The Taxation of Cross-Border Interest in Australia

This article summarises and analyses Australia's treatment of interest expense for tax purposes, with a focus on cross-border interest. It covers the definition of interest for tax purposes, payments equivalent to interest, the circumstances in which interest is deductible to the lender and assessable to the borrower, and whether status as a resident or non-resident of Australia makes a difference. Australia's thin capitalisation rules, which are aimed at preventing excessive debt deductions, are analysed in detail. Australian tax treaty practice with respect to interest deductions and income is considered, particularly in the context of Australian withholding taxes on outbound interest. The Australian foreign tax credit is also considered, particularly with respect to foreign tax on inbound interest. Recent developments in IFRS, Tier 1 capital and anti-avoidance are also considered