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Deferred interest entitlement in ATO sights

Deferred interest entitlement in ATO sights

Jenny Wong discusses the Australian Taxation Office's focus on financing with accrued deductions and withholding tax deferral or avoidance.

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Jenny Wong

Director, Australian Tax Centre

KPMG Australia

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The Australian Taxation Office (ATO) is focussing on financing arrangements that result in accrued deductions and also withholding tax deferral or withholding tax avoidance.

In Taxpayer Alert 2018/4, released on 20 December 2018, the ATO has advised that it is reviewing inbound cross-border financing arrangements that have the following features:

  • A deferred interest entitlement that is payable at the end of the financial arrangement;
  • Interest deductions are claimed throughout the term of the arrangement on an accrual basis under the Taxation of Financial Arrangements (TOFA) provisions; and
  • Withholding tax is deferred until the interest entitlement arises ( ie at the end of the financial arrangement).

The ATO has indicated that in order for it to accept that such an arrangement is low risk, the taxpayer should be able to convincingly demonstrate with evidence that deferral of the entitlement to interest is driven by commercial non-tax factors and that withholding tax is paid when the interest entitlement becomes due.

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