Edited version of private advice

Authorisation Number: 1052286564070

Date of advice: 9 August 2024

Ruling

Subject: Interest withholding tax

Question 1

Does the judgment debt owed to Bank M, although being recorded as one lump sum, comprises an interest component that retains its character as interest, and that if an amount is paid to Bank M as part of the liquidation process whether as an interim distribution or a final distribution, the interest component of that payment will be subject to withholding tax under subsection 128B(2) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

The interest component from the judgment debt meets the definition of interest under subsection 128A(1AB) of the ITAA 1936. As you satisfy the criteria in subsection 128B(2) of the ITAA 1997 the interest component will be subject to withholding tax.

Question 2

Are you subject to a 10% withholding tax as per section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 on the interest payment to Bank M?

Answer

Yes.

As Australia does not have a tax treaty with Country N, you are subject to interest withholding tax of 10% on your interest payment to Bank M as per section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You entered into a facility agreement (Facility Agreement) with Bank M. You provided us with details on the date you entered into the agreement, the amount borrowed and the term of the loan.

Bank M is a foreign resident for Australian tax purposes. The loan was made at the Country N branch of Bank M which is now closed.

On a specified date Bank M provided their proposed calculation for the Judgment. You provided us with details on the full amount along with the breakdown which included an interest amount.

The judgment obtained by Bank M against you were handed down on a specified date for a specified amount, which was listed as a single amount.

Person O (the liquidator) was appointment as your liquidator on a specified date, where Bank M is a creditor. Bank M lodged a proof of debt with the liquidator for the judgment amount against you.

The liquidator intends to pay an interim dividend and further dividend to your creditors who have submitted a proof of debt.

The liquidator currently estimates that there will be insufficient funds to pay all creditors, therefore dividends paid to Bank M will be insufficient to discharge your outstanding amount with Bank M.

You provided us with the Facility Agreement which detailed when the accrued interest on the loan is payable along with how part payments are allocated when received.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 128A(1AB)

Income Tax Assessment Act 1936 subsection 128B(2)

Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 section 7