Private ruling: Liability to withhold amounts from interest paid to foreign resident
Published: April 2014
Ruling period: Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017
Date scheme commenced: 1 July 2013

Ruling: Question and answer | Are you required to withhold and remit withholding tax on the interest you pay to a foreign bank? | Yes.

Relevant facts and circumstances: The trust is a unit trust and a resident of Australia for tax purposes. You are the trustee and you are a corporate entity incorporated in Australia. The director has significant business experience to help manage the activities of the trust. The director is the chairman of a property investment group and has substantial experience in property investment activities. In 2014, the trust acquired a commercial property in Country X. The property was acquired with a tenant in situ. There is a mortgage over the property with a Country X bank, which charges interest at the normal commercial rates. Mortgage and interest repayments are made monthly. You have engaged the services of a Country X company to act as property manager. The property manager receives rent from the tenant, pays operating expenses and remits the net proceeds to the trust, after deducting their fees and paying interest to a Country X bank and paying Country X sales tax. The trust does not own any other assets, nor does it operate any other activities, in either Australia or Country X. There is no documented business plan. You have provided profit and loss and forecast statements. You keep records including, monthly profit and loss reports, minutes of monthly meetings, cash flow reports and forecasts, copies of contracts and agreements, property reports, insurance policy details, legal and professional advice, and loan agreements. You undertook substantial due diligence prior to the purchase, including seeking advice from both Australian and Country X advisors. The directors allocate time to the activities on an 'as needs' basis, which includes planning, review of monthly profit and loss reports, attendance at quarterly meetings, liaison with property managers and travel to Country X. One director operates their own business as a chartered accountant on a full time basis. The other director is a full time employee of another corporation.

Relevant legislative provisions: Taxation Administration Act 1953 Schedule 1, Section 12-245. | Income Tax Assessment Act 1936 Subparagraph 128B(2)(b)(i). | Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision: Summary: Section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA) provides that an entity must withhold an amount from interest it pays to a non-resident entity, however, under subparagraph 128B(2)(b)(i) of the Income Tax Assessment Act 1936 (ITAA 1936) interest will not be subject to withholding tax if it is an outgoing incurred by a resident in carrying on business through the resident's overseas permanent establishment. Therefore, in your case, you will be required to withhold amounts from the interest you pay to a Country X bank, a non-resident entity, unless it is determined that you are carrying on business through your overseas permanent establishment. Section 995-1 of the Income Tax Assessment Act 1997 defines 'business' as 'including any profession, trade, employment, vocation or calling, but not occupation as an employee'. The question of whether a business is being carried on is a question of fact and degree. The courts have developed a series of indicators that are applied to determine the matter on the particular facts. Taxation Ruling TR 97/11 Income tax: am I carrying on a business of primary production? provides the Commissioner's view of the factors used to determine if you are in business for tax purposes. In the Commissioner's view, the factors that are considered important in determining the question of business activity are: • whether the activity has a significant commercial purpose or character • whether the taxpayer has more than just an intention to engage in business • whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity • whether there is regularity and repetition of the activity • whether the activity is of the same kind and carried on in a similar manner to that of ordinary trade in that line of business • whether the activity is planned, organised and carried on in a businesslike manner such that it is described as making a profit • the size, scale and permanency of the activity, and • whether the activity is better described as a hobby, a form of recreation or sporting activity. No one indicator is decisive. The indicators must be considered in combination and as a whole. Whether a 'business' is carried on depends on the large or general impression. Most rental activities are a form of investment and do not amount to carrying on a business. A person who simply owns an investment property or several investment properties is usually regarded as an investor who is not carrying on a rental property business. In your case, the activities that you undertake in relation to your investment property are similar to the activities that a reasonable investor would undertake when purchasing and managing an investment property. They are not sufficient to show that you are in business. You only own one rental property with one tenant in that property. The management of the property is done by an agent. You do not have a documented business plan. Both of your directors are engaged in full time employment outside of the trust's activities. For these reasons, you are not carrying on a business. Therefore, subparagraph 128B(2)(b)(i) of the ITAA 1936 does not apply. It is therefore not necessary to consider the issue of permanent establishment. You are required to withhold amounts from the interest you pay to the Country X bank in accordance with section 12-245 of Schedule 1 to the TAA.