Income Tax Assessment Act 1936
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Hide history note(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.
Note:
This Part also:
(a) applies to foreign entities that are financial entities in the same way as it applies to foreign banks; and
(b) applies to permanent establishments in Australia of foreign entities that are financial entities in the same way as it applies to Australian branches of foreign banks.
See Division 4 .
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.
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.
160ZZVB(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;
the bank may elect that this Part is not to apply in the calculation of its taxable income of that year of income.
160ZZVB(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.
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 Division
230
financial arrangement (within the meaning of the
Income Tax Assessment Act 1997
) that is 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 entered into for the provision of finance or a foreign exchange transaction;
"foreign bank"
means a body corporate that is a foreign ADI (authorised deposit-taking institution) for the purposes of the
Banking Act 1959
;
"foreign exchange transaction"
means a transaction by which different currencies are exchanged;
interest
has the same meaning as in Division
11A
of Part
III
.
"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.
Subsections (2), (3), (4) and (5) apply only:
(a) for the purposes of sections 160ZZZ , 160ZZZA , 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.
To avoid doubt, subsection (2) applies for the purposes of applying Subdivision
230-A
of the
Income Tax Assessment Act 1997
to a financial arrangement (within the meaning of that Act).
Note:
This means that it is possible for financial arrangements to be entered into between the bank and the branch and for the bank or the branch to have a gain or loss from such an arrangement dealt with under Division 230 of the Income Tax Assessment Act 1997 .
The branch and the bank are taken to be, and to have been since the time of establishment of the branch, separate legal entities.
Note:
For cross-border transfer pricing, the rules in Subdivision 815-B of the Income Tax Assessment Act 1997 apply to the separate legal entity, rather than the rules for permanent establishments in Subdivision 815-C : see subsection 815-210(3) of that Act.
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.
160ZZW(4) [Branch deemed non-resident]The branch is taken to be a non-resident and to have been a non-resident since the time of its establishment.
160ZZW(5)(Repealed by No 101 of 2013)
Division 2 - Provisions relating to income tax SECTION 160ZZX INCOME OF BRANCH TO HAVE AUSTRALIAN SOURCE 160ZZX(1) [ Australian branch income]
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.
160ZZX(2) [ Australian branch financial arrangements]All gains from a Division 230 financial arrangement (within the meaning of the Income Tax Assessment Act 1997 ) made by a foreign bank through its Australian branch is taken, for the purposes of this Act, to be from an Australian source.
(Repealed by No 143 of 2007 )
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.
160ZZZ(2) [Amount made available by branch to bank]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.
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 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.
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
160ZZZA(3) [Reference to LIBOR; relevant interest calculation period]
(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.
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.
(Repealed by No 162 of 2001)
If:
(a) apart from this section, a foreign bank would be an offshore banking unit under a declaration made 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.
(Repealed by No 162 of 2001)
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.
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.
Subdivision 170-A of the Income Tax Assessment Act 1997 has effect as if an Australian branch of a foreign bank were a subsidiary of the bank and a resident of Australia.
Subdivision 170-B of the Income Tax Assessment Act 1997 (about transfer of net capital losses within wholly-owned groups of companies) has effect as if an Australian branch of a foreign bank were a 100% subsidiary (within the meaning of that Act) of the bank and an Australian resident (within the meaning of that Act).
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.
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, section 128B of this Act, and Subdivision 12-F in Schedule 1 to the Taxation Administration Act 1953 , 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.
160ZZZJ(2)
Section 128B of this Act, and Subdivision 12-F in Schedule 1 to the Taxation Administration Act 1953 , apply only to the amount worked out using the formula:
|
Taxable amount
2 |
160ZZZJ(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.
Division 4 - Extension of Part to Australian branches of foreign financial entities
The main objects of this section are:
(a) to treat foreign entities that are financial entities like foreign banks for the purposes of this Part; and
(b) to treat Australian permanent establishments of foreign entities that are financial entities like Australian branches of foreign banks for the purposes of this Part. 160ZZZK(2) Foreign financial entities treated like foreign banks.
This Part (except this Division) applies to a foreign entity that is a financial entity in the same way as this Part applies to a foreign bank.
160ZZZK(3) Australian permanent establishments treated like Australian branches.This Part (except this Division) applies to a permanent establishment in Australia of a foreign entity that is a financial entity in the same way as this Part applies to an Australian branch of a foreign bank.
160ZZZK(4) Definitions.In this section:
financial entity
has the meaning given by section
995-1
of the
Income Tax Assessment Act 1997
.
foreign entity
has the meaning given by section
995-1
of the
Income Tax Assessment Act 1997
.
Subsection (2) applies if:
(a) either:
(i) an amount of interest (a notional payment ) is taken under section 160ZZZA to be incurred by an Australian branch of a foreign bank in respect of a notional borrowing; or
(ii) an amount (also a notional payment ) is taken under section 160ZZZE to be an amount paid by an Australian branch of a foreign bank in respect of a notional derivative transaction; and
(b) the amount would, apart from this section, give rise to a deduction for the Australian branch in a year of income; and
(c) the amount of the deduction exceeds the amount worked out under subsection (3).
Neutralising hybrid mismatch outcomes
160ZZZL(2)
So much of the deduction as equals the excess worked out under paragraph (1)(c) is not allowable as a deduction for the year of income.
Extent to which notional payment gives rise to a deduction/non-inclusion outcome
160ZZZL(3)
For the purposes of paragraph (1)(c), sum the following amounts:
(a) the amount of the notional payment that is subject to foreign income tax;
(b) so much (if any) of the amount of the notional payment as it is reasonable to conclude is effectively funding expenses covered by subsection (4) or (5) (about non-deductible third party expenses);
(c) the amount (if any) of income or profits of the Australian branch that is both:
(i) subject to Australian income tax for the purposes of subsection 832-680(1) of the Income Tax Assessment Act 1997 in the year of income mentioned in paragraph (1)(b); and
(ii) subject to foreign income tax for the purposes of subsection 832-680(1) of the Income Tax Assessment Act 1997 in the foreign country in which the foreign bank is a resident.
Non-deductible third party expenses
160ZZZL(4)
For the purposes of paragraph (3)(b), if:
(a) the notional payment is in respect of a notional borrowing; and
(b) it is reasonable to conclude that the notional borrowing is effectively funded by actual borrowings by the foreign bank;
then the expenses in respect of the actual borrowings are covered by this subsection to the extent (if any) that those expenses do not give rise to foreign income tax deductions.
160ZZZL(5)
For the purposes of paragraph (3)(b), if:
(a) the notional payment is in respect of a notional derivative transaction; and
(b) it is reasonable to conclude that the foreign bank has hedged or managed all or part of its risk in relation to the notional derivative transaction by entering into actual transactions;
then the expenses in respect of the actual transactions are covered by this subsection to the extent (if any) that those expenses do not give rise to foreign income tax deductions.
Safe harbour
160ZZZL(6)
The deduction is taken for the purposes of paragraph (1)(c) not to exceed the amount worked out under subsection (3) if the foreign bank adopts a recognised transfer pricing methodology in allocating expenditure and income between itself and all its branches.
There is an adjustment under subsection (2) for the Australian branch in a year of income (the adjustment year ) if: (a) an amount of a deduction was not allowable for the branch in an earlier year of income under subsection 160ZZZL(2) ; and (b) this Part applies in the calculation of the foreign bank ' s taxable income in the adjustment year; and (c) an amount of income or profits of the Australian branch is:
(i) subject to Australian income tax for the purposes of subsection 832-680(1) of the Income Tax Assessment Act 1997 in the adjustment year; and
(ii) subject to foreign income tax for the purposes of that subsection in the foreign country in which the foreign bank is a resident.
160ZZZN(2)
So much of the amount of income or profits that satisfies paragraph (1)(c) as does not exceed the amount of the deduction that was not allowable is an amount the Australian branch can deduct in the adjustment year.
160ZZZN(3)
For the purposes of a later application of this section, treat the amount of the deduction that was not allowable under subsection 160ZZZL(2) as being reduced by the amount deducted under subsection (2).
For the purposes of paragraphs 160ZZZL(3)(c) and 160ZZZN(1)(c) , an amount of income or profits is to be disregarded if: (a) the amount is dual inclusion income; and (b) the amount has been applied by a provision of Division 832 of the Income Tax Assessment Act 1997 .
160ZZZP(2)
For the purposes of Division 832 of that Act, an amount of dual inclusion income is not available to be applied by a provision of that Division if it has been taken into account under paragraph 160ZZZL(3)(c) or subsection 160ZZZN(2) .
In this Division:
dual inclusion income
has the same meaning as in the
Income Tax Assessment Act 1997
.
foreign income tax deduction
has the same meaning as in the
Income Tax Assessment Act 1997
.
subject to Australian income tax
has the same meaning as in the
Income Tax Assessment Act 1997
.
subject to foreign income tax
has the same meaning as in the
Income Tax Assessment Act 1997
.