ATO ID 2005/307: Non-assessable non-exempt income: periodic payments received under a swap arrangement
Date of decision: 8 August 2005
Year of income: Year ended 30 September 2005 Year ended 30 September 2006
Business line: Public Groups and International

Issue
Will the periodic payments received by the taxpayer, an Australian resident company, from a Swap Counterparty under a swap arrangement be non-assessable income, non-exempt income under section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision
Yes. The periodic payments received by the taxpayer, an Australian resident company, from a Swap Counterparty under a swap arrangement will be non-assessable income, non-exempt income under section 23AH of the ITAA 1936.

Facts
The taxpayer is an Australian resident company that carries on business at or through a permanent establishment (or branch office) in New Zealand. The taxpayer capitalised its New Zealand branch office with Australian Dollar (AUD) funds. The New Zealand branch office of the taxpayer arranged, negotiated and executed a currency swap (the Swap) with an unrelated third party to swap the AUD amount for the equivalent New Zealand Dollar (NZD) amount at the relevant spot rate. The contract was not entered into in Australia and negotiations did not take place in Australia. The Swap Counterparty is not a resident of Australia and did not enter into the swap contract in the course of carrying on any business in Australia. Periodically, the New Zealand branch office will pay amounts equal to the NZD bank bill rate applied to the Swap Counterparty and will receive amounts equal to the AUD bank bill rate. From time to time, the New Zealand branch office will repatriate these AUD amounts to its Australian head office, the taxpayer.

Reasons for decision
Summary: Subsection 23AH(1) of the ITAA 1936 states that one of the objects of section 23AH is to ensure that active foreign branch income derived by an Australian resident company, is not assessable income or exempt income of the company. Subsection 23AH(2) of the ITAA 1936 provides: Subject to this section, foreign income derived by a company, at a time when the company is a resident in carrying on a business, at or through a PE of the company in a listed country or unlisted country is not assessable income, and is not exempt income, of the company. The periodic payments received by the New Zealand branch from the Swap Counterparty will be non-assessable, non-exempt income of the Australian resident company under section 23AH of the ITAA 1936 if all of the requirements, set out in subsection 23AH(2), are satisfied and are not excluded from the operation of subsection 23AH(2) by subsection 23AH(5). The requirements of subsection 23AH(2) are as follows: As New Zealand is a listed country pursuant to Part 1 of Schedule 10 of the Income Tax Regulations 1936, column 4 of item 209 of Part 2 of Schedule 9 of the Regulations provides that only 'capital gains in respect of tainted assets' that are 'not subject to tax in New Zealand in a tax accounting period' will be DCI in relation to a listed country as defined in subsection 23AH(15) with reference to Part X of the ITAA 1936. The periodic payments that will be received by the New Zealand branch under the swap arrangement will be of an income nature not capital, and will not constitute DCI and therefore will not constitute EDCI. Accordingly, subsection 23AH(5) of the ITAA 1936 will not apply to exclude such amounts of foreign income from the operation of subsection 23AH(2). Based on the facts set out above, the periodic payments received by the New Zealand branch from the Swap Counterparty will not be assessable income or exempt income of the Australian resident company under section 23AH of the ITAA 1936, because all the requirements for the application of subsection 23AH(2) are satisfied and subsection 23AH(5) does not apply to exclude such amounts of foreign income from the operation of subsection 23AH(2) of the ITAA 1936.

Legislative references: Income Tax Assessment Act 1936 section 23AH subsection 23AH(1) subsection 23AH(2) subsection 23AH(5) section 317
Case references: Nathan v. Federal Commissioner of Taxation (1918) 25 CLR 183
Related public rulings and determinations: Taxation Ruling IT 2050 | Taxation Ruling IT 2682
Subject references: Foreign income International tax Non-assessable non-exempt income Permanent establishment