Tech post: Div 11A vs Div240

3IX37

It is just test to see how many of us would like a bit tech discussion on the forum. So the question is:

We all know that for non-resident, Au sourced interest income derived is subject to withholding tax under Division 11A. But what about Div240 income under finance lease for tax purpose? Would that income also or not subject to Div11A? And why or why not?

(Please do not consider treaty implication of concessional tax)

3IX37

After a bit looking around, it seems rather obvious to me.

s.240-10 clearly treates Hire & Purchase as notional loan, and under s.128AC(7) DIv11A, the withhodling tax is payable for the amount taken to be an interest from an attribatble agreement payment (s.128AC(5)) regarding to a relevent agreement made, which in turn was defined in s.128AC(1) being a hire-purchase agreement, or a lease agreement.

Strategically speaking, if someone operates in a Hire-lease business, it can be operated under an Unit trust with an Au trustee, but with all benefeciaries /unit holders as non-residents.

Consequently, all business income will be distributed to Non-resident beneficiaries, as the distributions would be mostly Au sourced DIv 240 income, as the result, only 10% interest w/h tax would be levied under Div11A, instead of 30% company tax rate.

Maybe Toyota or other major car dealerships, car loaners have already been playing this strategy.

Any share thoughts are welcome.

jeff_lawsons

3IX37 发表于 2013-4-25 12:38
After a bit looking around, it seems rather obvious to me.

s.240-10 clearly treates Hire & Purchas ...

Interest income derived by a non-resident in carrying on business through a permanent establishment in Australia is exempted from interest withholding tax.  

twins7

Part4A may apply for tax avoidance scheme

3IX37

jeff_lawsons 发表于 2013-5-26 20:03
Interest income derived by a non-resident in carrying on business through a permanent establishmen ...

To beneficiaries, they wouldn't be considered to carry a business in Au. The whole operation is carried by a trust, whose trustee is Au incorporated Company. To them, this is mainl just Au source interest income, wouldn't it?

3IX37

twins7 发表于 2013-5-26 21:10
Part4A may apply for tax avoidance scheme

Maybe, but what if part IVA dominant purpose test is satisfied? Having said that, the whole trust tax is under a reform right now. Let's see what would happen later.

jeff_lawsons

3IX37 发表于 2013-5-29 23:44
To beneficiaries, they wouldn't be considered to carry a business in Au. The whole operation is ca ...

Depends on the nature of the interest income. If it's passive income, then you are right.  A beneficiary is liable, under the withholding tax rules in Division 11A of Part III, for tax on Australian interest to which they are presently entitled while a non-resident.


However the interest income derived by the car dealers(Toyota, for example) is more likely to be a source of business income, then it is not a passive interest income, If the trust does not derive any of passive income then withholding tax should not be relevant. The trustee would be assessed on behalf of the non-resident beneficiary under s98 ITAA 1936. The rate of tax that a trustee pays in relation to a non-resident trustee beneficiary is the top tax rate for a non-resident individual.

3IX37

jeff_lawsons 发表于 2013-5-30 10:23
Depends on the nature of the interest income. If it's passive income, then you are right.  A benef ...

thanks for the feedback.

I will look into s.98 ITAA36. Having said that, wouldn't trust usually distribute all its tax profit? and to the non-resident beneficiaries, regardless whether the income is active for the trust, it would be a passive nature AU sourced interest income, wouldn't it?

3IX37

jeff_lawsons 发表于 2013-5-30 10:23
Depends on the nature of the interest income. If it's passive income, then you are right.  A benef ...

I had a quick look at s.98 ITAA36, it basically says that trustee is liable to the tax levied on the non-resident beneficiaries.
But note the tax is still taxed on beneficiaries' hand, the trustee is only liable on behalf of beneficiaries. In our case here, the trustee would be liable to the WTH tax.  what do you think?

xinxin119

read tr 98/21 and id 2005/263. hope this can help u

xinxin119

r u working in practice or doing research for you course ?

xinxin119

TR 2007/11

twins7

3IX37 发表于 2013-5-29 23:48
Maybe, but what if part IVA dominant purpose test is satisfied? Having said that, the whole trust  ...

So what is the dominant purpose in this structure? Not tax benefit?

The reform now aims to exclude 'no benefit no transaction' excuse.

3IX37

twins7 发表于 2013-5-30 23:10
So what is the dominant purpose in this structure? Not tax benefit?

The reform now aims to exclu ...

I am not saying that part IVA would not be considered. However, ATO will not consider Part IVA before it finishs all tests against other provisions. Part4A is usually last resort. Secondly, set aside the new reform, which has not passed the royal consent, it has always been very hard for ATO to prove the sole and dominant purpose of a scheme is for a tax benefit. Sure there might be a benefit, as tax is a big part of all business, it is a big part of every business. no one can ignore it. That is why there is a tax note on every financial statement of listed companies. But would the benefit be the sole and dominat purpose? Or just incidental?

3IX37

xinxin119 发表于 2013-5-30 22:52
TR 2007/11

This is very good, and it is worth more than 2 points, which sadly is my limit. Yes, it is for my general research, not for a course, but purely for my own curiosity. :)

xinxin119

3IX37 发表于 2013-5-30 23:40
This is very good, and it is worth more than 2 points, which sadly is my limit. Yes, it is for my  ...

what a 蛋疼的 curiosity.....杀了我多少脑细胞。。。

lee2267

xinxin119 发表于 2013-5-31 09:31
what a 蛋疼的 curiosity.....杀了我多少脑细胞。。。

9494..回到家。还要看这么大段的英文。。。累。。没哪个心思。。。

再加一个点。。出租的机器啥的记得一定要去政府注册。。
2011 新西兰的 有个案： 澳洲公司出租给新西兰的一个公司机器。。新西兰公司倒闭，机器被法拍，澳洲公司没拿到毛钱，
人律师说该机器没有在政府注册。不受保护。。