Proceeds Ruling: Tax Effects of a Mortgage Netting Agreement

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A mortgage netting agreement – where bank customers can choose to use the balance of their transaction and savings accounts to offset home loan accounts so that there is a reduction in interest payable – makes the subject of a recent product decision.

BR Prd 22/09 finds that, so long as interest rates are offered at arm’s length market rates, the tax consequences of Westpac’s mortgage netting arrangement (as described in the ruling) are as follows:

• the netting of a credit balance of a deposit account with a debit balance of a loan account does not, in itself, give rise to income or an expense within the meaning of the rules on financial arrangements;

• all fees payable by the customer to Westpac are “consideration” for the purposes of the financial arrangement rules

• as there is no payment (or right to) interest on the credit balance of these deposit accounts, there is no derivation of interest income for the account holder and no obligation for Westpac to deduct resident withholding tax (RWT) or non-resident withholding tax (NRWT), or pay issuer-approved levies

• the agreement is not an associated indirect financing agreement and RF 12I

• no revenue arises from Section CC7 for Westpac or its customers, and

• the tax avoidance provisions of ss. BG 1 and GB 21 do not apply.

The decree applies from April 1, 2022 to March 31, 2027.

Source: Product Ruling BR Prd 22/09, “Westpac New Zealand Limited”, Inland Revenue Tax Technical website, published July 13, 2022.

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