Contact: Gavin Clancy
Deloitte
Communications Manager
+61 3 9208 7759

Contact: Craig Saunders
Deloitte
International Tax Partner
+61-3-9208 6896

A draft tax ruling issued by the Australian Taxation Office today provides welcome guidance on offshore borrowing by Australian banks and other corporates, but further clarification is needed on the issue of borrowing through subsidiaries of offshore institutions, according to Deloitte.

The draft ruling relates to an exemption from Australian interest withholding tax (IWT) on borrowings by Australians from UK and US financial institutions.  The exemption lowers the cost of borrowing from these countries, as borrowers normally bear the cost of IWT on offshore debt.

Deloitte International Tax Partner Craig Saunders said the draft ruling (TR 2004/D16) provided welcome guidance on key aspects of the IWT exemption, including financing using debt-equity hybrids, leasing and securities lending and repurchase agreements.

Mr Saunders said: “The draft ruling shows the ATO is in step with modern offshore financing arrangements.  Allowing such arrangements to be exempt from IWT will give Australian corporates more opportunities to lower their cost of debt by accessing UK and US financial markets.”

However, Mr Saunders said concerns remained for offshore borrowing via subsidiaries of UK and US financial institutions.

“The ATO has taken a strict view and has decided that borrowing via subsidiaries cannot qualify for the IWT exemption under the relevant tax treaties with the US and the UK.  This is unfortunate, as financial institutions commonly provide finance via their subsidiaries,” he said.

Mr Saunders said the ATO was understood to be undertaking further industry consultation on this issue, and it was hoped that a workable solution may eventually be reached. 

“It is important to resolve this issue, otherwise access to the UK and US financial markets will be impeded unnecessarily,” he said.