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Non-resident withholding tax draft guidance

Non-resident withholding tax draft guidance

KPMG's Natalie Raju, Matthew McRae and Louis Raymond explore the draft ruling consolidation TR 2005/5DC which seeks to clarify the definition of a ‘financial institution’ under the treaty interest withholding tax exemption for non-resident lenders.

Natalie Raju

National Lead, Financial Services Tax

KPMG Australia


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The Australian Taxation Office has published a draft ruling consolidation TR 2005/5DC that proposes clarifications to Taxation Ruling TR 2005/5. Taxation Ruling TR 2005/5 was originally introduced to provide guidance for taxpayers around certain undefined terms within the financial institutions exemption from interest withholding tax under the United States (US) and United Kingdom (UK) Double Tax Conventions.

Under Article 11(2) of Australia’s Double Tax Conventions with the US and UK, Australia has a right to tax interest payments made to a US or UK resident that arise in Australia, except where the payments are made to US or UK residents that are:

  • ‘financial institutions’,
  • beneficially the owners of, or entitled to, the interest,
  • unrelated to the interest payer, and
  • dealing wholly independently with the payer of the interest,

and the interest received is:

  • not paid as part of a ‘back to back’ arrangement, or
  • not effectively connected with a permanent establishment in Australia of the US or UK resident.

The draft ruling consolidation seeks to clarify several undefined terms within the definition of ‘financial institution’ according Article 11(3)(b) of the Conventions. The draft ruling also sets out the additional conditions that a US or UK resident must meet for it to be subject to tax on interest payments arising in Australia.

Expansion to cover similarly worded treaties

The first welcome clarification to the ruling is the expansion of its coverage to include some of the newer treaties that have also adopted the financial institutions exemption (eg France, Germany, Switzerland, Norway, Finland, Japan, etc). This ruling will now apply to articles contained in Australia’s tax treaties which are similarly worded and have the same effect as the financial institution exemption in the US and UK treaty.

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