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23 Apr 077 Non-resident corporate beneficiary's interest income subject to withholding tax -GE Capital Finance

The Federal Court (Middleton J) has held that interest income to which a non-resident corporate beneficiary of a resident unit trust was presently entitled was subject to withholding tax under s 128B ITAA 1936 by virtue of the operation of s 128A(3). In so doing, the Court rejected the arguments of the Commissioner that the trustee of the unit trust was assessable under s 98(3) ITAA 1936 by virtue of the combined operation of s 3(11) and s 4 of the International Tax Agreements Act 1953.

The non-resident corporate beneficiary was a resident of the United States. It was accepted by the Commissioner that the non-resident beneficiary did not carry on business in Australia. However, the Commissioner argued that ss 128B and 128D did not apply because of the operation of s 128B(3)(h)(ii) - and that s 98(3) did apply - as the non-resident beneficiary was deemed by s 3(11) to have derived the interest income in carrying on business in Australia at or through a permanent establishment of the non-resident in Australia.

Under s 3(11), a resident of a taxation agreement partner country (in this case, the United States) who is entitled to a share of Australian source business profits derived by a trustee of a trust estate or unit trust from the carrying on of a business in Australia, is expressly to be taken as carrying on, through a permanent establishment in Australia, the business carried on by the trustee "for the purpose of determining whether the beneficiary’s share of the income may be taxed in Australia in accordance with the business profits article".

The Court said, at para 25:

"...the purpose for the introduction of s 3(11) was to amend Australian domestic law, without seeking to negotiate an amendment individually of each of Australia’s double taxation agreements. The aim was to put beyond doubt Australia’s "right" to tax distributions of the business profits in question pursuant to the business profits article. As the respondent contended, the mischief that was sought to be cured was payments made to a non-resident beneficiary escaping the operation of domestic tax law in circumstances where the business profits article would apply. However, there is nothing in the extrinsic materials referred to by the respondent that indicated that a purpose for the introduction of s 3(11) of the Agreements Act was to effect a change to the operation of s 128B or s 128D. The focus of the amendment was not upon interest income or the withholding tax provisions, or upon the circumstance that exists here where the business is carried on by a trustee who is in fact a resident of Australia."

GE Capital Finance Pty Ltd v FCT [2007] FCA 558 (Federal Court, Middleton J, 19 April 2007).

For a copy of the decision, go here

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