The ATO will be closely scrutinising certain cross-border funding arrangements that seek to avoid payment of withholding tax.
The arrangements typically provide a deduction in Australia for the borrower on an accruals basis under the TOFA rules (Div 230 of ITAA 1997). They involve a non-resident providing funding to a related resident under a financial arrangement, for example a loan or redeemable preference shares, but where entitlement to interest on the funding is deferred and payable at the end of the arrangement.
The ATO has issued Taxpayer Alert TA 2018/4 stating its concern that tax-driven structuring of such arrangements produces an outcome where a current deduction is obtained under the TOFA rules, but where withholding tax is not paid.
The tax issues that can arise from these arrangements include that, the withholding tax liability arises even though interest is not paid, because it is dealt with on behalf of a non-resident, or whether the loss is sufficiently certain under Div 230, or whether the arrangement is actually an equity interest under Div 974 of ITAA 1997. Furthermore, the ATO has concerns that anti-avoidance provisions or promoter penalty laws may also apply to such transactions.
The ATO is currently reviewing these arrangements and engaging with taxpayers who have entered into, or are considering entering into such arrangements. In the ATO’s view, the more artificial the form of the relevant financial instrument, the more likely it will be regarded as a high risk. Taxpayers must be able to demonstrate that deferral of the interest entitlement is driven by commercial reasons and that withholding tax is paid once the entitlement becomes due.