Edited version of private advice

Authorisation Number: 1051956432746

Date of advice: 4 March 2022

Ruling

Subject: Withholding tax

Question

Has ABC Co had an obligation to withhold pursuant to Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1935 (TAA 1953) in respect of interest amounts accruing under the various loan agreements between ABC Co and Parent Co at any point during the Ruling Period?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 January 20XX

Relevant facts and circumstances

Background

ABC Co is an Australian proprietary company limited by shares.

ABC Co was established as a Special Purpose Vehicle to develop and commercialise the XYZ Project in Australia.

Parent Co owns the majority of the shares in ABC Co and is a non-resident company.

Various approvals still need to be acquired before the XYZ Project is able to proceed to construction and commercial operation.

Parent Co is now seeking to conclude a sale of their shares in ABC Co to a third party to enable the XYZ Project to progress to construction.

Financing

In order to finance the XYZ Project, ABC Co has always relied on shareholder funding from Parent Co.

As the XYZ Project has not yet progressed to construction (and is not generating revenue), ABC Co has never had a revenue stream and has never had the capacity to repay third party debt without the ongoing financial support of Parent Co.

Several loans have been entered into between ABC Co and Parent Co totalling A$XX million. As at 31 December 20XX, interest of $X million has accrued on the loans and is continuing to accrue. Parent Co has registered its interest as a secured creditor on the Personal Properties Securities Register.

The various loans are explained in further detailed below.

The first loan

An initial loan agreement dated XX was entered into between ABC Co as Borrower and Parent Co as Lender which provided an A$X million loan (First Loan). The interest rate was X% per annum and the date for repayment of principal and interest was XX.

The First Loan was subsequently amended twice and the date for repayment of principal and interest was revised to a later date.

The second loan

ABC Co and Parent Co entered into another loan agreement on XX for a maximum amount of A$X million (Second Loan). The interest rate was X% per annum and the repayment date for the principal and interest was XX.

The Second Loan was initially amended to amend the interest rate to X% per annum for the period starting XX and to amend the repayment date for the principal and interest to XX.

The Second Loan was subsequently amended for a second time to update the repayment date for the principal and interest to XX.

The third loan

ABC Co and Parent Co entered into another loan agreement on XX for a maximum amount of A$X million (Third Loan). The interest rate was X% per annum and the repayment date for the principal and interest was XX.

The Third Loan was amended on XX. The loan amount was increased to A$X million and the repayment date for the principal and interest was updated to XX.

Administration of Parent Co

On XX, Parent Co filed for preliminary self-administration in a foreign court, which appointed a custodian (Custodian). At the time, ABC Co continued to rely upon the funding provided by Parent Co.

As a result of being in administration, Parent Co did not extend the loans provided to ABC Co, which had impending maturity dates as follows (collectively referred to as Maturity Dates):

•      First Loan: XX

•      Second Loan: XX

•      Third Loan: XX

Following the Custodian's appointment, a process was commenced to investigate and explore the possibility of a sale of ABC Co and the XYZ Project.

Parent Co made clear to ABC Co that it did not intend for the various loan amounts (and accrued interest) to become due and payable and provided a number of Financial Commitment Letters and Letters of Financial Support (collectively referred to as Letters) stating as such.

Letters

Letters of Financial Support

Between XX and XX, Parent Co provided ABC Co various Letters of Financial Support.

The Letters of Financial Support provided that Parent Co will provide financial support to ABC Co in such amounts and from time to time that sufficiently permits ABC Co to pay its external debts when they fall due, until such time that ABC Co is able to pay its external debts without the support of Parent Co.

Financial Commitment Letters

On XX, in order to address the impending maturity dates of the various loans, Parent Co provided the first Financial Commitment Letter to ABC Co. The letter provided that Parent Co agreed that it would not demand repayment of any intercompany loans (and interest) from ABC Co within the next three months.

Between XX and XX, Parent Co provided further Financial Commitment Letters to ABC Co, which confirmed that it would not demand repayment of any intercompany loans (and interest) until XX dates. The dates provided in the Financial Commitment Letters were anticipated as being when key milestones were to be reached in the share sale transaction.

Interest

The interest on the loans is calculated using a simple interest formula and interest is only calculated based on the outstanding principal amount and not on any outstanding interest. Interest is not compounding or being capitalised on any of the loans.

Interest continues to accrue on the First Loan, Second Loan and Third Loan after their Maturity Dates. No interest accrues on any outstanding interest with respect to those loans.

Accounting treatment of the loans and interest

Interest calculated and notified by Parent Co to ABC Co has been accounted for as an expense in ABC Co's Profit & Loss and the offsetting liability has been accrued against the intercompany loan account. The treatment has not varied during the terms of the various loans as interest was accounted for as an expense during the term of each of the loans.

Interest has never been invoiced by Parent Co and interest has never been paid by ABC Co.

ABC Co continues to account for the interest that accrues as an expense in the Profit & Loss.

ABC Co has claimed deductions for 'interest expenses overseas' and reported 'TOFA losses' in its income tax returns.

ABC Co's Statement of Financial Position as at XX reports various loans and accrued interest as current liabilities under 'Interest bearing loans & borrowings'. The Notes to the Financial Statements provide that the various loans are due 'on demand'.

Inclusion of the loans in the sale of ABC Co

Parent Co has entered into agreements with Purchaser Co to sell its interests in ABC Co.

As part of the sale process, the intention is that the outstanding loans (including associated interest) continue to be considered not due or payable.

As part of the sale process, the various loans will be assigned from Parent Co to Purchaser Co.

If Parent Co is unable to complete a sale of its shares in ABC Co then it will discontinue funding ABC Co and wind up the entity.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Subdivision 12-F

Reasons for decision

Summary

ABC Co has not had an obligation to withhold pursuant to Subdivision 12-F of Schedule 1 to the TAA 1953 in respect of interest amounts accruing under the various loan agreements between ABC Co and Parent Co at any point during the Ruling Period.

Interest has not been actually or constructively paid by ABC Co to Parent Co, nor has Parent Co derived interest income from ABC Co. As such, a withholding tax liability has not yet arisen for Parent Co and ABC Co has therefore been under no obligation to withhold an amount.

Detailed reasoning

Liability to withholding tax

Section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) contains the liability to withholding tax provisions. Subsection 128B(2) of the ITAA 1936 provides that the section applies to income that consists of interest that is 'paid' to a non-resident and is not an outgoing wholly incurred in carrying on business in a country outside Australia. Subsection 128B(5) of the ITAA 1936 further provides that a person who derives income to which this section applies that consists of interest is liable to pay income tax upon that income at the rate declared by Parliament.

Section 128A of theITAA 1936 defines 'interest' for the purposes of Division 11A of the ITAA 1936. Similar to section 11-5 of Schedule 1 to the TAA 1953, subsection 128A(2) of the ITAA 1936 provides that interest shall be deemed to have been paid by a person to another person although it is not actually paid over to the other person but is reinvested, accumulated, capitalised, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on behalf of the other person or as the other person directs.

Obligation to withhold an amount

The corresponding provisions to section 128B of the ITAA 1936 imposing the actual obligation to withhold are in Schedule 1 to the TAA 1953. Section 12-245 of Schedule 1 to the TAA 1953 states:

An entity must withhold an amount from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) it pays to an entity, or to entities jointly, if:

(a)     the recipient or any of the recipients has an address outside Australia according to any record that is in the payer's possession, or is kept or maintained on the payer's behalf, about the transaction which the interest relates; or

(b)     the payer is authorised to pay the interest at a place outside Australia (whether to the recipient or any of the recipients or to anyone else).

The obligation to withhold an amount in section 12-245 of Schedule 1 to the TAA 1953 must be read in conjunction with section 11-5 of Schedule 1 to the TAA 1953, which states when there will be a constructive payment:

11-5(1)

In working out whether an entity has paid an amount to another entity, and when the payment is made, the amount is taken to have been paid to the other entity when the first entity applies or deals with the amount in any way on the other's behalf or as the other directs.

11-5(2)

An amount is taken to be payable by an entity to another entity if the first entity is required to apply or deal with it in any way on the other's behalf or as the other directs.

Accordingly, in order to determine whether ABC Co has had an obligation to withhold in respect of interest amounts accruing under various loan agreements with Parent Co, the following three questions are relevant:

(i)    Are the amounts 'interest'?

(ii)        Has ABC Co 'paid' interest to Parent Co in accordance with the wide definition of 'paid' in subsection 128A(2) of the ITAA 1936 and section 11-5 of Schedule 1 to the TAA 1953?

(iii)      Has Parent Co 'derived' interest income in accordance with subsections 128B(2B) and (5) of the ITAA 1936?

These questions are considered below.

Are the amounts interest?

Subsection 128A(1AB) of the ITAA 1936 defines 'interest' for the purposes of Division 11A of the ITAA 1936 as:

interest includes an amount:

(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 interest - 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.

In accordance with the above definition, 'interest' includes amounts in the nature of interest and amounts converted into a form in substitution for interest etc, but does not include an amount to the extent to which it is a return on an equity interest in a company.

Justice Lee in Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 142 ALR 305 stated the following with regard to what constitutes interest at 311-312:

The common meaning of "interest" is the money which accrues from day to day, calculated according to a fixed ratio of sum lent, agreed to be paid under a contract of loan. But the word has a wider meaning which may include the compensation or damages to be paid to a person denied the use of a sum to which that person is, or becomes, entitled. Cardinal to either meaning is that the interest be referable to a principal in money or an obligation to pay money: see Halsbury's Laws (4th ed), vol 32 para 106; Consolidated Fertilizers Ltd v DCT (1992) 107 ALR 456 per Cooper J at 461-2.

The loan agreements for each of the First Loan, Second Loan and Third Loan, as amended (collectively referred to as Loan Agreements) each provide that interest is payable by ABC Co to Parent Co. The Loan Agreements provide that the interest is calculated in accordance with a fixed percentage that is referable to the principal amount loaned. Interest is calculated using a simple formula and is not compounding or capitalising.

It is therefore reasonable to conclude that the amounts referred to as 'interest' in the Loan Agreements are interest for the purposes of the withholding tax provisions in Division 11A of the ITAA 1936 and section 12-245 of Schedule 1 to the TAA 1953.

Has ABC Co 'paid' interest to Parent Co?

Section 12-245 of Schedule 1 to the TAA 1953 provides that an entity must withhold an amount from interest (within the meaning of Division 11A of Part III of the ITAA 1936) it pays to an entity, or to entities jointly, if the recipient or any of the recipients has an address outside Australia.

Section 11-5 of Schedule 1 to the TAA 1953 provides that there has been constructive payment of any amount by an entity to another entity when the entity deals with the amount in any way on the other's behalf or as the other directs.

The Explanatory Memorandum to A New Tax System (Pay As You Go) Bill 1999 (EM) provides at paragraph 1.80 that the words in section 11-5 of Schedule 1 to the TAA 1953 were not intended to change existing administrative practice.

The predecessor to section 11-5 of the Schedule 1 to the TAA 1953 was paragraph 221YK(3)(a) of the ITAA 1936, which stated:

For the purposes of this Division: (a) interest or a royalty shall be deemed to have been paid by a person to another person although it is not actually paid over to the other person but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on behalf of the other person or as the other person directs.

Even though the wording of section 11-5 of Schedule 1 to the TAA 1953 has been simplified by relying upon the higher level expression of the concept of an entity applying or dealing with an amount in any way on another entity's behalf or as the other entity directs, the EM confirms that the broader concept encompasses the particular instances which were identified in its predecessor.

In Millar and Another v Federal Commissioner of Taxation (2016) 243 FCR 302 (Millar), the Full Federal Court considered section 11-5 of Schedule 1 to the TAA 1953 (in addition to sham, which was the first issue in the case). The taxpayers deposited $600,000 from their superannuation fund with a Samoan entity and then borrowed the same amount from that entity under a loan facility agreement. The Commissioner contended that the interest payable by the taxpayers to the Samoan entity was not deductible pursuant to section 26-25 of the Income Tax Assessment Act 1997 (ITAA 1997), because they had not paid interest withholding tax on interest deemed to have been paid pursuant to section 12-245 of Schedule 1 to the TAA 1953 when read in conjunction with section 11-5 of Schedule 1 to the TAA 1953.

No interest was in fact paid by the taxpayers to the Samoan entity because it was capitalised by the Samoan lender pursuant to the loan facility agreement. However, the Commissioner contended that the capitalisation of the interest under clause 5.4 came within the constructive payments contemplated by section 11-5 of Schedule 1 to the TAA 1953.

Relevantly, clause 5.4 of the loan facility agreement stated:

Capitalisation

[The Samoan entity] may:

(a) capitalise, upon an annual or such other periodical basis as Hua Wang Bank may determine, any part of any interest which becomes due and owing and is not paid on its due date, and interest is payable in accordance with this document upon capitalised interest;

(b) continue to capitalise interest notwithstanding that as between Hua Wang Bank and the borrower the relationship of financier and customer may have ceased, any composition entered into or agreed to by Hua Wang Bank, any judgment or order against the borrower or any other thing.

In finding that the capitalised interest had been constructively paid, Pagone J provided at 320 that section 11-5 of Schedule 1 to the TAA 1953 is expressed in broad terms to capture constructive payment.

His Honour further provided at 321 that the contractual ability of the bank to capitalise the interest pursuant to agreement is an application or dealing with the amount on behalf of the taxpayers or as directed by them. The capitalisation effected was not akin to the debtor merely refraining from payment of a debt at the request of the creditor. Section 11-5 of Schedule 1 to the TAA 1953 is triggered by a dealing on behalf of another or a direction by that person, whether the dealing or direction results in the lender receiving something in exchange for an existing obligation or was nearer to receiving money or of transferring the new obligation into something of value.

Justice Davies agreed that there was payment within section 11-5 of Schedule 1 to the TAA 1953 by capitalisation and stated at 331:

In the present case, the parties had a contractual arrangement pursuant to which the taxpayers had agreed that Hua Wang may capitalise interest which was due and unpaid on the loan and it was not in dispute that Hua Wang exercised that contractual right. The taxpayers' agreement that Hua Wang may capitalise interest as provided for in cl 5.4 of the loan agreement is apt to fall within the ordinary language of the provision of s 11-5 as an amount applied or dealt with by the taxpayer's on behalf of Hua Wang or as Hua Wang directed.

Taxation Determination TD 93/146 Income tax: should a resident deduct withholding tax from interest payable under a loan from a non-resident if there is no actual payment of the interest? (TD 93/146) contains the Commissioner's view regarding when section 11-5 of Schedule 1 to the TAA 1953 deems an amount to have been paid. The following example is provided at page 1:

Example:

A is an Australian resident who borrows $250,000 on 1 July 2011 from non-resident, NR, at 10% simple interest calculated and payable annually over 5 years. By agreement between them, the annual interest is capitalised each year until the 5^th year when the total amount standing to the credit of the loan account is payable.

A has an annual interest liability of $25,000 payable on 30 June. Even though the interest is not actually paid over to NR each year, the interest debt is to be satisfied each year by crediting it to NR's loan account. This arrangement is enough to invoke the requirements of the withholding tax provisions to deduct withholding tax from the interest credited each year. Therefore, A is required to deduct $2,500 at the time the interest is credited to the loan account and remit it to the ATO.

The example provided illustrates the Commissioner's view that capitalisation of interest is a constructive payment that attracts the application of the withholding tax provisions.

Justice Davies also held in Millar that section 11-5 of Schedule 1 to the TAA 1953 is substantially similar to the former paragraph 221YK(3)(a) of the ITAA 1936. The wording of the former paragraph 221YK(3)(a) of the ITAA 1936 is also similar to subsection 128A(2) of the ITAA 1936. Accordingly, the constructive payment provisions for the withholding tax liability and collection appear to be aligned such that there should be no deemed payment under section 11-5 of Schedule 1 to the TAA 1953 if there is no deemed payment under subsection 128A(2) of the ITAA 1936.

The Explanatory Memorandum to the Income Tax Assessment Bill (No. 4) 1967 inserting subsection 128A(2) of the ITAA 1936 states:

Subsection (2) provides, in effect, that interest shall be deemed to have been paid to a person if dealt with on his behalf or at his direction in such a way that he would be regarded as having derived that interest in pursuance of section 19 of the Principal Act [ITAA 1936].

Former section 19 of the ITAA 1936 stated:

Income or money shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs.

The former section 19 of the ITAA 1936 was considered by the High Court in Brent v Federal Commissioner of Taxation 71 ATC 4195 (Brent). Gibbs J considered whether an amount had been 'dealt with' on the taxpayer's behalf. The Commissioner sought to rely on section 19 of the ITAA 1936 in support of his assessment of the taxpayer on certain sums of money due to her under an agreement for personal services rendered but which were not in fact paid during the period to which the assessment related.

Gibbs J held that former section 19 of the ITAA 1936 did not apply as the evidence was that the taxpayer did not ask for payment and the company refrained from making payment. His Honour stated at 4201:

On the evidence I decline to hold that the company held the balance of the money pursuant to a request by the appellant not to pay it. However, even if the company had deferred payment at the request of the appellant, sec 19 would not have applied. Income is not 'dealt with', under sec 19, when all that happens is that a debtor refrains from paying his debt at the request of the creditor.

Gibbs J also provided that, even if the money had been retained at the taxpayer's request, her position would have remained exactly as it was. The income would not have been used on her behalf and the company would have remained under an obligation to pay it to her.

In Case U152 87 ATC 896, the Administrative Appeals Tribunal, in confirming the decision in Brent stated at 896:

As to the question as to whether the income might be "deemed to have been derived... although it is not actually paid over...(by reason of being) dealt with on his behalf or as he directs" as provided for by sec. 19, it is sufficient once again to refer to the decision in Brent (ante). Just as in that case his Honour said that "income is not 'dealt with' under sec. 19 when all that happens is that a debtor refrains from paying his debts at the request of the borrower (sic)" so, too, in my view income is not "dealt with" under sec. 19 when all that happens is that a debtor, for his own reasons or by inadvertent delay, fails to pay his debt, notwithstanding the request of the debtor.

This provision was again similarly worded to section 19 of the Income Tax Assessment Act1922 (1922 Act) (repealed). The Explanatory Memorandum to the Income Tax Assessment Bill 1922 contains the following note regarding section 19 of the 1922 Act:

NOTE - The Department does not apply this section to require income tax to be paid on such items as interest or rents accrued due if they are owing under circumstances which make ultimate payment very doubtful. These items of revenue are taxed in the year in which they are received, or are taken into account where, though not actually received, credit has been taken for them in the taxpayers' accounts.

This suggests that interest accrued should not be considered to have been accumulated or capitalised for subsection 128A(2) of the ITAA 1936 purposes in circumstances where payment might be found to be uncertain.

With respect to the current arrangement, Parent Co has not provided ABC Co with any direction to deal with the interest amounts on its behalf. Its only direction to ABC Co has been the absence of such; there has been no demand for payment, and Parent Co continues to provide financial support to ABC Co. As such, it is only if there are any clauses of the Loan Agreements that capitalise the interest that an amount will be deemed to be paid.

Whilst the relevant clauses in the Loan Agreements provided that interest was required to be paid on the repayment dates, no such amount could be paid and any such requirement was in direct contrast to the Letters, pursuant to which Parent Co continued to provide funding to ABC Co.

In addition, the facts are clearly distinguishable from those in Millar and TD 93/46 where the terms of the loan facility agreement provided the lender with the discretion to capitalise any unpaid interest, or for the automatic capitalisation of interest. The terms of the Loan Agreements between ABC Co and Parent Co do not include any clauses for automatic capitalisation of the interest amounts, nor do they provide Parent Co with a discretion to capitalise the interest. As such, there is no avenue available in the Loan Agreements that provide for an automatic or manual activation for the accrued interest to be 'dealt with' on Parent Co's behalf. This is further supported by ABC Co's and Parent Co's accounts which reflect, with respect to the accumulation of interest under the Loan Agreements, that the interest is not capitalising or even compounding, but rather that only simple interest is being charged annually on the initial loan principal. This further supports that the character of the interest has not changed to become part of the loan 'principal' and has therefore not been 'dealt with'. The only option available for the interest to be 'dealt with' under the Loan Agreement itself is by way of actual payment from ABC Co to Parent Co, and that has not yet occurred.

Based on the facts, it therefore is reasonable to conclude that the interest is merely accruing and has the character of an unpaid debt which not been 'dealt with' on Parent Co's behalf.

Has Parent Co 'derived' interest income?

Section 128B of the ITAA 1936 contains the liability to withholding tax provisions and provides that a person who derives income to which this section applies that consists of interest is liable to pay income tax upon that income at the rate declared by Parliament.

TD 93/146 also provides that a resident should deduct withholding tax from interest payable under a loan from a non-resident even if there is no actual payment of the interest, provided that the interest is income derived by the non-resident and is not an outgoing incurred by the resident in carrying on a business at or through a permanent establishment outside Australia.

Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings provides at paragraph 47 that interest is generally derived when received or credited, and that this general rule is subject to the overall principle that the appropriate method is that giving a substantially correct reflex of income.

According to subsection 6-5(4) of the ITAA 1997, in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. The wording is also similar to that of section 11-5 of Schedule 1 to the TAA 1953 and subsection 128(2) of the ITAA 1936 referred to above.

In News Australia Holdings Pty Ltd v FCT [2017] FCA 645 (News Australia) the issue on appeal was the whether the taxpayer derived interest income due to it during the income year ended 30 June 2010. Interest income accrued to the taxpayer in the 2010 income year under the terms of a loan agreement. The interest, however, was not paid until the 2011 income year, which was when the taxpayer paid withholding tax in respect of that interest. The Commissioner contended that the taxpayer was to be assessed on an accruals basis for the interest income which accrued in the 2010 income year notwithstanding that the interest was not received by the taxpayer until the 2011 income year.

The loan provided for interest to become due and payable as at 28 June in each year in which the loan remained outstanding. Clause 3.4 of the loan agreement provided for the capitalisation of unpaid interest at the election of the lender. Pagone J held that the taxpayer derived the interest income on an accruals basis as the accruals basis of accounting for the interest provided the correct reflex of the taxpayer's true income which accrued in the 2010 income year.

At [6], Pagone J referred to the decision in Commissioner of Taxes (SA) v The Executor Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108 (Carden's Case) and stated:

The inquiry is, rather, into when an item of ordinary income can be said to have come home to the taxpayer in a realised or immediately realisable form: see Carden's Case at [155].

Pagone J also referred to the decision of the Privy Council in Saint Lucia Usines and Estates Company Limited v Colonial Treasurer of Saint Lucia [1924] AC 508, where it was held that interest on an unpaid debt from an investment which failed to pay interest due was not income which had arisen or accrued in that year. Their Lordships stated at 512-3:

The words "income arising or accruing" are not equivalent to the words "Debts arising or accruing." To give them that meaning is to ignore the word "income." The words mean "money arising or accruing by way of income." There must be a coming in to satisfy the word "income." This is a sense which is assisted or confirmed by the word "received" in the proviso at the end of section 4(1). If the taxpayer be the holder of stock of a foreign Government carrying say 5 per cent interest, and the Government is that of a defaulting State which does not pay the interest, the taxpayer has neither received nor has there accrued to him any income in respect of that stock. A debt has accrued to him but income has not. It does not follow that Income is confined to that which the taxpayer actually receives. Where Income Tax is deducted at the source the taxpayer never receives the sum deducted but it accrues to him. It is said, and truly, that a commercial company, in preparing its balance sheet and profit and loss account, does not confine itself to its actual receipts - does not prepare a mere cash account - but values its book debts and its stock in trade and so on and calculates its profits accordingly. From the practice of commerce and of accountants and from the necessity of the case this is so. But this is far from establishing that Income arises or accrues from (as above instanced) an investment which fails to pay the interest due.

Subsections 128B(2B) and (5) of the ITAA 1936 refer to 'derives' rather than 'arising or accruing' but also refer to 'income'. Accordingly, the above case suggests that a 'coming in' is necessary beyond merely accruing, for the amount to be income.

The terms of the Loan Agreements between ABC Co and Parent Co are distinguishable to the loan in News Australia in the sense that interest is only payable on the Maturity Dates and is not capitalising. It is therefore reasonable to conclude that interest has not been derived by Parent Co as it has not 'come home' as:

•         the repayment dates for the Loan Agreements have been extended multiple times

•         it is the intention of the parties that the loan is not repayable until ABC Co is in the position to pay it; this is reflected in the Letters

•         Parent Co has not invoiced the interest

•         no interest has actually been paid, and

•         the interest is simple interest, meaning that the character of the interest has not changed i.e. it is interest that has accrued but remains unpaid and is not itself earning interest.

Conclusion

A taxpayer is not required to withhold an amount if there is no withholding tax liability under section 128B of the ITAA 1936.

Given that Parent Co has not derived the interest income (it has not 'come home') and has not been 'paid' the interest (under the wide definition of paid in subsection 128A(2) of the ITAA 1936) by ABC Co, section 128B of the ITAA 1936 does not apply to impose an interest withholding tax liability with respect to the interest accruing to Parent Co under the Loan Agreements.

As a result, no obligation to withhold has arisen for ABC Co under section 12-245 of Schedule 1 to the TAA 1953 as Parent Co does not have a withholding tax liability under section 128B of the ITAA 1936.