Withholding Tax Obligations for Payments to Foreign Residents
Does your business or investment structure make payments such as interest, dividends or royalties to foreign residents? If so, you may be required to withhold tax from these payments.
The ATO has recently highlighted that it is focusing on ensuring taxpayers are aware of and complying with these obligations. Where withholding requirements apply, you may need to lodge a PAYG annual report or an annual investment income report, and withhold and remit the correct amount of tax to the ATO.
When Does Withholding Tax Apply?
Determining whether withholding tax applies to a particular payment can be complex. Assuming your structure is an Australian resident, the general starting point is that withholding tax applies to interest, dividends and royalties derived by foreign residents, unless a specific exemption applies.
The obligation to withhold arises regardless of whether you actually pay the amount to the foreign resident, credit it to their account, or otherwise deal with the payment on their behalf or at their direction. In some cases, withholding tax can also apply where the paying entity is not an Australian resident but has a permanent establishment in Australia.
Common Exemptions From Withholding Tax
A number of exemptions may apply to payments that would otherwise be subject to withholding tax. These include:
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The franked portion of dividends
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Deemed dividends arising under Division 7A
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Certain payments to non-residents carrying on business through a permanent establishment in Australia
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Certain interest and royalty payments incurred in carrying on business through a permanent establishment outside Australia
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Payments to certain exempt entities operating in areas such as charity, community service, health, tourism, culture and sport
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Payments relating to certain publicly offered company or unit trust debentures or debt interests
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Other specific statutory exemptions
As this list demonstrates, the exemptions are numerous and often highly technical in their operation. This makes it essential to seek advice tailored to your specific circumstances where payments are made to non-residents.
Impact of Tax Treaties
If the payment is made to a resident of a country that has a tax treaty with Australia, the applicable treaty may reduce the withholding tax rate or provide an exemption altogether. Treaty relief must be applied correctly and supported by appropriate documentation.
What Is the ATO Looking For?
The ATO is actively monitoring compliance in this area and is particularly focused on identifying situations where:
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Required withholding amounts have not been withheld or paid
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Incorrect withholding amounts have been applied
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Exemptions or treaty relief have been incorrectly relied upon
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Interest or royalty payments to offshore entities have been misclassified
In recent years, the ATO has also issued alerts regarding specific arrangements of concern, including treaty shopping, the use of interposed offshore entities, and the deferral of interest payments where deductions are claimed on an accrual basis. These arrangements may be viewed as attempts to avoid, defer or reduce withholding tax obligations.
Are You on Top of Your Withholding Obligations?
Failing to correctly withhold and remit tax on payments to foreign residents can result in penalties, interest and increased ATO scrutiny. If your business or investment structure makes interest, dividend or royalty payments offshore, it is important to confirm whether withholding tax applies and ensure your reporting obligations are met.
Speak to one of our accountants if you have any questions about the changes in tax for 2024.
