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Australia is reinforcing tax rules for international capital deployment, focusing on interest withholding tax (WHT) for foreign lenders and new thin capitalisation rules effective from 1 July 2023. The measures aim to prevent excessive deductions on cross-border debt while providing exemptions under certain conditions.
Interest Withholding Tax (WHT) on Foreign Lenders
Australia imposes a 10% WHT on interest payments to foreign resident lenders, payable within 21 days after the month the interest is deemed paid. Borrowers are responsible for covering this tax, typically through a gross-up mechanism in financing agreements.
The WHT applies to:
- Interest paid by Australian resident borrowers to non-resident lenders not operating in Australia.
- Interest paid by non-resident borrowers operating via a permanent establishment in Australia.
Exemptions and Treaties
Certain double tax treaties (e.g., with France, UK, and the US) reduce WHT on interest to zero for qualifying financial institutions or government bodies. Additional exemptions exist under Sections 128F and 128FA of the Income Tax Assessment Act 1936, covering specific debt interests and debentures that meet public offer or syndicated loan criteria.
Syndicated Loan and Public Offer Tests
To qualify for exemptions, borrowers must meet criteria under either the syndicated loan or public offer test, ensuring loans or debentures are issued to multiple independent lenders or offered publicly. Compliance is critical to avoid triggering anti-avoidance provisions under Part IVA.
Thin Capitalisation Rules
New thin capitalisation rules, effective 1 July 2023, limit excessive cross-border interest deductions exceeding AUD 2 million on an associate-inclusive basis. Exceptions include third-party debt and conduit financing arrangements, provided the terms align closely with original financing agreements and the lender has recourse only to Australian assets.
Planning Opportunities
Companies can leverage the alignment between thin capitalisation restrictions and Sections 128F/128FA exemptions to bring unrelated third-party debt into Australia without triggering debt denial provisions, offering a strategic avenue for international financing while remaining compliant.
Key Points / Summary:
- 10% WHT applies to interest payments to foreign lenders.
- Exemptions exist under double tax treaties and ITAA Sections 128F/128FA.
- Syndicated loan and public offer tests determine eligibility for exemptions.
- Thin capitalisation rules restrict excessive cross-border interest deductions.
- Planning opportunities exist for third-party financing while avoiding anti-avoidance provisions.
