Edited version of private advice

Authorisation Number: 1052070698778

Date of advice: 20 December 2022

Ruling

Subject: Withholding tax - foreign resident

Question 1

Is the Borrower required by section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to withhold from payments of interest made to the Lenders under the Payment Deed?

Answer

Yes.

Question 2

If the answer to Question 1 is 'yes', is all of the interest paid by the Borrower under the Payment Deed to the Lenders subject to withholding under section 12-245 of Schedule 1 to the TAA?

Answer

Yes.

This ruling applies for the following periods

Years ended 30 June 20xx

The scheme commences on

x date

Relevant facts and circumstances

Background

Two equal parties in business separated their respective interests with the Borrower buying out the shareholding of the Lenders.

A share sale agreement was negotiated where the Borrower acquired all of the Lenders' shares in the group, being 50% of the shares then on issue. This was financed in part by vendor finance as set out in a Payment Deed, that provides for interest to be paid by the Borrower to the Lenders' jointly.

Under the Payment Deed:

(a) the Lenders together agreed to make a "single, non-cash advance" to the Borrower to facilitate the Borrower's purchase of the shares

(c) one of the Lenders is identified as a foreign Coy with an address offshore

The Payment Deed governs the relationship between the Borrower and the Lenders.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 11A

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1936 subsection 128B(2)

Taxation Administration Act 1953 Subdivision 12-F

Taxation Administration Act 1953 section 12-245 of Schedule 1

Taxation Administration Act 1953 section 12-300 of Schedule 1

Taxation Administration Regulations 2017 section 41

Reasons for decision

Question 1

Summary

The Borrower is required by section 12-245 of Schedule 1 to the TAA to withhold from payments of interest made to the Lenders under the Payment Deed.

Detailed reasoning

Sections 12-245, 12-250 and 12-255 of Subdivision 12-F of Schedule 1 to the TAA set out the circumstances requiring an entity to withhold an amount from, respectively:

•         an interest payment it makes to an overseas entity,

•         an interest payment it receives for or on behalf of a foreign resident, or

•         an interest payment it makes to either an Australian resident lender or an Australian government agency and the lender or the agency notifies the borrower that the interest is or will be derived in carrying on business through an overseas permanent establishment.

Section 12-245 of Schedule 1 to the TAA 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 to 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).

Section 12-300 of Schedule 1 to the TAA provides that there is no requirement to withhold if no withholding tax is payable on the interest. It states:

This Subdivision does not require an entity:

(a) to withhold an amount from a *dividend, from interest (within the meaning of Division 11A of Part III of the Income Tax Assessment Act 1936) or from a *royalty if no *withholding tax is payable in respect of the dividend, interest or royalty; or

(b) to withhold from a dividend, from interest (within the meaning of that Division) or from a royalty more than the withholding tax payable in respect of the dividend, interest or royalty (reduced by each amount already withheld from it under this Subdivision).

The liability to withholding tax is dealt with under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 128B(2) of the ITAA 1936 imposes a liability to withholding tax where income is derived and consists of interest that is either:

(i) paid to the non-resident by a person to whom this section applies and is not an outgoing wholly incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country; or

(ii) paid to the non-resident by a person who, or by persons each of whom, is not a resident and is, or is in part, an outgoing incurred by that person or those persons in carrying on business in Australia at or through a permanent establishment of that person or those persons in Australia.

Subsection 128B(5) of the ITAA 1936 states:

A person who derives income to which this section applies that consists of interest is, subject to subsections (6) and (7), liable to pay income tax upon that income at the rate declared by the Parliament in respect of income to which this subsection applies.

Question 2

Summary

All of the interest paid by the Borrower to the Lenders is subject to the withholding obligation under section 12-245 of Schedule 1 to the TAA.

Detailed reasoning

Under section 12-245 of Schedule 1 to the TAA an entity must withhold an amount from interest it pays to an entity, or to entities jointly if 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 to which the interest relates.

The withholding rate on the interest payable to the Lenders is 10%, under section 41 of the Taxation Administration Regulations 2017.