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ATO Publishes Draft Revised Ruling on the Right to Tax Interest Income of Financial Institutions Under U.S. and UK Tax Treaties — Orbitax Tax News & Alerts

The Australian Taxation Office has published draft Taxation Ruling TR 2005/5DC2 (PDF with tracked changes), which provides extensive guidance on the ascertainment of the right to tax financial institutions under the tax treaties with the U.S. and the UK in respect of interest income arising in Australia. Draft TR 2005/5DC2 includes proposed changes to TR 2005/5 to clarify the ATO's view on aspects of the definition of 'financial institution' as used in Australia's tax treaties with the U.S. and the UK.

One important change concerns the application of the ruling beyond the U.S. or UK tax treaties. This includes that the ruling also covers interest income derived by financial institutions in other countries with which Australia has a tax treaty if such other treaty contains an interest article that is similarly worded and has the same effect as those in the U.S. or UK treaties.

The actual ruling itself is largely unchanged, as follows:



10. Where a US or UK resident:

  • satisfies the definition of 'financial institution';
  • is beneficially entitled to, or beneficially owns the interest; and
  • is unrelated to, and dealing wholly independently with the payer of the interest,

and the interest arising in Australia is not:

  • effectively connected with a permanent establishment in Australia of the US or UK resident; nor
  • paid as part of an arrangement involving 'back to back' loans,

Australia has no taxing rights under Article 11(2) of the Conventions in respect of interest paid to the US or UK resident. Accordingly, payers of interest of this type have no obligation under section 12-245 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to withhold tax from such payments made to these US or UK residents. This is because no withholding tax is payable in respect of the interest under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936).