Income Tax Act 2007 section 878

Interest paid by banks

Section 878 exempts banks from the usual obligation to deduct income tax at source when they pay interest in the ordinary course of their business, but preserves the duty to deduct in certain specific circumstances.

• Banks are not required to deduct income tax from interest payments made in the ordinary course of their business
• The exemption does not apply where a payment is treated as yearly interest under the special rule in section 874(5A) — in that case, the bank must still deduct tax
• Interest is generally considered to be paid in the ordinary course of business unless it relates to the bank's capital structure or the transaction is primarily motivated by a tax-avoidance purpose
• The term "bank" takes its meaning from the definition in section 991 of the Income Tax Act 2007