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On 7 June 1993, Lockhart J handed down the judgment in Spotless Services Ltd v FCT (1993) 93 ATC 4397. The decision concerned the source of interest income to an Australian resident company and the application of Pt IVA of the Income Tax Assessment Act (the Act) to an arrangement designed to attribute a particular source to the interest income.
This article examines the basis of the decision as to the source of the interest income and the operation of Pt IVA.
The judgment itself relates to "source" as used in s 23(q) of the Act which has now been repealed. However, source is still important and relevant to many aspects of taxation, including s 25(1) (particularly in relation to non-residents), Div 13 and also provisions such as the Foreign Tax Credit and Controlled Foreign Company provisions in Div 18 of Pt III and Pt X of the Act respectively.
BACKGROUND
The case centred on interest received by Spotless Services and Spotless Finance (collectively referred to as Spotless) from the European Pacific Banking Company Ltd (EPBCL) on a deposit with EPBCL in the Cook Islands during the year ended 30 June 1987. Spotless claimed that s 23(q) applied because the income had been derived from sources in the Cook Islands and had been subjected to Cook Islands withholding tax. The Commissioner assessed Spotless on the basis that the interest income was derived from sources in Australia and as such was not exempt under s 23(q) and, alternatively, he sought to rely on Pt IVA to assess the interest income. The two issues before Lockhart J were:
(a) whether the source of the interest was outside Australia and Papua New Guinea; and
(b) whether Pt IVA of the Act operated to deem the amounts of interest to be included in the assessable income (assuming that the interest was foreign source income in the first place.
EPBCL was incorporated in the Cook Islands. Its holding company, European Pacific Banking Corporation (EPBC) was incorporated in the Cook Islands and was registered in respect to off-shore banking business to be conducted, inter alia, with EPBCL. EPBCL was a holder of a domestic Cook Island banking licence. EPBCL did not carry on business outside the Cook Islands and was...