Deemed interest in respect of a hire purchase agreement for non-resident interest withholding tax purposes

Where both Division 240 of the Income Tax Assessment Act 1997 (ITAA 1997) and section 128AC of the Income Tax Assessment Act 1936 (ITAA 1936) apply to an arrangement entered into by the taxpayer, is the notional interest for an arrangement payment determined under Division 240 relevant for determining the notional interest for an attributable agreement payment for the purposes of the interest withholding tax provision in section 128AC?

No. The notional payments determined under Division 240 of the ITAA 1997 would not be relevant for the purposes of section 128AC of the ITAA 1936. The implicit interest component of actual rental payments made, or liable to be made, under the hire purchase agreement will be determined according to the requirements of section 128AC.

The taxpayer is a resident of Australia for tax purposes.

In July 2003, the taxpayer entered into an agreement with a non-resident plant supplier for plant used by the taxpayer in carrying on a business for the purpose of producing assessable income. The agreement conferred upon the taxpayer a right to use and possess the plant, and an option to purchase the plant at the end of the term of the agreement.

On the facts of the case: • Division 240 of the ITAA 1997 would apply to the agreement which met the paragraph (a) definition of 'hire purchase agreement' in subsection 995-1(1) of the ITAA 1997. • Section 128AC of the ITAA 1936 would apply to the agreement in accordance with Taxation Ruling TR 98/21.

The plant supplier has an address outside Australia.

In the present case both Division 240 of the ITAA 1997 and section 128AC of the ITAA 1936 applied to the arrangement between the taxpayer and the non-resident plant supplier.

Division 240 of the ITAA 1997 has no effect for the purposes of Division 11A of Part III of the ITAA 1936 (paragraph 240-15(b) of the ITAA 1997). Hence, the implicit interest component of actual rental payments made, or liable to be made, under the hire purchase agreement would be determined according to the requirements of section 128AC of the ITAA 1936.