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The Government will phase down the Interest Withholding Tax (IWT) incurred by local subsidiaries and branches when they pay interest on borrowings from their overseas parents.

This reform also extends to Australian-owned financial institutions borrowing from related parties overseas, and any financial institution borrowing offshore retail deposits which they on-lend in Australia.

For local subsidiaries of overseas parents, the IWT rate will be reduced on such borrowings from 10% to 7.55 in 2013-14 and to 5 per cent in 2014-15. The Government is favourably disposed to reducing this rate to zero, subject to its medium-term fiscal objectives.

Additionally, the IWT rate applying to borrowings by any bank branch from its overseas head office will be reduced from 5% to 2.5% in 2013-14 and to zero in 2014-15.

As an integrity measure, the IWT phase-down will not apply to interest paid on non-resident retail deposits held in Australia. It will also not apply to offshore borrowings by entities that are not financial institutions.

This announcement implements a recommendation of the Australia's Future Tax System review.

For more information, see the joint media release issued by the Treasurer, Assistant Treasurer and the Minister for Financial Services, Superannuation and Corporate Law, No 2010/35, 11 May 2010.

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