Private ruling: Interest deduction and withholding tax
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you required to withhold tax from interest payments made to non-resident lender in order to be entitled to claim interest deductions relating to your overseas rental property? | A1: Yes.

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. You lived and worked overseas for a number of years prior to returning to Australia. You are an Australian resident for taxation purposes. You bought a house overseas which was your principal place of residence. Upon returning to Australia, you kept the house and leased it to tenants. The house is mortgaged by a lender overseas. Australia does not have a tax treaty with the overseas country.

Relevant legislative provisions: Section 8-1 of the Income Tax Assessment Act 1997 | Section 26-25 of the Income Tax Assessment Act 1997 | Subsection 128B(2) of the Income Tax Assessment Act 1936 . | Section 12-245 of Schedule 1 to the Tax Administration Act 1953 | Section 16-140 of the Tax Administration Act 1953 | Section 16-140 of the Tax Administration Act 1953

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. Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. Interest is deductible under section 8-1 of the ITAA 1997 to the extent that it is incurred in relation to funds used for an income producing purpose. However, section 26-25 of the ITAA 1997 provides that interest is not deductible if the taxpayer has not met the withholding tax requirements of the Taxation Administration Act 1953 (TAA 1953). Section 12-245 of Schedule 1 to the TAA 1953 provides that an entity must withhold an amount from interest that it pays to another entity if the recipient has an address outside Australia. In your case, your house overseas has been leased and deriving income. You incurred interest expenses in relation to the mortgage of that property. As the interest is solely incurred to produce assessable income, you are entitled to a deduction for the interest expenses incurred on the loan under section 8-1 of the ITAA 1997 where withholding requirements have been met. Providing you deduct and remit the withholding tax from your interest payments, section 26-25 of the ITAA 1997 will not apply to deny you a deduction. Consequently, you are entitled to a deduction under section 8-1 of the ITAA 1997 for the interest payments. | Detailed Reasoning - PAYG Withholding: Under the pay as you go (PAYG) system, non-residents are liable for Australian tax on all assessable income earned in Australia. This includes interest, dividend and royalty income. A non-resident is liable for withholding tax on interest under subsection 128B(2) of the Income Tax Assessment Act 1936 . Under section 12-245 of the TAA 1953, payers of interest are required to withhold tax if: · any of the recipients has an address outside Australia (according to any record that is in the payers possession, or records that are kept on the payers behalf about the transaction to which the interest relates), or · the payer is authorised to pay the interest to a place outside Australia. Payers are required to: · withhold tax from interest paid to non-residents, · remit the withheld amounts to the Tax Office (section 16-150 of the TAA 1953), and · lodge a PAYG withholding from interest, dividend and royalty payments paid to non residents annual report (NAT 7187) (section 16-153 of the TAA 1953). Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 provides that the rate of withholding tax on interest paid to non-residents is generally 10%. Under section 16-140 of the TAA 1953, you must be registered for pay as you go (PAYG) withholding before you withhold tax from interest, dividend or royalty payments to non-residents. You can register: · when you apply for an Australian business number (ABN), using the same form · by phoning 13 28 66 between 8.00am and 6.00pm Monday to Friday - you must have your ABN or tax file number to register by phone · online through the Business Portal or through the Australian Business Register · in writing by completing Add a new business account (NAT 2954). If you need help to register, phone 13 28 66 between 8am and 6pm Monday to Friday. | Detailed Reasoning - Note:: The timing and frequency with which you must report and forward to the Tax Office amounts withheld from interest, dividends and royalties paid are determined by whether you are a small, medium or large withholder. The Tax Office notifies you of your status when you register for PAYG withholding. Payers making interest, dividend or royalty payments to non-residents (or you are a recipient Australian entity acting on behalf of non-residents) are required to provide an annual report to the Tax Office of all non-resident withholding payments made in a financial year. For further information go to the ATO website at www.ato.gov.au

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.