1 Are gains you have made from the disposal of your Australian securities assessable under section 26BB of the Income Tax Assessment Act 1936 (ITAA 1936)?
1 Yes. Question 2 Are losses you have incurred from the disposal of your Australian securities deductible under section 70B of the Income Tax Assessment Act 1936 (ITAA 1936)? Answer 2 Yes. Issue 2 Taxation of interest income earned on traditional securities by an individual who is a foreign resident Question 3 Is the interest earned from your Australian securities non-assessable non-exempt income in accordance with section 128D of the ITAA 1936? Answer 3 Yes. This ruling applies for the following period : Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
You are not a resident of Australia for taxation purposes. You have purchased a portfolio of Australian debt securities (the securities/bonds). You purchased all of the bonds through a large Australian financial services provider. You disposed of some of the bonds (the sold bonds/securities) in the relevant income year through an Australian financial advice provider. You continue to hold some of the bonds. You are not in the business of trading bonds or securities. All of the bonds were issued at par value. In the relevant income year you received coupon interest from the bonds. You did not convert any of the bonds to any other instruments or shares. You did not receive any deferred interest payments from any of the bonds. Assumptions All of the bonds with the exception of the foreign company issued corporate bond are issued in a manner that satisfied the public officer test under section 128F of the ITAA 1936.
All of the bonds have a fixed return at 100% of the issue price, there is no conditions within the securities that would make it likely that they would exceed their issue price on redemption. As such, all of the bonds will not have an eligible return as defined in subsection 159GP(3) of the ITAA 1936. All the bonds are not considered trading stock. All of the bonds have not been and will not be redeemed for shares.
Income Tax Assessment Act 1936 Division 11A Income Tax Assessment Act 1936 section 26BB Income Tax Assessment Act 1936 section 70B Income Tax Assessment Act 1936 section 128B Income Tax Assessment Act 1936 subsection 128B(2A) Income Tax Assessment Act 1936 subsection 128B(2C) Income Tax Assessment Act 1936 subsection 128B(9C) Income Tax Assessment Act 1936 subsection 128B(3) Income Tax Assessment Act 1936 subsection 128B(3) Income Tax Assessment Act 1936 section 128D Income Tax Assessment Act 1936 section 128F Income Tax Assessment Act 1936 subsection 128F(3) Income Tax Assessment Act 1936 section 128FA Income Tax Assessment Act 1936 section 128GB Income Tax Assessment Act 1936 subsection 159GP(3)
Issue 1 Question 1 Are gains you have made from the disposal of your Australian securities assessable under section 26BB of the Income Tax Assessment Act 1936 (ITAA 1936)? Answer 1 Yes. Detailed reasoning Subsection 26BB(2) of the ITAA 1936 operates to include gains made upon the disposal or redemption of traditional securities in the assessable income of a taxpayer in the year of disposal. For the securities in Tables 1 and 2 to be assessable under subsection 26BB(2) of the ITAA 1936 they must satisfy the definition of 'traditional security' in subsection 26BB(1) of the ITAA 1936, relevantly that section provides: traditional security , in relation to a taxpayer, means a security held by the taxpayer that: (a) is or was acquired by the taxpayer after 10 May 1989; (b) either: (i) does not have an eligible return; or (ii) has an eligible return, where: (A) the precise amount of the eligible return is able to be ascertained at the time of issue of the security; and (B) that amount is not greater than one 0.5% of the amount calculated in accordance with the formula: Payments x Term where:
Payments is the amount of the payment or of the sum of the payments (excluding any periodic interest) liable to be made under the security when held by any person; and Term is the number (including any fraction) of years in the term of the security; and (d) is not trading stock of the taxpayer. Subsection 159GP(3) of the ITAA 1936 defines the term 'eligible return': For the purposes of this Division, there shall be taken to be an eligible return in relation to a security if at the time when the security is issued it is reasonably likely, by reason that the security was issued at a discount, bears deferred interest or is capital indexed or for any other reason, having regard to the terms of the security, for the sum of all payments(other than periodic interest payments) under the security to exceed the issue price of the security, and the amount of the eligible return is the amount of the excess.
The securities were acquired by you after 10 May 1989. The securities are not reasonably likely to exceed their issue price on redemption and therefore do not have an eligible return as described in subsection 159GP(3) of the ITAA 1936. The securities are not trading stock for the purposes of the ruling. The securities are traditional securities for the purposes of section 26BB of the ITAA 1936 and any gain upon disposal would be included in your assessable income. Question 2 Are losses you have incurred from the disposal of your Australian securities deductible under section 70B of the Income Tax Assessment Act 1936 (ITAA 1936)? Answer 2 Yes. Detailed reasoning Section 70B of the ITAA 1936 provides that a deduction is allowable upon the disposal or redemption of traditional securities in the year of disposal. Subsection 70B(2) of the ITAA 1936 provides: Where a taxpayer disposes of a traditional security or a traditional security of a taxpayer is redeemed, the amount of any loss on the disposal or redemption is allowable as a deduction from the assessable income of the taxpayer of the year of income in which the disposal or redemption takes place.
You have incurred losses on the disposal of your securities, these securities are considered traditional securities for the purposes of both sections 26BB and 70B of the ITAA 1936. The losses in relation to the disposal of the securities are therefore deductible under section 70B of the ITAA 1936. Issue 2 Question 3 Is the interest earned from your Australian securities non-assessable non-exempt income in accordance with section 128D of the ITAA 1936? Answer 3 Yes. Detailed reasoning Section 128D of the ITAA 1936 deems receipts of interest on traditional securities to be non-assessable non-exempt income for applicable foreign investors. The application of section 128D of the ITAA 1936 is, however, restricted to those entities who satisfy the required prerequisites listed under the provision, which states: Income other than income to which section 128B applies by virtue of subsection (2A), (2C) or (9C) of that section upon which withholding tax is payable, or upon which withholding tax would, but for paragraph 128B(3)(ga), (jb) or (m), section 128F, section 128FA or section 128GB, be payable, is not assessable income and is not exempt income of a person.
Section 128B of the ITAA 1936 applies interest withholding tax to receipts by entities which meet the criteria therein contained. As such, subsections 128B(2A), (2C), and (9C) must not apply for section 128D of the ITAA 1936 to be effective. Subsection 128B(2A) applies to business entities with respect to relevant interest income earned in Australia. The provision states: Subject to subsection (3), where income: (a) is, or has, after 2 July 1973, been, derived, or derived in part, by a person to whom this section applies in carrying on business in a country outside Australia at or through a permanent establishment of the person in that country; and (b) c onsists of interest that: (i) is or has been paid to the person by another person to whom this section applies and is not an outgoing wholly incurred by that other person in carrying on business in a country outside Australia at or through a permanent establishment of that other person in that country; or
(ii) is or has been paid to the first-mentioned person by a person who is, or by persons each of whom is, not a resident and is, or is in part, an outgoing incurred by that last-mentioned person or those last-mentioned persons in carrying on business in Australia at or through a permanent establishment of that last-mentioned person or those last-mentioned persons in Australia; this section also applies to that income or to the part of that income so derived, as the case may be. Therefore, section 128D will not apply to entities involved in a business of securities trading. Subsection 128B(2C) similarly applies to business entities with respect to relevant royalty income earned in Australia. The provision states: Subject to subsection (3), where income: (a) is derived, or derived in part, by a person (the recipient ) to whom this section applies in carrying on business in a country outside Australia at or through a permanent establishment of the person in that country; and (b) consists of a royalty that: (i) is paid to the recipient by another person (the payer
) to whom this section applies and is not an outgoing wholly incurred by the payer in carrying on business in a country outside Australia at or through a permanent establishment of the payer in that country; or (ii) is paid to the recipient by one or more persons (the non-resident payers ), each of whom is not a resident, and is, or is in part, an outgoing incurred by the non-resident payers in carrying on business in Australia at or through a permanent establishment of the non-resident payers in Australia; this section also applies to that income or to the part of that income mentioned in paragraph (a). As such, section 128D will not apply to foreign business entities earning Australian-sourced royalty income. Subsection 128B(9C) provides: If: (a) apart from this subsection, tax would be payable under subsection 126(1) on an amount of interest paid to a person; and (b) section 128F would apply to the interest, assuming that paragraph (1)(e) of that section had not been enacted; then: (c) despite anything else in this section, the interest is taken, for the purposes of this Division, to be income derived by the person and to be income to which this section applies; and (d)
in addition to the effect of any credit arising under section 18-30 in Schedule 1 to the Taxation Administration Act 1953 in respect of the interest, the total tax payable by the person, other than under this section, is reduced by the amount of any tax payable under this section on the interest; and (e) tax paid under this section on the interest is not an allowable deduction. Paragraph 128B(9C)(c) of the ITAA 1936 confirms that interest receipts to which section 128F of the ITAA 1936 apply are not subject to tax under subsection 126(1) of the ITAA 1936, as such no withholding tax is incurred upon these receipts. Application to your circumstances You are not in the business of share trading, therefore subsections 128B(2A) and 128(2C) of the ITAA 1936 will not apply. Section 128(9C) of the ITAA 1936 confirms that the receipts of interest income you receive will not be taxed under subsection 126(1) of the ITAA 1936 as section 128F will apply to these receipts.
Therefore, the requirements of section 128D of the ITAA 1936 are satisfied and interest payments you receive on the securities will be non-assessable non-exempt income conditional upon satisfaction of 128B(3)(ga), (jb) or (m), section 128F, section 128FA, or section 128GB of the ITAA 1936. Division 11A of the ITAA 1936 contains the provisions which dictate the taxation of dividends, interest, and royalties paid to non-residents and certain other persons, including non-resident interest withholding tax provisions in section 128B. However, subparagraph 128B(3)(h)(iv) of the ITAA 1936 provides that the withholding tax provisions of section 128B do not apply to interest to which section 128F of the ITAA 1936 applies. Section 128F of the ITAA 1936 provides that Division 11A of the ITAA 1936 does not apply to interest paid by Australian resident companies to foreign investors, dependent on a number of qualifying criteria. Relevantly, the issue of the debt interest must satisfy the public offer test described in subsection 128F(3) of the ITAA 1936, which requires that the issue of the debt must be offered to:
• at least 10 persons carrying on a business of providing finance who are not associates of the issuer of the debt as per paragraph 128F(3)(a) of the ITAA 1936, or • at least 100 persons who it would be reasonable to regard as having acquired debt interests in the past, or are likely to be interested in acquiring debt interests as per paragraph 128F(3)(b) of the ITAA 1936. Paragraph 128F(3) provides: The issue of a debenture or debt interest by a company satisfies the public offer test if the issue resulted from the debenture or debt interest being offered for issue: (e) to a dealer, manager or underwriter, in relation to the placement of debentures or debt interests, who, under an agreement with the company, offered the debenture or debt interest for sale within 30 days in a way covered by any of paragraphs (a) to (d). Section 128D of the ITAA 1936 confirms that interest payments which section 128F excludes from being subjected to interest withholding tax under section 128B are non-assessable non-exempt income.
The securities were purchased through an Australian financial services provider. The term sheets of each security stated that they were offered in a manner which would satisfy the public offer test, and each of the securities were offered on the Australian corporate debt market at large. As such, the withholding tax provisions of section 128B of the ITAA 1936 will not apply to interest payments received in respect of the securities. Section 128D of the ITAA 1936 confirms that these payments are non-assessable, non-exempt income. Therefore, interest payments for the securities are not assessable.