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The Tax Office has reminded taxpayers of withholding tax obligations that may apply with certain payments to non-residents.
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ATO underscores focus on withholding tax obligations
05 August 2024
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The ATO is focused on ensuring taxpayers are aware of withholding tax obligations that can apply and announced there will be a stronger focus on this.
Taxpayers who have paid interest, dividends, or royalties to a non-resident may need to meet certain withholding tax requirements, the ATO said. These include the lodgment of a PAYG annual report, an annual investment income report, and the payment of withholding tax.
The lodgment of a PAYG annual report encapsulates PAYG withholding from interest, dividend and royalty payments paid to non-residents.
The ATO said that even if interest has been paid, taxpayers may still have a withholding tax obligation, and if withholding tax obligations apply, taxpayers must ensure they follow the relative steps.
Along with lodging a PAYG annual report or an annual investment income report, the correct amount must be paid regarding the impact of any applicable tax treaties and withholding exemptions.
Whether a business is small, medium or large, a payment must be made on time. When required to withhold, only claim a deduction where withholding tax obligations have been met.
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Classify and report deductions for payments subject to withholding to a non-resident at the correct label in the income tax return and international dealing schedule.
The ATO recommends ensuring the eligibility criteria to claim is satisfied and can substantiate an exemption under section 128F or section 128A of the Income Tax Assessment Act 1936, including meeting the eligibility requirements of the public offer test.
This also includes ensuring the fulfilment of eligibility criteria to claim evidence for an exemption for superannuation funds for foreign residents under paragraph 128B(3)(jb) of the ITAA 1936.
Finally, it must be ensured the eligibility criteria to claim are satisfied to substantiate tax treaty relief as well as considering whether an entered arrangement is covered by:
- Taxpayer Alert TA 2018/4: Accrual deductions and deferral or avoidance of withholding tax
- Taxpayer Alert TA 2020/3: Arrangements involving interposed offshore entities to avoid interest withholding tax
- Taxpayer Alert TA 2022/2: Treaty shopping arrangements to obtain reduced withholding tax rates
The Tax Office has said there will be a more focused approach towards withholding tax obligations, however also reminded there are specific instances when tax should be withheld.
This includes interest, dividends and royalties to a non-resident when a payment is made, the payment has been credited to the foreign resident’s account or the payment is dealt with on behalf of the foreign resident.
The ATO also provided tax should be withheld when an Australian agent represents a foreign resident.
In this instance, tax should be withheld if the payment is received on behalf of the foreign resident, the amount has been credited to an Australian account and the payments have been dealt with at the direction of the Australian agent or the non-resident payee.
Some interest, dividend and royalty payments may be exempt from withholding, the ATO said.
“You do not have to withhold amounts from interest if the payee is not liable to pay withholding tax on those amounts, for example, a payee is entitled to the foreign income exemption for temporary residents.”
The ATO recommended taxpayers stay up to date with specific withholding requirements to avoid scrutiny.
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