Taxation Ruling IT 2185 - Income tax: foreign debenture issue with premium payable upon redemption



Ruling: 4. Confirmation was given concerning (i) and (iii) insofar as it related to interest payable at the specified annual rate on the face value of the debentures. 5. In relation to (ii) however, advice was given that no deduction would be allowable for the premium payable upon redemption to avoid currency exchange losses. The premium would be an outgoing of capital or of a capital nature, i.e. it would be part of the repayment of the principal amount. As a consequence there would be no liability for interest withholding tax in respect of the amount of the premium - it would not be an amount in the nature of interest. 6. The advice given in the preceding paragraph in relation to the deductibility of the premium would not apply in the case of a financial institution. Where a financial institution borrowed money overseas in the ordinary course of its business and not for some special purpose the payment of a premium to cover any loss on exchange on repayment of the borrowing would be an allowable income tax deduction, Avco Financial Services Ltd v FC of T, 82 ATC 4246 : 13 ATR63. COMMISSIONER OF TAXATION 29 August 1985




FACTS: This office was recently asked to examine the withholding tax implications of a borrowing by an industrial company in which debentures were to be issued overseas denominated in certain specified amounts of a foreign currency. The debentures were to bear interest on their face value at a rate per annum which was fully commercial for debentures of the particular type. The debentures were to be redeemable some years later in Australian currency for an amount which included a substantial premium calculated at current rates of exchange. | 2. The premium payable on redemption in Australian currency was designed to avoid any loss on exchange which might arise on redemption of the debentures though there remained the risk of exchange loss on interests payments. | 3. Notwithstanding any possible exemption from interest withholding tax which might be available for widely distributed debenture issues, confirmation was sought that:- | Date of effect: Immediate | Date original memo issued: 26 August 1985


Legislative references: 128A(1) 128B 51(1)
Case references: Avco Financial Services Ltd v FC of T 82 ATC 4246 13 ATR63
Subject references: INTEREST WITHHOLDING TAX INCOME IN THE NATURE OF INTEREST DEDUCTIBILITY OF INTEREST & PREMIUM OUTGOINGS