• Service: Tax, Corporate Tax
  • Industry: Financial Services
  • Type: Regulatory update
  • Date: 1/11/2013

Tax Insights

KPMG's analysis of tax issues and developments.

Jenny Clarke

Jenny Clarke
Partner, Tax

+61 2 9335 7213

Australia’s interest withholding tax regime 

by Jenny Clarke, Financial Services Specialist

The Johnson report, commissioned in 2008 and released in 2010, considered a raft of measures designed to develop Australia as a global financial centre. Amongst other things, particular attention was given to the Australian withholding tax regime and interest paid by foreign bank branches.

A number of issues were raised. Specifically, the current level of withholding tax is seen as an impediment to the access of offshore capital driven in part by inconsistencies in levying interest withholding tax on offshore borrowings. Further, the interest withholding tax costs are usually passed on to borrowers increasing the cost of borrowing for non-residents.


As part of the recommendations, the report suggested interest withholding tax be eventually phased down and cease to apply on any borrowings from foreign bank head offices to their branches in Australia. For other financial institutions, it was suggested that the rate on borrowings from foreign financial institutions was to be eventually phased down to 5 percent with an aspirational target of 0 percent.


These recommendations were seen as beneficial for capital markets and the financial services industry in Australia. At the time of the release of the report, the then Labor Government provided initial support of the recommendations. In the 2010/11 budget commitments were made by the government to undertake a phase down of the rate of interest withholding tax for financial institutions from 2013-14.


In November 2011, the then Assistant Treasurer disappointingly announced the deferral and extension of the proposed phase down of interest withholding tax with the announced changes fully taking effect from 2015-16.


The current government has unfortunately indicated that the phase-down of interest withholding tax is to be discontinued. This was announced during the election campaign and forms part of the additional savings from the abolition of the minerals resource rent tax (MRRT).


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