ATO Interpretative Decision
ATO ID 2003/528
Income Tax
Debt and Equity Financing: rate of withholding tax on a return on a debt interest under Division 974FOI status: may be released
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This ATO ID does not take account of the effect of Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009 that implements Stages 3 and 4 of the reforms to the taxation of financial arrangements (TOFA 3 and 4).
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer, a non-resident company, liable for withholding tax on Australian-sourced dividends at a rate of 10% if the dividends constitute a return on a debt interest?
Decision
Yes. The taxpayer is liable for withholding tax at a rate of 10%, on Australian-sourced dividends that constitute a return on a debt interest.
Facts
The taxpayer is a non-resident company. During 2002, the taxpayer company received dividends on redeemable preference shares (RPS) from a resident company.
The terms of the RPS are such that the shares give rise to a debt interest under Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997).
Reasons for decision
Liability to non-resident withholding tax on interest and dividends is determined by Division 11A of Part III of the Income Tax Assessment Act 1936 (ITAA 1936).
Section 128B of the ITAA 1936 deals with liability to withholding tax. Subsections 128B(2) and 128B(5) provide that subject to certain exceptions listed in subsection 128B(3), a non-resident is liable to withholding tax on income consisting of interest that is paid to the non-resident by a resident person and is not an outgoing solely incurred by that person in carrying on business in a country outside Australia at or through a permanent establishment of that person in that country.
For the purposes of Division 11A of the ITAA 1936, 'interest' is defined to include 'an amount...that is a dividend paid in respect of a non-equity share' (paragraph 128A(1AB)(d)).
The term 'non-equity share' is defined as a share that is not an equity interest in the company. As the RPS issued by the resident company constitute a debt interest under Division 974 of the ITAA 1997, they are not an equity interest (paragraph 974-70(1)(b)). The RPS are non-equity shares for income tax purposes.
Therefore, RPS dividends will be income derived by a non-resident that consists of interest to which section 128B applies of the ITAA 1936. The taxpayer company is therefore liable to pay tax on the dividends at the rate which applies to interest income under subsection 128B(5) of the ITAA 1936. Paragraph 7(b) of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 provides that this rate is 10%.
The taxpayer company's liability under these income tax provisions is not affected by any articles in the applicable Double Tax Agreement.
Date of decision: 16 April 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1997
subsection 974-70(1)
subsection 128A(1AB)
section 128B Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974
Section 7 Related ATO Interpretative Decisions
ATO ID 2003/527
ATO ID 2003/529
ATO ID 2003/530
Keywords
Debt equity borderline
Redeemable preference share
Non-resident interest withholding tax
Non-equity share
ISSN: 1445-2782