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4 Austl. Tax F. 123 (1987)
Interest, Exempt Income and Inter-Corporate Dividends

handle is hein.journals/austraxrum4 and id is 127 raw text is: Interest, Exempt Income and Inter-corporate Dividends Wayne Mayo * Introduction The tax treatment of inter-corporate dividends has been the subject of a good deal of discussion lately, particularly in the context of the proposed change from our current classical system of company taxation to a full imputation system. This discussion often presents inter-corporate dividends, which are currently relieved of multiple layers of tax as they pass through the corporate chain by the s.46 rebate, as exempt income and suggests that the tax treatment afforded interest payments on associated debt funds should be framed accordingly. In particular, it is suggested that the interest expenses should be effectively denied deductibility at the company level by the s.46 rebate being calculated on the dividends received net of associated interest payments. This paper analyses these issues by first considering the principles involved in the question of denying deductibility of interest on debt used to fund direct investments which give rise to exempt income. The paper goes on to look at the treatment of inter-corporate dividends in the context of both classical and imputation systems when either assessable or exempt (or tax-preferred) income underlies the dividends. Interest Deductibility and Exempt Income An investor is able to lend funds and obtain a 15 per cent before tax annual return. Alternatively, it costs the investor 15 per cent before tax to borrow funds to invest. The investor is subject to income tax. Nominal interest income is assessable and nominal interest payments are * Department of the Treasury. The views expressed are not necessarily those of the Treasury or the Government. This paper was presented at the Australian Tax Forum Fourth Intensive Workshop in Taxation, October 1986.

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