Taxation Laws Amendment Act (No. 3) 1994 (138 of 1994)
Part 2 AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936
Division 14 Australian branches of foreign banks
113 Insertion of new Part
After Part IIIA of the Principal Act the following Part is inserted:
"PART IIIB-AUSTRALIAN BRANCHES OF FOREIGN BANKS
"Division 1-Preliminary
Object
"160ZZVA.(1) The object of this Part is:
(a) to assist in calculating that part of a foreign bank's taxable income that is referable to certain activities of its Australian branch; and
(b) to make it clear that withholding tax will apply to amounts that are taken by this Part to be interest paid by the branch to the bank.
"(2) For the purpose of achieving the object mentioned in subsection (1), this Part requires, in the circumstances stated in this Part and not otherwise, that the Australian branch is to be treated as if it were a separate legal entity from the bank.
Application
"160ZZVB.(1) It is the intention that, in so far as this Part is to be applied to identify amounts of income and expenditure that are taken into account in calculating that part of a foreign bank's taxable income of a year of income that is referable to certain activities of its Australian branch, the provisions of this Part are to be applied in their entirety.
"(2) If, as a result of the application of this Part:
(a) the taxable income of a year of income of a foreign bank that is attributable to activities carried on by the bank through its Australian branch is greater than the amount that would be that taxable income if this Part did not apply; or
(b) a foreign bank would be taken not to incur a loss in a year of income in respect of activities carried on by the bank through its Australian branch that it would be taken to have incurred if this Part did not apply; or
(c) the amount of a loss that a foreign bank would be taken to incur in a year of income in respect of activities carried on by the bank through its Australian branch is less than the amount of the loss that it would be taken to have incurred if this Part did not apply;
and an agreement within the meaning of the Income Tax (International Agreements) Act 1953 that has the force of law applies in relation to the bank, the bank may elect that this Part is not to apply in the calculation of its taxable income of that year of income.
"(3) If a foreign bank makes an election as mentioned in subsection (2):
(a) this Part does not apply in the calculation of the bank's taxable income of the year of income to which the election relates and the bank may furnish returns, and is liable to pay tax, accordingly; but
(b) the election does not affect the operation of this Part in respect of the application of withholding tax to amounts that are taken by this Part to be interest paid by the branch to the bank.
Definitions
"160ZZV. In this Part, unless the contrary intention appears:
'accounting records' includes:
(a) invoices, receipts, vouchers and other documents of prime entry; and
(b) any working papers and other documents that are necessary to explain the methods and calculations by which accounts are made up;
'Australian branch', in relation to a foreign bank, means a permanent establishment in Australia through which the bank carries on banking business;
'derivative transaction' means a transaction entered into for the purpose of eliminating, reducing or altering the risk of adverse financial consequences that might result from changes in rates of interest or changes in rates of exchange between currencies, or for the purpose of making a profit from such changes, but does not include a transaction for the provision of finance or a foreign exchange transaction;
'foreign bank' means a foreign bank as defined by subsection 5(1) of the Banking Act 1959;
'foreign exchange transaction' means a transaction by which different currencies are exchanged;
'offshore banking unit' has the same meaning as in Division 11A of Part III;
'time of establishment', in relation to an Australian branch of a foreign bank, means the time when the bank began to carry on business through the permanent establishment in Australia that constitutes the branch.
Certain provisions to apply as if Australian branch of foreign bank were a separate legal entity
"160ZZW.(1) Subsections (2), (3), (4) and (5) apply only:
(a) for the purposes of sections 160ZZZ, 160ZZZA, 160ZZZB, 160ZZZC, 160ZZZE and 160ZZZF as they have effect in the determination under this Act of the liability of a foreign bank to tax (other than withholding tax) in respect of income derived from an Australian branch of the bank; and
(b) for the purposes of the provisions of this Act other than this Part as those provisions apply in relation to amounts that are taken by this Part to have been received from a foreign bank by its Australian branch or to have been paid to a foreign bank by its Australian branch; and
(c) for the purposes of section 160ZZZJ as it has effect in determining the liability of a foreign bank to withholding tax in respect of amounts paid to the bank by an Australian branch of the bank.
"(2) The branch and the bank are taken to be, and to have been since the time of establishment of the branch, separate legal entities.
"(3) The branch is taken to be, and to have been since the time of its establishment, a company having a share capital all the shares in which are or were beneficially owned by the bank.
"(4) The branch is taken to be a non-resident and to have been a non-resident since the time of its establishment.
"(5) For the purposes of Division 13 of Part III, the branch is taken not to be, and not to have been at any time since its establishment, a permanent establishment in Australia of the bank.
"Division 2-Provisions relating to income tax
Income of branch to have Australian source
"160ZZX. All income derived by a foreign bank through its Australian branch is taken, for the purposes of this Act, to be income derived from a source in Australia.
Deduction for foreign tax
"160ZZY. Foreign tax paid during a year of income by a foreign bank on interest received by its Australian branch from a place outside Australia is an allowable deduction for that year of income.
Notional borrowing by branch from bank
"160ZZZ.(1) If an amount has been made available by a foreign bank for use by an Australian branch of the bank and is recorded in the branch's accounting records as having been provided by the bank to the branch, that amount is taken, for the purposes of this Act, to have been borrowed by the branch from the bank when the amount became so available and to have been so borrowed in the currency in which the amount became so available.
"(2) If an amount has been made available by the branch to the bank in purported repayment of an amount that is taken, under subsection (1), to have been borrowed by the branch from the bank and the amount so made available is recorded in the branch's accounting records as having been repaid by the branch to the bank, the amount that was so taken to have been borrowed is taken, for the purposes of this Act, to have been repaid by the branch to the bank when the amount became so available and to have been so repaid in the currency in which the amount became so available.
Notional payment of interest by branch to bank
"160ZZZA.(1) If, under section 160ZZZ, an amount is taken, for the purposes of this Act, to have been borrowed (the 'notional borrowing') in a particular currency from a foreign bank by an Australian branch of the bank, the following provisions have effect:
(a) at any time (the 'relevant time') when, in respect of the notional borrowing, an amount (the 'notional amount of interest') is entered in the branch's accounting records as interest for a period fixed by the bank, interest is taken, for the purposes of this Act, to be incurred by the branch, paid by the branch to the bank, and derived by the bank, in respect of the notional borrowing;
(b) subject to the application of paragraph (c), the notional amount of interest is taken, for the purposes of this Act, to be the amount of interest so taken to be paid;
(c) if the interest on the notional borrowing at the relevant time was calculated at a rate of interest that exceeded the LIBOR that was applicable at the beginning of the relevant interest calculation period in relation to the notional borrowing, there is taken to have been entered in the branch's accounting records at the relevant time, in lieu of the notional amount of interest, the amount that would have been so entered if interest on the notional borrowing for the relevant interest calculation period had been calculated at the LIBOR that was applicable at the beginning of that period.
"(2) For the purposes of this section, a reference to the LIBOR that was applicable at the beginning of the relevant interest calculation period in relation to the notional borrowing is a reference to:
(a) the LIBOR applicable at the beginning of that period in respect of advances in the currency of that borrowing for a term the number of days in which was equal to the number of days in that period; or
(b) if there was no LIBOR applicable at the beginning of that period in respect of advances in the currency of that borrowing for such a term:
(i) the LIBOR applicable at the beginning of that period in respect of advances in that currency for a term the number of days in which most nearly approximated the number of days in that period; or
(ii) if there were different LIBORs so applicable for different terms the number of days in each of which could be described as having most nearly approximated the number of days in that period-the LIBOR so applicable for the shorter of those terms.
"(3) For the purposes of this section:
(a) a reference to LIBOR, in relation to a particular time, is a reference to the rate of interest applicable at that time in relation to banks in the London inter bank market as determined by reference to the Reuter Monitor Money Rates Service or any other published source; and
(b) a reference to the relevant interest calculation period in relation to a notional borrowing from a foreign bank by an Australian branch of the bank is a reference to the period fixed by the bank for the calculation of the notional amount of interest in respect of the notional borrowing.
Deductions in respect of interest
"160ZZZB.(1) If, apart from this section, an amount would be allowable as a deduction other than an allowable OB deduction (within the meaning of Subdivision B of Division 9A of Part III) under subsection 51(1) from the assessable income of an Australian branch of a foreign bank in respect of interest incurred by the branch in respect of money borrowed by the branch, the amount that is allowable as a deduction under that subsection from that assessable income in respect of that interest is the first-mentioned amount reduced by the notional equity requirement.
"(2) In subsection (1):
'notional equity requirement' means 4% of the amount first mentioned in that subsection.
Offshore banking units
"160ZZZC. If:
(a) apart from this section, a foreign bank would be an offshore banking unit under a declaration published under subsection 128AE(2); and
(b) the foreign bank has an Australian branch;
this Act has effect as if the Australian branch were the offshore banking unit under the declaration.
Thin capitalisation
"160ZZZD. A foreign bank that carries on banking business in Australia through an Australian branch is not taken to be a foreign investor for the purposes of Division 16F of Part III in respect of income derived by the bank through that branch.
Notional derivative transactions between branch and bank
"160ZZZE. If the accounting records of an Australian branch of a foreign bank reflect a derivative transaction notionally entered into by the branch with the bank:
(a) the notional transaction is taken to be a transaction entered into by the branch with the bank; and
(b) any amount entered in the branch's accounting records as a payment or receipt in respect of the notional transaction is taken, for the purposes of this Act, to be an amount paid or received by the branch, as the case may be, in respect of the derivative transaction when the amount was so entered.
Notional foreign exchange transactions between branch and bank
"160ZZZF. If the accounting records of an Australian branch of a foreign bank reflect a foreign exchange transaction notionally entered into by the branch with the bank:
(a) the notional transaction is taken to be a transaction entered into by the branch with the bank; and
(b) any amount entered in the branch's accounting records as a payment or receipt in respect of the notional transaction is taken, for the purposes of this Act, to be an amount paid or received by the branch, as the case may be, in respect of the foreign exchange transaction when the amount was so entered.
Losses
"160ZZZG. Section 80G has effect as if an Australian branch of a foreign bank were a subsidiary of the bank and a resident of Australia.
Capital losses
"160ZZZH. Section 160ZP has effect as if an Australian branch of a foreign bank were a subsidiary of the bank and a resident of Australia.
Certain transactions to be disregarded
"160ZZZI. Any transaction entered into by a foreign bank otherwise than through its Australian branch:
(a) under which finance is provided to the bank; or
(b) that is a derivative transaction or a foreign exchange transaction;
is to be disregarded for the purpose of determining whether a deduction is allowable to the bank under this Act.
"Division 3-Provisions relating to withholding tax
Withholding tax on interest paid by branch to bank
"160ZZZJ.(1) If:
(a) an amount of interest is taken under section 160ZZZA to be paid to, and derived by, a foreign bank by an Australian branch of the bank; and
(b) apart from this section, sections 128B and 221YL would apply to an amount (the 'taxable amount') that comprises the whole or a part of the amount so taken to be paid;
the following subsections have effect.
"(2) Sections 128B and 221YL apply only to the amount worked out using the formula:
Taxable amount less notional equity requirement / 2
where:
'notional equity requirement' means 4% of the taxable amount.
"(3) An amount to which section 128B applies because of subsection (2) of this section is taken, for the purposes of section 128C, to be income that was derived by the bank when the amount of interest referred to in paragraph (1)(a) is taken to have been paid to the bank.".