The Australian Taxation Office has issued Taxpayer Alert (TA) 2020/3 on arrangements involving interposed offshore entities to avoid interest withholding tax.
We are reviewing arrangements which use offshore related entities to facilitate the avoidance of a withholding tax liability in relation to interest expenses deducted against Australian-sourced income and paid to non-residents.
The arrangements involve a non-resident deriving Australian-sourced income and incurring interest expenses (commonly from debt sourced from a related party) deductible against that income.
Relevant arrangements typically display some or all of the following features:
- an Australian resident flow-through trust with one or more non-resident investors
- the non-resident investor holds its interest in the resident trust through an interposed offshore entity (usually in a third jurisdiction which is a low or no tax jurisdiction and which is not part of the Australian tax treaty framework)
- the interposed beneficiary is financed in part or in whole by (usually, related-party) debt
- the interest rate on the debt is at a significant premium to referrable third-party debt, or the lending entity's cost of funds (and the arrangement would usually fall outside the 'green zone' referred to in PCG 2017/4)
- the resident trust derives Australian-sourced income and makes distributions to the interposed beneficiary
- the interposed beneficiary deducts the interest expense against the Australian income it receives from the trust.
We are not concerned with structures where deductible interest payments by a non-resident are merely incidental to what can be evidenced as ordinary and commercially appropriate business decisions.