GE Capital Finance Pty Ltd (as trustee for the Highland Finance Unit Trust) v Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Federal Court of Australia (VID 1210)
Judgment date: 19 April 2007
Date published: 9 August 2007

Summary of decision:
This case examines whether interest income to which a non resident beneficiary is presently entitled, should be assessed to the trustee at the corporate rate of 30% or at the withholding rate of 10%.

Overview of facts:
GE Capital Finance Pty Ltd (the Applicant) is an Australian company and a resident of Australia for Australian tax purposes. It is the trustee of the Highland Finance Unit Trust (HFUT). | The sole beneficiary of the HFUT is GE Capital International Holdings (the beneficiary), a United States corporation that is a resident of that country for the purposes of the United States Convention. The beneficiary does not carry on business in Australia. | In the relevant income years, the trust business carried on in Australia by the Applicant included making short term loans in Australia to businesses to finance the payment of insurance policy premiums and professional fees. | The Applicant set aside to the beneficiary the whole of the net income of the trust, including interest and other income. The Applicant retained and remitted to the Respondent, withholding tax under section 128B of Div 11A of ITAA 1936 at the rate of 10% of the interest income. | The Commissioner assessed the net income to which the beneficiary was entitled pursuant to subsection 98(3) of the ITAA 1936 at the corporate rate of tax. | The Applicant objected to the inclusion of the interest income in the assessments and the matter was heard before Middleton J in the Federal Court on the 9 November 2006. | Issues decided by the court or tribunal | The correctness of the subsection 98(3) assessments depended on: 1. Whether subsection 3(11) of the Agreements Act deems the beneficiary to have a permanent establishment (PE) in Australia; and 2. If so, whether this affects the ITAA 1936, including subparagraph 128B(3)(h)(ii) of the ITAA 1936? | 1. Whether subsection 3(11) of the Agreements Act deems the beneficiary to have a permanent establishment (PE) in Australia; and 2. If so, whether this affects the ITAA 1936, including subparagraph 128B(3)(h)(ii) of the ITAA 1936? | Subparagraph 128B(3)(h)(ii) excludes interest income from being subject to withholding tax under section 128B where it is derived by the non-resident taxpayer at or through a PE of the taxpayer in Australia. If the interest income is excluded from withholding tax, section 128D does not apply to make the interest income non-assessable and non-exempt income. | His Honour did not find it necessary to decide the first issue. As for the second, His Honour held that even if the beneficiary was deemed to have a PE by virtue of subsection 3(11) and the Business Profits Article applies, this does not affect subparagraph 128B(3)(h)(ii). Subsection 3(11) is not concerned with the operation of withholding tax imposed under section 128B. The two provisions can operate without any inconsistency. The relevant definition of PE for the withholding tax provisions is to be found in subsection 6(1) of the ITAA 1936.

Issues decided:
The correctness of the subsection 98(3) assessments depended on: 1. Whether subsection 3(11) of the Agreements Act deems the beneficiary to have a permanent establishment (PE) in Australia; and 2. If so, whether this affects the ITAA 1936, including subparagraph 128B(3)(h)(ii) of the ITAA 1936? 1. Whether subsection 3(11) of the Agreements Act deems the beneficiary to have a permanent establishment (PE) in Australia; and 2. If so, whether this affects the ITAA 1936, including subparagraph 128B(3)(h)(ii) of the ITAA 1936? Subparagraph 128B(3)(h)(ii) excludes interest income from being subject to withholding tax under section 128B where it is derived by the non-resident taxpayer at or through a PE of the taxpayer in Australia. If the interest income is excluded from withholding tax, section 128D does not apply to make the interest income non-assessable and non-exempt income. His Honour did not find it necessary to decide the first issue. As for the second, His Honour held that even if the beneficiary was deemed to have a PE by virtue of subsection 3(11) and the Business Profits Article applies, this does not affect subparagraph 128B(3)(h)(ii). Subsection 3(11) is not concerned with the operation of withholding tax imposed under section 128B. The two provisions can operate without any inconsistency. The relevant definition of PE for the withholding tax provisions is to be found in subsection 6(1) of the ITAA 1936.

ATO view of decision:
Justice Middleton has not accepted the Commissioner's arguments in relation to the operation of subsection 3(11) and section 4 of the Agreements Act. | In light of the decision, the Commissioner accepts that the operation of the withholding tax provisions is not affected by subsection 3(11) of the Agreements Act where the treaty party resident beneficiary is deemed to carry on, through an Australian PE of the beneficiary, the business carried on in Australia by the trustee. | Where a treaty partner resident beneficiary's share of the net income of an Australian business trust is not connected to the carrying on of business by the beneficiary at or through a PE of the beneficiary in Australia as defined in subsection 6(1) of the ITAA 1936, the distribution to the beneficiary of that share of net income derived that consists of interest will be subject to tax by withholding in accordance with section 128B, provided that the requirements of that provision are satisfied.

Administrative treatment:
Implications on current Public Rulings & Determinations | None.

Legislative references: Income Tax Assessment Act 1936 (Cth) (ITAA 1936) 6 98(3) 128A 128B 128D International Tax Agreements Act 1953 (Cth) 3(11) 4 Tax Administration Act 1953 (Cth) 14ZZ
Case references: Amalgamated Television Services Pty Ltd v Australian Broadcasting Tribunal (1984) 1 FCR 409 (1984) 54 ALR 57 Cadbury - Fry - Pascall v Commissioner of Taxation (1944) 70 CLR 362 (1944) 7 ATD 471 [1944] ALR 401 Director of Public Prosecutions (NSW) v Alderman (1998) 45 NSWLR 526 (1998) 104 A Crim R 116 James Hardie & Coy Pty Ltd v Seltsam Pty Ltd (1998) 196 CLR 53 [1998] HCA 78 159 ALR 268 McGillivray v Piper (2000) 182 ALR 282 [2000] WASCA 245 (2000) 157 FLR 196 Mills v Meeking (1990) 169 CLR 214 91 ALR 16 R v L (1994) 49 FCR 534 (1994) 122 ALR 464
Subject references: Income Tax interest income non resident beneficiary entitlement trustee corporate rate withholding tax permanent establishment statutory interpretation construction inconsistency
Other references: IT 2680 Convention Between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (6 August 1982) (entered into force 31 October 1983), Article 7, 11