Alert – Withholding tax reductions deferred by one year by Australian Government

The Australian Government announced in the 2010-11 Budget that it would phase down the rate of interest withholding tax (IWT) for financial institutions from 2013-14.  This measure has now been deferred by one year to 2014-15 (saving the Budget A$70 million in each of 2013-14 and 2014-15).

IWT is generally levied at the rate of 10 per cent when interest payments are made on overseas borrowings.  Where IWT applies, it may be passed on to Australian borrowers through higher interest rates and may also bias the funding choices of financial institutions.

The one-year deferral will mean that:

• The rate of IWT for foreign bank branches that borrow from their overseas head office will fall from 5 per cent to 2.5 per cent in 2014-15, and to zero in 2015-16.
  
  
• The rate of IWT for other financial institutions that borrow from foreign financial institutions, and financial institutions that borrow from offshore retail deposits, will fall from 10 per cent to 7.5 per cent in 2014-15, and to 5 per cent in 2015-16.

The 2010-11 Budget Papers noted that "phasing down IWT will help support banking competition, put downward pressure on interest rate margins and enhance Australia's status as a regional financial centre". 

The removal of IWT was also recommended by the Australian Financial Centre Forum in its report "Australia as a Financial Centre: Building on our strengths".

Interest paid on overseas borrowings by other 'Australian' borrowers will continue to attract a 10 per cent IWT unless an IWT exemption applies (eg, a public offer of debentures or a public offer of a syndicated loan facility of at least A$100 million) or a reduced (nil) withholding rate applies under one of Australia's Double Tax Agreements (eg, UK, USA, Japan).