Private ruling: TFN withholding obligations
Published: October 2013
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q2: Do you have a PAYG obligation to withhold from interest payments on accumulated member rebates paid to members in circumstances where a TFN has not been provided? 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 are a company as defined in subsection 117(1) of the Income Tax Assessment Act 1936 (ITAA 1936). You have many members and each member holds a minimum number of your shares. Your rules provide that interest may be paid on your paid-up share capital at such rate as shall be recommended by the board from time to time and approved by the members at a general meeting. At the annual general meeting an interest rate is agreed and ratified by the members concerning interest payable on share capital for the proceeding year. All interest payments on share capital are entirely discretionary from year to year. Your board also determines the interest rate applicable to accumulated member rebates. These are member rebates which have been declared and credited to member accounts but not yet taken in cash or offset against future purchases. You have advised that the accumulated rebates are available upon request. There is no set period for which these funds are "re-invested". Some funds remain with the Co-Op for a period of greater than one year and some are withdrawn earlier. All accumulated rebate interest payments are entirely discretionary from year to year. Normally most of your members receive nominal interest payment for the year.

Relevant legislative provisions: Taxation Administration Act 1953 Subsection 12-140(1) | Taxation Administration Act 1953 Section 12-150 | Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1936 Subsection 117(1) | Income Tax Assessment Act 1936 Subsection 159GP(1) | Income Tax Assessment Act 1936 Section 202D

Reasons for decision: Summary: Under subsection 12-140 (1) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), an investment body must withhold an amount from a payment it makes to another entity in respect of a Part VA investment if: (a) all or some of the payment is ordinary income or statutory income of the other entity; and (b) if the investment is non-transferable - the other entity did not quote its tax file number in connection with the investment before the time when the payment became payable; and (c) if the investment is transferable - the other entity did not quote its tax file number in connection with the investment before the time when the other entity had to be registered with the investment body as the investor to be entitled to the payment. Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an investment body for a Part VA investment has the meaning given by section 202D of the Income Tax assessment Act 1936 (ITAA 1936). Subsection 202D(1) of the ITAA 1936 lists those Part VA investments in the following table: | Detailed Reasoning - Column 3 Investment body: 1 Interest-bearing account with a financial institution The person in whose name the account is held The financial institution 2 Interest-bearing deposit (other than a deposit to the credit of an account) with a financial institution The person in whose name the deposit is made The financial institution 3 Loan of money to a government body or to a body corporate (other than a deposit to the credit of an account referred to in item 1, a deposit to which item 2 applies or a loan made in the ordinary course of the business of providing business or consumer finance by a person who carries on that business) The person in whose name the money is lent The government body or body corporate 4 Deposit of money with a solicitor for the purpose of: The person for whose benefit the money is to be invested or lent The solicitor (a) being invested by the solicitor; or (b) being lent under an agreement to be arranged by or on behalf of the solicitor 5 Units in a unit trust The person in whose name the units are held The manager of the unit trust 6 Shares in a public company The shareholder The company 7 An investment-related betting chance The betting investor The betting investment body | Detailed Reasoning - Interest payments on share capital: A public company includes a co-operative company as defined in section 117 of the ITAA 1936. A co-operative company is one that either has no share capital or has rules that limit the number of shares which may be held by any one shareholder. Therefore for the purposes of subsection 202D(1) item 6 of the ITAA 1936 you are a public company. Subdivision 12E of the TAA 1953 set out various exceptions where, upon certain criteria being satisfied, an investment body may not be required to withhold an amount from a payment in respect of an investment. Subsection 12-150(1) of Schedule 1 to the TAA limits the extent to which section 12-140 of Sch 1 to the TAA 1953 applies to a payment in respect of a Part VA investment if the investment is a qualifying security and: (a) is of a kind mentioned in item 1 or 2 of the table in subsection 202D(1) of that Act; or (b) is of a kind mentioned in item 3 of that table and is non-transferable. Notwithstanding the requirements to be classified as a qualifying security, item 6 of subsection 202D(1) of the ITAA 1936 is not listed in the items for exemption under subsection 12-150(1) of Sch 1 to the TAA 1953. Therefore public companies have an obligation to withhold where no TFN is provided. Accordingly you do have an obligation to withhold from interest payments on share capital paid to members in circumstances where a TFN has not been provided. | Detailed Reasoning - Accumulated member rebates: Body corporate (item 3 of the table in section 202D of the ITAA 1936) is defined in Taxation Ruling IT 2634 as having the meaning of a group of persons legally incorporated in a corporation and therefore for the purposes of subsection 202D(1) of the ITAA 1936 you are a body corporate. As discussed in IT 2634, the term loan takes on its ordinary meaning, which includes something lent or furnished on condition of being returned, especially a sum of money lent at interest. In your case, throughout the year, members of the co-operative are entitled to rebates on purchases they have made with the co-operative. In the event that these rebates are accumulated to the members' account, but not paid, (so that the money stays within the Co-op) the Co-op pays the members interest on the amount of the accumulated rebates. Your members have loaned money to the co-operative and the co-operative is a body corporate. Therefore those payments constitute a loan of money to a body corporate and represent an investment of the kind described at Item 3 of the table under subsection 202D(1) of the ITAA 1936. Thus we agree that these accumulated rebates constitute a loan to the co-operative for the purposes of section 202D of the ITAA 1936. As mentioned, section 12-150 of subdivision 12E of Schedule 1 to the TAA 1953 limits the application of section 12-140 of the TAA 1953 to a payment in respect of a Part VA investment if it is in relation to a 'qualifying security' of a kind mentioned in items 1-3 of the table in section 202D of the ITAA 1936. A qualifying security as defined in subsection 159GP(1) of Division 16E of the ITAA 1936. The term qualifying security is defined to mean any security: (a) that is issued after 16 December 1984; (b) that is not a prescribed security within the meaning of section 26C; (ba) that is not part of an exempt series; (c) the term of which, ascertained as at the time of issue of the security will, or is reasonably likely to, exceed 1 year; (d) that has an eligible return; and (e) where the precise amount of that eligible return is able to be ascertained at the time of issue of the security - in relation to which the amount of the eligible return is greater than 1% of the amount ascertained by multiplying the amount of the payment or the sum of the payments (excluding any periodic interest) liable to be made under the security by the number (including any fraction) of years in the terms of the security; but does not except as provided by subsection (10), include an annuity. You have advised that the accumulated rebates are available upon request. There is no set period for which these funds are "re-invested". Some funds remain with the Co-Op for a period of greater than one year and some are withdrawn earlier. As the term of the rebates is not necessarily in excess of one year, the condition in (c) above is not met. Thus the accumulated member rebates do not satisfy the definition of a qualifying security We shall now consider the withholding obligation of an investment body with regard to the member rebates. | Detailed Reasoning - Withholding obligations of an investment body: Section 202A of the ITAA 1936 provides that the term 'investment body' means a person who is an investment body within the meaning of section 202D. Subsection 202D(2) of the ITAA 1936 provides the definition for the term investor and investment body, which states that: In relation to an investment of a kind mention in column 1 of an item in the table in subsection (1): (a) the investor is the person specified in column 2 of the item; and (b) the investment body is the person specified in column 3 of the item. You are a body corporate in relation to an investment of the kind described at item 3 of the table in subsection 202D(1) of the ITAA 1936. You represent an entity described in column 3 of the table. Therefore you meet the definition of an investment body under subsection 202D(2) of the ITAAA 1936. In addition, as your members have loaned money in relation to an investment of a kind described under item 3 of the table under subsection 202D(1) of the ITAA 1936, the members represent a person described in column 2 of the table. Therefore your members meet the definition of investor under subsection 202D(2) of the ITAA 1936. As you are an investment body under section 202D of the ITAA 1936, you are an investment body for the purposes of subdivision 12E to Schedule 1 to the TAA 1953. Therefore where your members have not provided their respective TFN, or notified you of an exemption from providing a TFN, you are required to withhold an amount from any accumulated rebate interest payments to those members. | Detailed Reasoning - Financial institutions and $120 threshold: In examining column 3 of the table under subsection 202D(1) of the ITAA 1936, under items 1 and 2, an investment includes a financial institution. For completeness we shall look at financial institutions and the $120 threshold. Investment bodies which are financial institutions are not required to withhold amounts for the non-quotation of a TFN/ABN from interest bearing deposits and accounts provided the payment is less than $120 for the financial year. We have noted that normally most of your members receive a nominal interest payment for the year. However, as you are not a financial institution the $120 threshold does not apply to your situation. | Summary: You are a public company for the purposes of section 117 of the ITAA 1936 as a public company includes a co-operative. For the purposes of subsection 202D(1) item 6 of the ITAA 1936 you are a public company. Item 6 of subsection 202D(1) of the ITAA 1936 is not listed in the items for exemption under subsection 12-150(1) of the TAA 1953. Therefore you have an obligation to withhold where no TFN is provided with regard to interest on share capital. With regard to the interest on accumulated member rebates, you are a body corporate in relation to an investment of the kind described at item 3 of the table in subsection 202D(1) of the ITAA 1936. You represent an entity described in column 3 of the table. Therefore you meet the definition of an investment body under subsection 202D(2) of the ITAAA 1936. As your members have loaned money in relation to an investment of a kind described under item 3 of the table under subsection 202D(1) of the ITAA 1936, the members represent a person described in column 2 of the table. Therefore your members meet the definition of investor under subsection 202D(2) of the ITAA 1936. As you are an investment body as per item 3 of subsection 202D(1) of the ITAA 1936, you are obliged to withhold where no TFN is provided with regard to interest on accumulated member rebates. The $120 threshold does not apply in your case as you are not a financial institution.

Question 1: Do you have a Pay As You Go (PAYG) obligation to withhold from interest payments on share capital paid to members in circumstances where a tax file number (TFN) has not been provided?