ATO ID 2003/530: Debt and Equity Financing: liability to withholding tax on a return on a debt interest under Division 974
Date of decision: 16 April 2003
Year of income: Year ended 30 June 2003
Business line: Finance and Investment Centre of Expertise

Issue
Does the liability to withholding tax arise in respect of dividends, on redeemable preference shares which are classed as a debt interest under Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997), arise at the time the dividend is paid or deemed to have been paid?

Decision
Yes. For non-resident withholding tax purposes, dividends on redeemable preferences shares which are classed as a debt interest are treated as interest. The liability to withholding tax therefore arises at the time the dividend is paid, or is reinvested, accumulated, capitalised, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on behalf of the dividend recipient, or as the recipient directs.

Facts
The taxpayer is a non-resident company. During 2002, the taxpayer company received dividends on redeemable preference shares ('RPS'). The RPS constitute a debt interest under Division 974 of the ITAA 1997 and are therefore, non-equity shares for income tax purposes.

Reasons for decision
Summary: Liability to non-resident withholding tax on interest and dividends is determined by Division 11A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). For the purposes of Division 11A of the ITAA 1936, 'interest' is defined to include 'an amount...that is a dividend paid in respect of a non-equity share' (paragraph 128A(1AB)(d) of the ITAA 1936). Consequently, the RPS dividends will be treated as income derived by a non-resident that consists of interest to which section 128B of the ITAA 1936 applies. The time at which the non-resident company becomes liable for withholding tax on the RPS dividends is at the time it is both derived by and paid to the non-resident company (subsections 128B(2) and 128B(5) of the ITAA 1936). Subsection 128A(2) of the ITAA 1936 provides that an amount of interest is deemed to have been paid if it 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'. Therefore, for non-resident withholding tax purposes, dividends on redeemable preferences shares which are classed as a debt interest are treated as interest and the liability to withholding tax therefore, arises at the time the dividend is paid.

Legislative references: Income Tax Assessment Act 1936 subsection 128A(1AB) subsection 128A(2) subsection 128B(2) subsection 128B(5)
Related ATO interpretative decisions: ATO ID 2003/527 | ATO ID 2003/528 | ATO ID 2003/529
Subject references: Debt equity borderline Redeemable preference share Non-resident interest withholding tax Non-equity share