Deduction for interest paid to overseas lender: withholding tax paid

Is the taxpayer, who borrows funds for an income producing purpose from an overseas source, entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for interest paid to the lending entity, if the taxpayer deducts and remits withholding tax from the payments?

Yes. The taxpayer, who borrows funds for an income producing purpose from an overseas source, is entitled to a deduction under section 8-1 of the ITAA 1997 for interest paid to the lending entity, if the taxpayer deducts and remits withholding tax from the payments.

The taxpayer borrows money for an income producing purpose.

The lending entity is located overseas.

The loan contract requires the taxpayer to make monthly interest payments to the lending entity. The taxpayer is required under the contract to deduct withholding tax from the interest payments and remit it to the Tax Office on behalf of the lending entity.

Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Interest is deductible under section 8-1 of the ITAA 1997 to the extent that it is incurred in relation to funds used for an income producing purpose.

However, section 26-25 of the ITAA 1997 provides that interest is not deductible if the taxpayer has not met the withholding tax requirements of the Taxation Administration Act 1953 (TAA 1953).

Section 12-245 of Schedule 1 to the TAA 1953 provides that an entity must withhold an amount from interest that it pays to another entity if the recipient has an address outside Australia.

Providing the taxpayer deducts and remits the withholding tax from their interest payments, section 26-25 of the ITAA 1997 will not apply to deny them a deduction. Therefore, the taxpayer will be entitled to a deduction under section 8-1 of the ITAA 1997 for the interest payments.