Australia imposes interest withholding tax (IWT) of 10% on interest paid by Australian resident borrowers not acting at or through a permanent establishment outside Australia; or non-resident borrowers carrying on business in Australia at or through a permanent establishment in Australia (together, Australian Borrowers).
It is imposed on the interest paid by these Australian Borrowers to either non-resident lenders not deriving interest in carrying on business at or through a permanent establishment in Australia; or Australian resident lenders deriving interest in carrying on business at or through a permanent establishment outside Australia (together, Offshore Lenders).
IWT can also apply to interest paid in relation to other relationships, for example, interest paid by an Australian guarantor to an Offshore Lender or interest paid by an Australian debtor to an offshore supplier.
In their session at the 2019 Financial Services Taxation Conference, Ian Kellock, CTA, and Bronwyn Kirkwood, CTA, (both Ashurst), looked at some practical interest withholding tax issues using examples and case studies.
Their paper, excerpted in this post, looked at the financial institutions exemption under Australia’s tax treaties, the application of s 128FA to trust borrowers, and letter of credit facilities, the application of s 128F and the potential application of the non-resident insurer provisions.
It also covered the interaction of the IWT rules with deeming rules (eg Divs 240 and 250), gross-up clauses, and where we are at with proposals to reform IWT.
The primary focus of the paper is on interest paid in respect of borrower/lender relationships.
The paper is available to view here.
Ian Kellock, CTA, is a Tax Partner at Ashurst and has extensive experience in Australian corporate and international tax, advising Australian and foreign owned banking and financial services groups.
Ian’s practice primarily focuses on due diligence and structuring for mergers, acquisitions and divestments, financing transactions and group reorganisations. Ian has significant recent experience advising on all income tax aspects of financing and refinancing transactions and asset and debt reconstruction projects.
Bronwyn Kirkwood, CTA, is a Senior Associate at Ashurst in Melbourne. Her practice is in direct tax, with an emphasis on financial services and general corporate tax issues.
Bronwyn’s experience covers a broad range of matters, including providing income tax advice for structured financing arrangements, securitisations, PPPs and mergers and acquisitions. She has significant experience in advising on exemptions to the application of interest withholding tax.
