Non-resident withholding tax

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Earlier this year we learnt that taxpayers who had loans from Australian banks in respect of investment properties that they had bought in Queensland (in particular) were required to deduct withholding tax from the interest prior to the interest being paid to the Australian bank. What was or is the rate of the withholding tax and is it applicable to a loan from the Bank of Melbourne? (The Bank of Melbourne is a division of Westpac.) ANSWER

Answer
For non-resident withholding income comprising interest, the rate of non-resident withholding tax (NRWT) is 15% of the gross amount of the income. In the case of interest paid in Australia, however, the double tax agreement with New Zealand provides that the NRWT on interest paid to an Australian resident is 10%.

There is no requirement for NRWT to be paid if the loan is from a bank operating in Australia with a branch in New Zealand. Under s NG 1 of the Income Tax Act, interest derived by a person carrying on business through a fixed establishment in New Zealand is excluded from the definition of non-resident withholding income.

The following list of the banks operating in Australia with a branch in New Zealand has been obtained from the Reserve Bank of New Zealand:

1. ABN AMRO;
2. AMP Bank;
3. Bank of Tokyo-Mitsubishi (Australia);
4. Banque Nationale de Paris;
5. Citibank;
6. Deutsche Bank;
7. Hongkong and Shanghai Bank;
8. Kookman Bank;
9. PIBA;
10. Rabobank; and
11. Westpac.

It is important to note, however, that the NRWT rules do not apply just to bank borrowings. It is possible, therefore, that a lender has a fixed establishment in New Zealand but is not a registered bank, in which case the exemptions regarding fixed establishments could still apply.

The IRD non-resident centre has confirmed that Westpac is a branch of the Bank of Melbourne and that the exemption therefore applies to the Bank of Melbourne from 3 May 1998. Interest paid prior to 3 May 1998 is liable for NRWT.

Income Tax Act 1994, ss NG 1(2)(b), NG 2(1), OB 1 ("fixed establishment").
Double Taxation Relief (Australia) Order 1995, art 11.

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