Australia Reaffirms Withholding Tax Policy

by Mary Swire, Tax-News.com, Hong Kong

26 May 2010

The Australian government’s Minister for Financial Services, Chris Bowen, and the Assistant Treasurer, Nick Sherry on May 25 called for opposition parties to withdraw their opposition to tax reforms, which would facilitate the introduction of a lower interest withholding tax rate, as announced in the recent budget.

The two ministers recalled the opposition's previous endorsement of the Johnson report on promoting Australia as a financial services centre, with National Party MP, Luke Hartsuyker urging the government to “[take] the Johnson Report more seriously, because it contains some innovative measures to encourage international financial trading in Australia."

However just two months later, the ministers noted that the Coalition was opposed to the government's proposed reduction in interest withholding tax, a key recommendation of the Johnson report.

"By committing to overturn the interest withholding tax reforms, the Coalition is damaging Australia's status as a financial services centre – you can't be in favour of growing Australia as a regional financial services sector, yet oppose every policy setting that is designed to achieve that outcome," Bowen said.

"In seeking to overturn this measure, [the Opposition] is coming down on the side of less banking competition and more expensive loans for Australian households and businesses," added Sherry.

Under the proposals, a reduced interest withholding tax (IWT) rate would apply to Australian-owned financial institutions borrowing from related parties overseas and any financial institution borrowing offshore retail deposits which they on-lend in Australia.

In addition, for local subsidiaries of overseas parents the IWT rate would be reduced on borrowings from 10% to 7.5% in 2013-14 and to 5% in 2014-15. The IWT rate applying to borrowings by any bank branch from its overseas head office would also be reduced from 5% to 2.5% in 2013-14 and then tax exempt by 2014-15.

"The Rudd government's reform package - the Superannuation reforms, the incentive for deposit savings and the cut to IWT - [would] grow our financial services sector because it's based on lifting national savings and funds under management," Bowen said.

The proposed tax cut to the IWT rate would be funded from the government's recently announced Resource Super Profits Tax, which the Liberal Democrat party has adamantly opposed.

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