2018 and section 128A(3) does not apply (where it is presently entitled to the interest as a beneficiary of a trust), then the new limitation on WHT exemption will only apply for interest payments made from 1 July 2026 (i.e. it will not be subject to WHT until that time).

As outlined in response to Question 1, the June 20XX Agreement is not a new asset, but rather an amendment to an existing asset (the 20XX Loan) acquired before 27 March 20XX.

Accordingly, the transitional provisions of the WHT Amending Legislation apply, and X will continue to be exempt from WHT for interest payments made after 1 July 2019, however WHT will apply to interest payments made after 1 July 2026.

[1] All subsequent legislative references are to the ITAA 1936.