Private ruling: Non-resident withholding
Published: December 2011

Ruling: Q1: Will the difference between the 'transfer price' and the 'issue price' (if any) be deemed to be income that consists of interest derived by a non-resident pursuant to section 128AA of the Income Tax Assessment Act 1936 (ITAA 1936) if the non-resident transfers a loan to another non-resident? | A1: No. The difference between the 'transfer price' and the 'issue price' (if any) will not be deemed to be income that consists of interest derived by a non-resident pursuant to section 128AA of the ITAA 1936 if the non-resident transfers a loan to another non-resident. | Q2: Will the non-resident that transfers a loan to another non-resident otherwise be subject to interest withholding tax pursuant to subsection 128B(2) of the ITAA 1936? | A2: No. The non-resident that transfers the loan to another non-resident will not be subject to interest withholding tax pursuant to subsection 128B(2) of the ITAA 1936 on the amounts received for the assignment or transfer of the loans

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. The scheme under consideration involves a group of related non-resident and Australian resident companies with a non-resident as the ultimate parent. Loans have been made to an Australian resident member by certain non-resident entities of the group. Some of these loans will be assigned or transferred by the current non-resident lenders to other non-resident members of the group under a corporate reorganization of the group.

Relevant legislative provisions: Income Tax Assessment Act 1936 , section 128AA | Income Tax Assessment Act 1936 , section 128B

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. | Detailed Reasoning - Question 2 - section 128B of the ITAA 1936: It is considered that section 128AA of the ITAA 1936 is not a self-executing provision. In other words, section 128AA of the ITAA 1936 does not have the effect of imposing interest withholding tax in its own right. That provision merely has the effect of deeming that a payment is to be treated as being 'interest' for the purposes of Division 11A of the ITAA 1936. For example, it is stated in the Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 2) 1986 (the Explanatory Memorandum) that: where - · a non-resident transfers a security to a resident (paragraph (a)); and · the transfer price exceeds the issue price or the reduced issue price of the security (paragraph (b)), the amount of that excess is deemed to be income that consists of interest. By this means, the existing provisions of section 128B of the Principal Act will operate to make liable to withholding tax the amount of that excess. As stated in the above quote from the Explanatory Memorandum, withholding tax will be imposed by the operation of section 128B of the ITAA 1936. Moreover, at various points in the Explanatory Memorandum reference is made to a situation where a 'non-resident transfers a security to a resident'. Section 128AA of the ITAA 18936 does not explicitly limit its operation to the transfer of a security to a resident . Section 128AA of the ITAA 1936 does not need to explicitly limit its operation to a resident because section 128AA of the ITAA 1936 merely deems the payment to be 'interest'. If it is decided that a payment constitutes 'interest', it is still necessary to determine whether the other elements in section 128B of the ITAA 1936 are satisfied before it can be concluded that the payment is liable to interest withholding tax through the operation of section 128B of the ITAA 1936. One crucial element is that the 'interest' must be paid by an Australian resident (or an Australian permanent establishment of a non-resident). If a security is transferred to a resident and if part of that payment will be deemed to be 'interest' by the operation of section 128AA of the ITAA 1936, the resident can be described as having made a payment for the transfer/assignment and that payment of interest by a resident will generally be liable to interest withholding tax because it satisfies all the elements of section 128B of the ITAA 1936. In the present case, the debt will be assigned by one non-resident to another non-resident. There is no suggestion on the facts that the non-resident to whom the debt will be assigned (and who will pay the price for the assignment) has an Australian permanent establishment. A payment of interest by one non-resident (with no Australian permanent establishment) to another is not liable to interest withholding tax under section 128B of the ITAA 1936. Consequently, in the present case interest withholding tax is not payable at the time of the assignment of the loan by one non-resident to another in terms of section 128B of the ITAA 1936. | Detailed Reasoning - Questions 1 - section 128AA of the ITAA 1936: As stated above, it is considered that section 128AA of the ITAA 1936 is not a self-executing provision. Interest withholding tax will not be imposed under section 128B of the ITAA 1936 because the 'interest' was not paid by an Australian resident (or an Australian permanent establishment of a non-resident). Because section 128B of the ITAA 1936 does not apply to the payment, interest withholding tax is not payable. Hence, it is not necessary to decide the other questions which relate to whether an amount is deemed to be 'interest' in terms of section 128AA of the ITAA 1936. Nevertheless, the following comments have been provided because the questions have been raised in the ruling application. | Detailed Reasoning - Qualifying securities: The present written loan agreements, do not on their face contain any 'deferred interest', however, the parties appear to have an understanding that the payment of interest will in fact be deferred. It is not necessary to deal with the issue as to whether the present security is a 'qualifying security' on the basis that it contains an element of 'deferred interest' that is not 'periodic interest' and that the securities have an 'eligible return' that is greater than 1.5%. The following comments are based on the assumption (without deciding the point) that the loans contain 'deferred interest' and that they constitute 'qualifying securities' for the purposes of section 128AA of the ITAA 1936. | Detailed Reasoning - Purpose of section 128AA of the ITAA 1936: Section 128AA of the ITAA 1936 was not introduced for the purpose of imposing tax on qualifying securities which were transferred to non-residents (who do not have an Australian permanent establishment). The earlier quote from the Explanatory Memorandum indicates that the purpose of the introduction of section 128AA of the ITAA 1936 was to deem an amount to be interest where 'a non-resident transfers a security to a resident '. On a number of other occasions, the Explanatory Memorandum makes the point that the securities will be transferred to a 'resident'. In Interpretative Decision ATO ID 2005/305, the Commissioner observed: Section 128AA of the ITAA 1936, introduced in 1986 as an anti-avoidance measure, was designed to prevent non-residents disposing of Australian qualifying securities before their maturity date, so that the accrued interest was converted into a business profit, thus avoiding the deduction of interest withholding tax by the Australian resident (or non resident Australian PE) issuer… This transfer of bonds from the non-resident subsidiary of a foreign banking group to its Australian branch OBU is not the kind of arrangement which the above amendment was designed to address. This is because the bonds in question have had no connection with Australia until they were transferred to the Australian branch in this transaction… The Commissioner is satisfied that section I28AA of the ITAA 1936 does not extend to the arrangement in question, as, unlike the arrangement described in the second reading speech (above) there is no transaction to which interest withholding tax should apply until the Australian branch acquires the bonds issued by the non-residents, which were held until then by non-residents. Therefore, it is only at the time when the securities are first brought on shore that any liability to tax arises. Any liability which does arise will relate only to income derived from that time. Both the EM and ATOID 2005/305 make clear that section 128AA of the ITAA 1936 is an anti-avoidance provision directed at preventing the circumvention of the interest withholding tax provisions. In the present circumstances, the transfers of the loans are all transfers from a non-resident to another non-resident . None of these transfers of qualifying securities would otherwise result in the circumvention of the interest withholding tax provisions because they do not involve an assignment to an Australia resident (or an Australian permanent establishment). Section 128AA of the ITAA 1936 should be read down so that it only applies if transfers would otherwise result in the circumvention of the interest withholding tax provisions. Hence, section 128AA of the ITAA 1936 does not have the effect of deeming an amount to be interest because the loans are being transferred to a non-resident (with no Australian permanent establishment) and the withholding tax provisions are not circumvented by the present assignment.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. | If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. | For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.