Income tax: interest withholding tax exemption under section 128F of the Income Tax Assessment Act 1936 - when is a company taken to have the requisite knowledge or suspicion that interest was paid to an associate for the purposes of subsection 128F(6)?

Subsection 128F(6) disallows the exemption from interest withholding tax in section 128F in circumstances where the interest paid by the company is paid to an associate of the company and the company knows or has reasonable grounds to suspect such a person is an associate.

Whether or not a person is an 'associate' of the company (a defined term) is a question of fact, to be determined in light of the individual facts and circumstances of each case. In the case of registered debentures, the presence of an associate's name on the register on which the interests in the debentures are recorded (as at the date on which entitlement to interest is determined) would be considered as sufficient grounds for subsection 128F(6) to apply. However, in the case of bearer debentures, it is accepted a company would not know or have reasonable grounds to suspect who the holder is unless officers of the company knew or had reasonable grounds to suspect interest was paid to an associate of the company.

As set out in the explanatory memorandum accompanying the legislation, it would be prudent for companies issuing debentures, to '... direct related parties not to acquire the company's debentures'.