Private ruling: Deduction - interest - interest payable to non-resident lender - interest withholding
Date of advice: 22 July 2025
Published: 22 September 2025
Ruling period: 1 July 2022 to 30 June 2025
Date scheme commenced: 10 March 2023

Ruling: Q1: Can you claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest payable to a non-resident Lender? | A1: No. | Q2: Are you required to withhold an amount from interest under Subdivision 12-F in Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) in respect of interest payable to the non-resident Lender? | A2: No.


Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 128A(2) | Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1936 subsection 128B(2) | Income Tax Assessment Act 1936 subsection 128B(5) | Income Tax Assessment Act 1997 section 8-1 | Taxation Administration Act 1953 Subdivision 12-F, Schedule 1 | Taxation Administration Act 1953 section 11-5 | Taxation Administration Act 1953 subsection 11-5(1) | Taxation Administration Act 1953 section 12-245 | Taxation Administration Act 1953 section 12-250 | Taxation Administration Act 1953 section 12-300

Reasons for decision: Detailed Reasoning - Detailed reasoning: General deduction An interest expense is deductible under section 8-1 of the ITAA 1997 if and to the extent that the loss or outgoing is incurred in gaining or producing your assessable income or in carrying on a business for that purpose, except to the extent to which the loss or outgoing is of a capital, private or domestic nature or incurred in gaining or producing exempt income. Incurred There is no statutory definition of the term 'incurred'. Taxation Ruling TR 97/7 Income tax: section 8-1 - meaning of 'incurred' - timing of deductions (TR 97/7) sets out our views on whether the word 'incurred', in section 8-1 of the ITAA 1997 has the same meaning for taxpayers who return their income on a receipts basis as it does for those taxpayers who generally return their income on an earnings basis. At paragraph 6 of TR 97/7 the following general rules will assist in determining whether a loss or outgoing has been incurred: (a) a taxpayer need not actually have paid any money to have incurred an outgoing provided the taxpayer is definitively committed in the year of income. Accordingly, a loss or outgoing may be incurred within section 8-1 even though it remains unpaid, provided the taxpayer is 'completely subjected' to the loss or outgoing. That is, subject to the principles set out below, it is not sufficient if the liability is merely contingent or no more than pending, threatened or expected, no matter how certain it is in the year of income that the loss or outgoing will be incurred in the future. It must be a presently existing liability to pay a pecuniary sum; (b) a taxpayer may have a presently existing liability, even though the liability may be defeasible by others; (c) a taxpayer may have a presently existing liability, even though the amount of the liability cannot be precisely ascertained, provided it is capable of reasonable estimation (based on probabilities); (d) whether there is a presently existing liability is a legal question in each case, having regard to the circumstances under which the liability is claimed to arise; (e) in the case of a payment made in the absence of a presently existing liability (where the money ceases to be the taxpayer's funds) the expense is incurred when the money is paid. A loss or outgoing may be incurred for the purposes of section 8-1 even though no money has actually been paid out. At paragraph 17 of TR 97/7: This proposition was recently confirmed by the High Court in FC of T v. Energy Resources of Australia Limited 96 ATC 4536; (1996) 33 ATR 52 (Energy Resources) when, quoting from James Flood, it said (ATC at 4539; ATR at 56): 'Section 51(1) "has been interpreted to cover outgoings to which the taxpayer is definitively committed in the year of income although there has been no actual disbursement".' However, at paragraph 18 of TR 97/7 "the liability must be 'more than impending, threatened or expected' - refer New Zealand Flax (CLR at 207)" and "it is not a presently existing liability if it is contingent - refer James Flood (CLR at 506); Nilsen Development Laboratories (CLR at 207); Marbren Pty Ltd v. FC of T 84 ATC 4783 at 4788-4789; (1984) 15 ATR 1145 at 1152". Where a taxpayer wishes to report receipts and outgoings on a cash basis guidance can be found at paragraphs 11 through to 13. At paragraph 11 of TR 97/7 "many small business taxpayers use a cash received and expenditure paid basis both for their accounts and for taxation purposes." At paragraph 12 of TR 97/7 "It has long been established practice, where the receipts basis is the appropriate method to account for income, to accept the returns lodged by taxpayers, notwithstanding that both income and expenses have been accounted for on a cash receipts basis". As outlined in paragraph 13 of TR 97/7 "In the interests of practical administration, there is no intention to disturb this practice". Timing of interest deduction Interest expense is deductible under section 8-1 of the ITAA 1997 when it is 'incurred'. Interest is usually incurred under section 8-1 of the ITAA 1997 when it becomes due and payable. For example, in Case 14/97 97 ATC 202 (Case 14/97) interest on funds borrowed to invest in an employee share scheme was deductible when the employee was committed to pay, even though no payment was in fact ever made and the liability was subsequently waived. Loan agreement Interest under a loan agreement was held to have been incurred when it accrued rather than in the following year when it was actually paid by the taxpayer. The loan agreement in issue in that case provided for interest to be paid in April each year, but the taxpayer had claimed a deduction for the later year in which he actually paid the interest ( Case Q55 83 ATC 296 (Case Q55)). Carrying on a business Taxation Ruling TR 2019/1 Income tax: when does a company carry on a business? (TR 2019/1) provides the Commissioner's views on when a company carries on a business. Companies are typically formed for the purpose of carrying on a business. In Westleigh and American Leaf , it was observed that where a company aims to make, and has a prospect of profit, it is presumed that the company intends to, and does in fact, carry on a business. In American Leaf , Diplock LJ observed that this means any gainful use to which a company puts its assets will, on its face, amount to the carrying on of a business. However, this presumption can be rebutted if it can be shown that, on the facts, the company had no aim or prospect of making a profit (paragraph 19 of TR 2019/1). Application to your circumstances On the facts provided, the Commissioner is of the view there is no presently existing liability and therefore there is no deduction available to you. You have not paid any interest to the Lender, and you have not recorded any interest liability in your accounts. Although you and the Lender had an Agreement executed on a specified date to pay interest you have subsequently come to an agreement not to accrue interest to avoid compounding principal and interest. The actions of the parties are in concert with the non-accrual of interest and support this subsequent agreement. Because no interest is accruing there is no interest liability. If there is no interest liability, there cannot be any interest expense. There is no evidence the Lender has taken any action against you for non-payment despite the original agreement being executed over 2 years ago. You have stated the Borrower has limited funds and any further payment is not soon foreseeable. Your payment of interest is completely dependent on future payments by the Borrower. And as noted above, you and the Lender have agreed not to accrue interest. Any potential interest expense, at best, could only be contingent or threatened. As noted above, threatened or contingent is not enough to satisfy the criteria for deductibility. Accordingly, there is no outgoing you have definitively committed yourself to. Additionally, following Case Q55, interest under a loan agreement is held to have been incurred when it accrued rather than in the following year when it was actually paid by the taxpayer. You have neither accrued or paid any interest. You are not considered to be carrying on a business. There is no intention of profit and there is no intention to engage in business activities. You have been incorporated to merely act as a conduit between the Lender and the Borrower. Any income you receive through repayments by the Borrower will in turn be offset against payments by to the Lender or other expenses incurred. This is a once off arrangement to allow the registration of mortgages over the properties purchased by the Borrower to 'protect' the Lenders advancements to the Borrower. | Detailed Reasoning - Question 2: Are you required to withhold an amount of interest under Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) in respect of interest payable to the Lender? | Summary: No. | Detailed Reasoning - Detailed reasoning: An entity that pays interest to an entity must withhold an amount if the recipient has an address outside Australia or the payer is authorised to pay the interest at a place outside Australia (whether to the recipient or to anyone else). The recipient's address is to be determined according to any record in the payer's possession, or that is kept or maintained on the payer's behalf, about the transaction to which the interest relates (section 12-245 in Schedule 1 to the TAA 1953). Received for a non-resident Under section 12-245 of Schedule 1 to the TAA 1953 an entity must withhold an amount from interest it pays to an entity if: (a) any record that is in the payer's possession, or is kept or maintained on the payer's behalf, about the transaction to which the interest relates; or (b) the payer is authorised to pay the interest at a place outside Australia (whether to the recipient or any of the recipients or to anyone else). Subsection 11-5(1) in Schedule 1 to the TAA 1953 deems an amount to have been paid when the paying entity applies or deals with the amount or is required to apply or deal with the amount, in any way on the other's behalf or as the other directs. Section 12-300 in Schedule 1 to the TAA 1953 limits the amount to be withheld. Under section 12-300 an entity is not required to withhold an amount where no withholding tax is payable, and the entity is not required to withhold an amount more than the withholding tax payable. Section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) deals with withholding tax liability. Liability to withholding tax Section 128B of the ITAA 1936 sets out the circumstances in which withholding tax is payable in respect of dividend, interest and royalty income derived by non-residents. Under subsection 128B(2) income is subject to withholding tax if it is: • derived by a non-resident, and • consists of interest that is paid to the non-resident by a "person" who is a resident, and • is not an outgoing wholly incurred by the "person" in carrying on a business outside of Australia at our through a permanent establishment For the purposes of Division 11A of the ITAA 1936 subsection 128A(2) deems interest to have been paid by a person to another person although it is not actually paid over to the other person but is reinvested, accumulated, capitalized, 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. The requirement to withhold the tax arises at the time the interest is 'paid' or 'payable' under Subdivision 12-F, Schedule 1 to the TAA 1953. Section 11-5 of the same Schedule deems an amount to have been paid when the paying entity applies or deals with the amount or is required to apply or deal with the amount, in any way on the other's behalf or as the other directs. Conversely, the non-resident is liable, under subsection 128B(5) of the ITAA 1936, to withholding tax on interest 'paid' to them. Subsection 128A(2) of the ITAA 1936 deems the interest to have been paid to a non-resident when it is dealt with in the same manner as described in subsection 11-5(1) of Schedule 1 to the TAA 1953. The non-resident's liability to withholding tax in these circumstances is therefore unaffected by the absence of an actual payment of the interest. Application to your circumstances In your case, and as detailed in Question 1 above, you have not paid or credited an amount of interest (or part of it) to the Lender, or applied or dealt with the amount, or are required to apply or deal with the amount, in any way on the Lender's behalf or as the Lender directs. There is no interest liability and therefore the Commissioner is of the view that the interest is not income derived by the Lender (while it remains credited to you only). Consequently, you are not required to withhold an amount of interest under Subdivision 12-F, Schedule 1 to the TAA 1953 in respect of interest payable to the Lender, until such time as you either actually pay, credit, or are otherwise required to apply or deal with an amount of interest, in any way on the Lender's behalf or as the Lender directs.

You are an Australian resident private company for income tax purposes incorporated in the 2023 income year. | You have a sole director and secretary (Director). | You have paid Ordinary shares on issue. | Your shareholders are the non-resident Lender, who owns minimal Ordinary shares and an Australian resident for income tax purposes who owns the majority Ordinary shares (Shareholder). | On a specified date, the non-resident Lender provided a non-Australian resident for income tax purposes and an Australian resident for income tax purposes (Borrower) a loan of a specified foreign currency amount (equivalent to AU$XX) (Loan). | The Loan was formalised in a written loan agreement and executed by all parties on a specified date (Loan Agreement). | Article 1 of the Loan Agreement provides the following Loan description as: | Due to lack of funds for operation and the lack of funds for a specified business venture plus return of partial arrears, the Borrower borrows a specified foreign currency amount from the non-resident Lender, and the Borrower voluntarily registers the collateral right of the house in Australia under the name of the Lender or the affiliated party designated by the Lender to guarantee the safety of loan principal and interest of the Lender. | The Loan term lasts for five years in total (Term). Prior to the end of the Loan Term, the Borrower shall reimburse the loan principal to the Lender in a lump sum, and the Lender takes charge of writing off and returning the house mortgage to the Borrower. | Article 4 of the Loan Agreement provides for the calculation and payment of interest as: | If the Lender loans a specified foreign currency amount to the Borrower, the Lender shall enjoy a specified foreign currency amount as the interest paid by the Borrower based on the interest rate of XX% per month (Interest Rate). | Since the Lender's loan totals a specified foreign currency amount only, the Lender shall enjoy a specified foreign currency amount of interest paid by the Borrower each month, and the Borrower shall pay the interest of the current month on the 28 th day after the agreement is executed. | You were incorporated to facilitate the effective registration of mortgages by the Lender over three Australian properties that are owned by the Borrower, to guarantee the safety of the Loan principal and interest. | You entered an 'Agreement on Authorized Holding' that was executed by your Director, the Lender and Shareholder on a specified date (Holding Agreement). The Holding Agreement states that you were incorporated in accordance with the relevant provisions of the Corporations Act 2001 and your shareholding agreement with a registered capital of AU$XX. | The Holding Agreement further provides under: | • Clause 1 - the Lender contributed AU$XX by credit subscribed capital, with the total capital contribution accounting for 100% and equity interest accounting for XX%. | • Clause 2 - the Shareholder contributed AU$Nil by subscribed capital, with the total capital contribution accounting for 0% and equity interest accounting for XX%. | • Subclause II(1) - the Lender is the actual contributor of your assets and the majority Shareholder is requested to hold your assets on behalf of the Lender for specific reasons. | • Subclause I(2) - the majority Shareholder agrees to hold your assets on behalf of the Lender as a nominal holder in accordance with the Holding Agreement and does not have any beneficial interest in your assets. | • Subclause I(3) - the Lender and majority Shareholder have reached the following after friendly consultation: | • Clause II - the Lender authorises the majority Shareholder to hold your assets (being the Lender's contribution of AU$XX by credit subscribed capital) on behalf of the Lender. The majority Shareholder agrees to accept the Lender's authorisation as the nominee holder to hold your assets on behalf of the Lender. | • Clause III - the Lender is the actual contributor and beneficial owner of your assets and enjoys all interests in your assets. The Lender shall have the right to require the majority Shareholder to transfer your assets held on behalf of the Lender to the Lender or a third person designated by the Lender at any time. The majority Shareholder is a nominal holder only and does not have any beneficial interest in your assets held on behalf of the Lender. | • Clause IV - the Lender is responsible for the management of the Borrower's repayment of the loan principal and interest; the Borrower must obtain the Lender's signature for the application of house mortgage release and your Director (on your behalf) will issue a certificate of approval for house mortgage release to the Borrower upon receipt of the signed letter of consent from the Lender. | You were assigned the Lender's rights and liabilities under the Loan Agreement by Deed of Assignment executed by you and the Lender on a specified date (Assignment). | You agreed to pay the Lender an amount of AU$XX (being the principal plus accumulated unpaid interest) for the Assignment, by way of loan, formalised in Company Repayment Agreement executed by you, your shareholders and the Lender also on a specified date (Company Loan). | You borrowed the Company Loan to fund the Assignment from the Lender, at the same Interest Rate specified in the original Loan Agreement, with a 3-year term (having the same end date as the Term for the original Loan Agreement). | Subclause I(1) of the Company Repayment Agreement provides for the repayment of the Company Loan as: | On the basis of your receipt of the repayment of the principal and interest of the loan from the Borrower, you (from the date of receipt of the return of the principal and interest of the loan from the Borrower) undertake to pay the same amount of the principal and interest of the loan to the Lender within 3 working days. | You were thereafter registered as a mortgagee with the State Land Registry on a specified date over 3 Australian security properties owned by the Borrower (Properties). | You are the bare legal owner of the mortgages over the Properties secured against the Loan to the Borrower. | You have no other assets, liability or trading activity apart from holding the assigned Loan's rights and liabilities. | You account for your assessable income on a cash basis. | Your financial statements for the 2023 and 2024 income years, show you have a: | • non-current loan liability of AU$XX owing to the Lender, and | • non-current loan asset of AU$XX owed to you by the Borrower. | As at a specified date, you have only received and accounted for in your records, interest income totalling an amount of AU$XX from the Borrower. | The Borrower has limited funds and the next repayment to you is not soon foreseeable. | You and the Lender have agreed to not accrue interest payable to avoid compounding principal and interest. | To date, you have not credited (in your accounts) or paid any amounts to the Lender, as you require any Borrower repayments to pay your expenses. | You have not accrued any interest liability in your accounts. | You will pay the Lender any amounts (and only when) received from the Borrower, when cash-flow allows and after your expenses are paid. | Does IVA apply to this private ruling?: Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. | If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. | 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 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 ato.gov.au/gaar .