Income tax: is a payment made under a loan agreement with a foreign lender, which is (a) in addition to stipulated interest payments as per the agreement, (b) calculated at a specified percentage rate, and (c) designed to compensate the lender for timing differences between the deduction of Australian withholding tax and the crediting of the withholding tax against income tax imposed in the lender's home country,

Yes. We consider any payment by a borrower regardless of its description, calculated using a periodic percentage rate to compensate the lender for funding costs associated with differences in timing between the deduction of Australian withholding tax and the absorption, or offsetting, of the withholding tax against income tax imposed in the lender's home country, to be interest or in the nature of interest - as defined by subsection 128A(1). The payment is therefore subject to withholding tax under subsection 128B(5). Example: Austco has borrowed $100 000 from a foreign bank, Forbank. The terms of the contract include: - interest payable quarterly at 10% per annum - a 'fee' of 0.5% p.a. is payable to compensate for withholding tax paid. Austco is obliged to deduct interest withholding tax from both of the payments to Forbank.