Taxation Ruling IT 2466 (Addenda exist) - Income tax : trust distributions of group interest to non-resident beneficiaries : determination of objections

What this ruling is about: This ruling provides guidelines for arrangements designed to provide a non-resident beneficiary with entitlement to interest income derived by a resident trust estate from associated entities. If the arrangements are effective, Australian tax payable on the entitlement is limited to the 10 per cent withholding tax on interest paid to non-residents. 2. Under the arrangements a deduction is claimed by the borrower in the group for the amount of interest paid to the associated trust. The interest income is then distributed to the non-resident beneficiary and 10 per cent interest withholding tax is paid by the trustee. The arrangement is based on the premise that the interest payment to the trust retains the character of interest when it passes into the hands of the beneficiary. 3. A common feature in many of these cases is that the amount applied for the benefit of the non-resident is not paid to the beneficiary but is retained by the trust, being shown in its accounts as owing to the beneficiary or, although paid to the beneficiary, is returned to the trustee, a resident beneficiary or to an associate.


Ruling: 4. A trustee may, where the trust deed allows, distribute income by type to particular beneficiaries. The trustee may, for example, choose to distribute interest income to a non-resident beneficiary and the accounts may separately identify the income to reflect this. The non-resident beneficiary, if presently entitled to interest income, is deemed, in terms of sub-section 128 A(3) of the Income Tax Assessment Act, to have derived such interest income for the purposes of Division 11A. If this is the position, it must be accepted that the arrangement is effective for income tax purposes and Australian tax in respect of the trust distribution is therefore limited to the rate applicable to withholding tax on interest payments to non-residents. 5. However, cases have been encountered where the arrangements designed to pass group interest to non-resident beneficiaries have the hallmarks of challengeable tax avoidance schemes and bring into question both the deductibility of the interest payments by group borrowers and the status and entitlement of the non-resident beneficiary in relation to trust interest income. These scheme cases have generally fallen into one of two categories: | PENALTY: 6. Penalty should be imposed and remitted in accordance with Taxation Rulings No's IT 2012, 2028, 2043, 2141, 2206 and 2312, as appropriate. | DETERMINATION OF OBJECTIONS: 7. Where, after consideration of all relevant factors, it is not possible to be satisfied that the requirements of section 51 are met, objections against the disallowance of deductions for interest paid to the group trust should be disallowed. Cases relying on the application of sections 100A, 260 or Part IVA should be cleared with National Office before determination. Objections against the assessments raised on the basis that the trust distributions to non-residents are not genuine should be determined in accordance with Taxation Ruling No. IT 2344. | WITHHOLDING TAX PAID: 8. In scheme cases assessed in accordance with this ruling, it will be necessary to refund or credit the amount of withholding tax paid on interest under the scheme arrangement in any case where it is established that no liability for the withholding tax existed. Action to refund or credit withholding tax to a taxpayer should not be taken until any disputes about that taxpayer's assessments arising from the disallowance of the scheme have been finally settled. | RECOVERY: 9. Normal recovery action can be instituted on assessments that disallow the interest claim of the associated borrower. Recovery action in respect of assessments raised on the basis that the purported distributions to non-resident beneficiaries are not genuine should be taken in accordance with Taxation Ruling No. IT 2344. COMMISSIONER OF TAXATION 18 February 1988




View the Addendum notice for this document. | View the Addendum (2) notice for this document. | Date of effect: Immediate | Date original memo issued: 26 July 1983


Related rulings: IT 2344
Legislative references: PART III . DIVISION 6 . DIVISION 11A PART IVA PART VII
Subject references: INCOME TAX AVOIDANCE TRUSTS WITH NON-RESIDENT BENEFICIARIES INTEREST WITHHOLDING TAX