PAYG withholding from interest, dividends and royalties paid to non-residents
PAYG withholding from interest, dividends and royalties paid to non-residents
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Within this publication, foreign resident is the same as non-resident.
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Withholding tax from payments you make
If you pay interest, dividend or royalty payments to a foreign resident; that is, someone who is not an Australian resident, generally, the gross amount of each of those payments is subject to a final withholding tax rate of:
- 10% for interest
- 30% for dividends - fully franked dividends are not subject to withholding tax
- 30% for royalties.
However, if the payment is made to resident of a country with which Australia has a tax treaty, you may be required to withhold less tax or no tax at all.
Tax treaties are special agreements that Australia has entered into with over 40 countries. The tax treaties prevent the same income being taxed more than once.
The reduced tax rate that applies under a tax treaty only applies if the recipient of the dividend, interest or royalty is both:
- a resident of the particular tax treaty country
- beneficially entitled to that income.
A foreign resident can be an individual, company, partnership, trust or super fund.
Registering for PAYG withholding
You must be registered for pay as you go (PAYG) withholding before you withhold tax from interest, dividend or royalty payments you make to foreign residents. If you are not already registered, you can register:
- when you apply for an Australian business number (ABN), using the same form
- by phoning 13 28 66 between 8.00am and 6.00pm, Monday to Friday - you must have your ABN or tax file number (TFN) to register by phone
- online through the Business Portal or through the Australian Business Register
- in writing by completing Add a new business account (NAT 2954).
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For help with registering, phone us on 13 28 66 between 8.00am and 6.00pm, Monday to Friday.
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Your obligations
You must:
- withhold tax from interest, dividends and royalties you pay to foreign residents
- pay the amounts you withhold to us
- issue payment summaries to your payees
- lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents - annual report (NAT 7187). You do not have to lodge this annual report if you have correctly reported interest and dividend payments to foreign residents in an annual investment income report (AIIR) and have made no payments of royalties to foreign residents. However, to report any royalties, you must use this form or the electronic version of this form.
Foreign residents do not have to pay us any more tax if both of the following apply:
- you correctly withheld an amount from them and paid it to us
- the only income they receive in Australia is from interest, dividends or royalties.
This is because foreign resident withholding tax on interest, dividends and royalties is a final tax. They do not include this income on a tax return.
Foreign resident payees must lodge an Australian tax return if they have assessable income other than interest, dividends or royalties in Australia.
Collecting and paying withholding tax
Who should withhold?
Under the PAYG withholding system, you must withhold tax under either of the following conditions:
- when you make dividend, interest or royalty payments to a payee with an address outside Australia
- when you are authorised to make the payments to a place outside Australia, regardless of who you make the payments to.
You may have to withhold even if you are making the payments for private purposes.
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Under Australian law, Australian payers must withhold amounts from the payments they make.
An Australian payer can be either an Australian resident or a foreign resident with a permanent establishment in Australia.
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You must send us the tax you withhold from the interest, dividend or royalty payments you make, even if you haven't actually made the payment of interest, dividend or royalty yet. For example, if the payment you make is re-invested, accumulated, capitalised or dealt with as the foreign resident directs, it is deemed to be paid.
Australian resident agents acting on behalf of foreign residents
You must withhold tax from payments you make to a foreign resident if both of the following apply:
- you are acting as the foreign resident's agent
- the actual payer of this payment has not withheld tax.
Australian resident living overseas temporarily
If you are an investment body such as a financial institution and you have Australian resident payees who temporarily live overseas, the amounts you pay to those payees are not subject to foreign resident withholding tax if they:
- advise you that they continue to be Australian residents
- provided you their tax file number (TFN) or Australian business number (ABN).
If they are Australian residents and have not provided their TFN or ABN, you must withhold tax at the top rate plus Medicare levy (currently 46.5%)
When to withhold
You must withhold tax from payments you make when you do either of the following:
- credit the amounts to your payees' accounts
- deal with the amounts at the direction of your foreign resident payees.
If you are an agent of a foreign resident, you must withhold tax when you do one of the following:
- receive the payment
- have the amounts credited to your account
- have the payments dealt with at the direction of your foreign resident payees.
How withholding tax is collected
Withholding tax is collected within the PAYG withholding system. You pay the withheld amounts to us periodically, depending on your withholding payment cycle.
Exemptions
You do not have to withhold amounts from interest, dividends and royalties if the payee is not liable to pay withholding tax on those amounts.
Example
Overseas Co is a foreign resident company. It operates a business in Australia through a permanent establishment and it earns interest and dividend income that is effectively connected with the business.
Payers making the interest and dividend payments do not have to withhold amounts from the payments they make to Overseas Co because they earn other income in Australia. This means Overseas Co must lodge a tax return and include the interest and dividend payments they receive, and pay the tax they are liable to pay after their tax return has been assessed. This applies to entities resident in treaty and non-treaty countries.
Permanent establishment
A permanent establishment means a fixed place through which a business entity carries on their business activities in part or in full. A permanent establishment can include a:
- place of management
- branch
- office
- factory
- workshop
- building and construction site
- mine or quarry
- pastoral or agricultural property.
An establishment may not be counted as a permanent establishment if is just used:
- as a storage facility
- to display goods or services
- as a fixed place of business for the purpose of purchasing goods or merchandise
- to collect information for the enterprise.
Interest
Interest for withholding tax purposes includes:
- interest income
- amounts you pay in the nature of interest, such as a discount on a security
- amounts you pay as a substitute for interest, such as a lump sum paid instead of paying periodical interest
- dividends you pay for non-equity shares but not an amount that is a return on an equity interest in a company
- the profits on the transfer of a qualifying security - that is, a security where the sum of the payments to be made (excluding periodic interest) exceeds the issue price
- charges you pay under hire purchase and similar financial arrangements
- the discount element of payments you make to offshore acceptors of bills of exchange and promissory notes
- non-monetary payments.
Who should withhold?
You must withhold tax from interest you pay to overseas payees under any of the following circumstances:
- interest you pay as an Australian resident payer to a foreign resident payee with an overseas address, whether the loan is for business or private purposes
- interest you pay as a foreign resident payer in Australia to a foreign resident payee with an overseas address where it relates to your business in Australia
- interest you pay as an Australian resident payer to another Australian resident payee where both of the following apply
- your payee's business is carried on outside of Australia
- your business is carried on in Australia
- interest you pay as a foreign resident payer in Australia to an Australian resident payee where both of the following apply
- your business is carried on in Australia
- the business your payee carries on is outside of Australia.
When to withhold
You should withhold tax if the payee is a foreign resident when you do any of the following:
- make payments to a payee with an address outside Australia
- credit the amounts to your payees' accounts
- otherwise dealt with the payments at the direction of your payees.
If you are an agent of a foreign resident, you should withhold tax when you do any of the following:
- receive the payment
- have the amounts credited to your account
- have the payment otherwise dealt with at the direction of your foreign resident payees.
Example
Ally is an Australian resident who borrows $250,000 on 1 July 2008 from a foreign resident lender in a country that Australia does not have a tax treaty with. The interest rate for the loan is 10% each year over five years.
Under the loan contract, the interest Ally is liable to pay is added to the total loan amount each year. At the end of the fifth year, Ally is liable to pay the total amount of the loan and interest.
Ally accrues an interest debt of $25,000 on 30 June each year. Even though she does not actually pay this amount each year, the amount is added to her loan. Under the PAYG withholding system, tax must be withheld from the interest credited each year. Therefore, Ally must withhold $2,500 from the interest at the time it is charged to her loan account and send it to us.
Withholding rate
You must withhold tax from interest at a rate of 10%. This rate may be lowered or reduced to nil, depending on whether a tax treaty applies to the payee who earns the interest and the conditions of the treaty.
If there is a tax treaty, you should apply the withholding rate specified in the tax treaty, not exceeding 10%.
If there is no tax treaty, you must apply a withholding rate of 10%.
Exemptions
You do not have to withhold tax from interest if the interest is exempt under tax law.
Example
An Australian resident company or a foreign resident carrying on a business through a permanent establishment in Australia issues debentures. Provided the debentures meet the public offer test, they will not have to withhold tax from the interest they pay to their foreign resident debenture holders.
Temporary resident
From 6 April 2006, temporary residents of Australia who pay interest to foreign lenders do not have to withhold tax from the payments they make. This exemption applies to qualifying temporary residents who are also Australian residents for tax purposes.
Example
John is an Australian resident for tax purposes who works in Australia under a business (long stay) temporary visa. John owns a house overseas for which he continues to make mortgage payments each month. John does not have to withhold tax from the interest payment he makes to the overseas bank.
If John was an Australian resident holding a permanent resident visa, he may have to withhold tax from each interest payment he makes. Also, it is likely that John's loan contracts will include an indemnity clause that requires him to pay the withholding tax in addition to the interest payment.
Dividends
Dividends for withholding tax purposes include:
- any distribution made by a company to any of its shareholders in the form of money or other property
- any amount credited by a company to any of its shareholders
- the return on all equity interests, including non-share dividends. However, they do not include dividends paid for non-equity shares that are subject to interest withholding tax.
You must issue a statement to your shareholder or payee that indicates the extent the dividend is franked or is conduit foreign income. You do not have to withhold tax if the dividends you pay have been fully franked or they are conduit foreign income.
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Conduit foreign income is foreign income that is not taxable in Australia and is distributed by an Australian company to their foreign resident shareholders.
An administrative penalty maybe applied for over-declaring franking or conduit foreign income. See Penalties, remissions, and refunds for more information.
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Who should withhold?
If you operate a company that is an Australian resident, you must withhold amounts from unfranked or partly franked dividends that are not conduit foreign income if either of the following applies:
- according to your company's register of members, any entities holding shares on which the dividends are paid have an address outside Australia
- your company is authorised to pay the dividend to any entities outside Australia.
When to withhold
You should withhold tax from dividends you pay to a foreign resident when any of the following occurs:
- you make the dividend payment
- you credit the dividend to the foreign resident's account
- you otherwise deal with the payment on behalf of, or at the direction of, the foreign resident.
If you are an agent of a foreign resident, you should withhold tax when you:
- receive the payment
- have the amount credited to your account
- have the payment or otherwise dealt with at the direction of your foreign resident payee.
Withholding rate
The general withholding rate is 30% for unfranked dividends, unless tax treaty rates apply.
Royalties
Royalties are generally payments made by one person for the use of rights owned by another person. They may be periodic, irregular or one-off payments.
Royalties also include payments or credits of any kind in return for any of the following:
- the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other similar property or right
- equipment - that is, the use of, or the right to use, industrial, commercial or scientific equipment
- know-how - that is, the supply of scientific, technical, industrial or commercial knowledge or information
- the supply of assistance - that is, a payment of services that are ancillary to, or part and parcel of enabling the above property, rights, equipment or knowledge to be applied or enjoyed
- the use of, or the right to use, motion picture films, television films or video tapes, or tapes for radio broadcasting
- receiving, or the right to receive, public transmissions by satellite, cable, optic fibre or similar technology
- the use of, or the right to use, satellite, cable, optic fibre or similar technology in television and radio broadcasting, whether or not such material is edited or the broadcast is delayed
- an undertaking that any of the above property or rights will not be granted or supplied to anyone else
- film and video tape royalties.
Who should withhold?
You must withhold tax from royalties you pay under any of the following circumstances:
- as an Australian resident payer to a foreign resident payee with an overseas address where the payment relates to your business in Australia
- as a foreign resident payer in Australia to a foreign resident payee with an overseas address where the payment relates to your business in Australia
- as an Australian resident payer to another Australian resident payee where both of the following apply
- your payee carries on their business outside of Australia
- the payment relates to your business carried on in Australia
- as a foreign resident payer in Australia to an Australian resident payee where both of the following apply
- you carry on your business in Australia
- your payee carries on their business outside of Australia.
When to withhold
You must withhold tax when you do any of the following:
- make payments
- credit the amounts to the payee's account
- otherwise deal with the payments at the direction of your foreign resident payees, for example, by re-investing or accumulating.
If you are an agent of a foreign resident, you should withhold tax when you do any of the following:
- receive the payment
- have the amounts credited to your account
- have the payments otherwise dealt with at the direction of your foreign resident payees.
Withholding rate
You must withhold 30% from the gross amount of royalties you pay to foreign residents of non-treaty countries. However, some tax treaties will reduce this rate in certain circumstances.
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A foreign resident cannot claim costs associated with earning the royalty to reduce the amount to be withheld.
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For more information about tax treaties we have with other countries, see Australian tax treaty rates.
For any questions relating to this information or withholding tax rates contact us on 13 28 66 (do not contact Treasury)
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Exemptions
Generally, you do not have to withhold amounts from royalty payments you make to a foreign resident of a treaty country if the following circumstances apply:
- the foreign resident payee carries on a business in Australia through a permanent establishment
- the payment you make is effectively connected with the business.
This means the foreign resident payees must obtain a tax file number (TFN) and lodge their tax returns where tax on royalties will be calculated on assessment. However, if you are a foreign resident payer carrying on a business through a permanent establishment in Australia and you make royalty payments to another foreign resident that does not carry on a business in Australia, withholding tax will apply.
Australian tax treaty rates
Australia has entered into tax treaties with over 40 countries. These agreements:
- prevent double tax
- reduce tax evasion
- increase cooperation between Australia and international tax authorities in enforcing tax laws.
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For further information on the countries with which Australia has tax treaties and their required withholding tax rates visit www.treasury.gov.au and search for 'Australian tax treaties table'.
For any questions relating to this information or withholding tax rates contact us on 13 28 66 (do not contact Treasury)
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Some situations where no withholding is required
Interest payments
Under Australia's tax treaties with New Zealand, Norway and the United Kingdom you do not have to withhold an amount from interest if both of the following apply:
- the interest is derived by a financial institution that is unrelated to and deals wholly independently with you
- the transaction does not involve back-to-back loans.
Dividend payments
Under Australia's tax treaties with Finland New Zealand, Norway, United Kingdom and United States, for unfranked or partly franked dividends you:
- do not have to withhold tax if you are a company that is a resident of Australia and you are paying a company that meets all the following conditions
- is a resident of the treaty country
- holds 80% or more of the voting power in your company
- has its principal class of shares listed on a stock exchange recognised under the treaty
- must withhold 5% from gross dividends you pay to any company that directly holds at least 10% of the voting power in your company. You must withhold 15% in all other cases.
Paying and reporting amounts you withhold
Paying amounts you withhold to us
If you pay interest, dividends or royalties to foreign residents or Australian agents acting on behalf of foreign residents, you must withhold amounts from payments you make and send those amounts to us.
We will tell you when you must report and pay amounts you withhold based on whether you are a small, medium or large withholder.
Small withholders
If you withhold A$25,000 or less each year, you are a small withholder and you must report and pay the amounts you withhold quarterly using an activity statement. We will send an activity statement to you each quarter showing when your payment is due. On your activity statement, you report amounts you withheld from foreign residents' interest, dividends, and royalties at label W3.
Medium withholders
If you withhold between A$25,001 and A$1 million each year, you are a medium withholder. You must report and pay the amounts you withhold monthly using an activity statement. We send an activity statement to you each month showing when your payment is due. On your activity statement, you report amounts from foreign residents' interest, dividend, and royalties at label W3.
Large withholders
If you withhold more than A$1 million each year, you are a large withholder and you must pay the amounts you withhold electronically. Do not report the withholding amount on your activity statement.
If you are already registered as a large withholder, continue to follow the same procedures as for all your other PAYG withholding obligations.
Reporting amounts you withhold to us
If you pay interest, dividend or royalty payments to foreign residents or to Australian agents of foreign residents, you must provide us with an annual report of all foreign resident withholding payments you made during the financial year. You must send the PAYG withholding from interest, dividend and royalty payments paid to non-residents - annual report (NAT 7187) to us by 31 October, following the end of the financial year. You must lodge this report electronically or on paper using our form.
Reporting electronically
You can lodge your annual report using electronic media; for example, using CD-ROM, DVD or USB flash drives. The report must be prepared in a spreadsheet which meets the electronic reporting specification for PC systems - PAYG withholding from interest, dividend and royalty payments paid to foreign residents annual report version 1.2.
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For more information:
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Reporting by paper
If you cannot lodge electronically you can use the paper form PAYG withholding from interest, dividend and royalty payments paid to non-residents - annual report (NAT 7187). If you have withheld for more than six payees, you will need to complete additional reports. You must use this form if you need to report royalties you paid to foreign residents.
Payment summaries
If you pay interest, dividends, and royalties to foreign residents, you must issue payment summaries to your payees. Any 'free format' payment summary, receipt or remittance advice is acceptable, as long as it includes all of the following information:
- your name, ABN and branch number if applicable
- your payee's name, address, ABN if known or TFN if known
- the period in which you made the payment
- the total amount of gross payment you made, including the market value of non-cash benefits
- the total amount of tax you withheld.
Exception
You do not have to issue a payment summary if you are an agent who receives interest, dividends and royalties for foreign resident payees who are entitled or will become entitled to receive them. However, you must withhold from these payments and report the amounts you withheld to us.
Certificates of payment
A certificate of payment is a document we issue to foreign residents where both of the following circumstances apply:
- their interest, dividend or royalty income is subject to Australian withholding tax
- they need proof of payment to meet their resident country's tax requirements.
We only issue certificates of payment for payees whose country of residence has a comprehensive tax treaty with Australia.
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For further information on the countries with which Australia has tax treaties and their required withholding tax rates visit www.treasury.gov.au and search for 'Australian tax treaties'.
For any questions relating to this information or withholding tax rates contact us on 13 28 66 (do not contact Treasury)
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We issue one certificate of payment per payee, per year, for the total amount of each type of withholding tax; that is, interest, dividend or royalty withholding tax.
In very limited circumstances, we may issue more than one certificate of payment for a payee in a year; for example, where there is an existing contractual arrangement with your payee to provide more than one certificate of payment a year.
If you need more than one certificate of payment per payee, you must provide us with details of the contractual arrangements, including when it expires. However, if you make any new contracts agreeing to provide more than one certificate of payment, we do not have to provide more than one.
When to request a certificate of payment
You can request a certificate of payment for your payees at the end of the financial year in the country that needs the certificate. Most countries that have a tax treaty with Australia have a financial year ending 31 December.
How to request a certificate of payment
Before you ask us for a certificate of payment for your payee, obtain a request for a certificate of payment from the payee for each year they need one.
You must then obtain:
- the name of the payee
- the payee's country of residence
- that country's financial year's start and end dates
- the type of withholding tax you applied; that is, interest, dividend or royalty withholding tax.
You must also obtain the transaction details for the financial year, including:
- each amount you withheld
- the total annual amount subject to withholding
- each amount you paid to us
- the total amount paid to us
- the date you paid us each amount.
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To request a certificate of payment, use Application for certificate of payment (NAT 6408).
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A certificate of payment is issued on request of the payees to comply with the requirements of the law in their country of residence. A payment summary must still be issued in addition to a certificate of payment to meet Australian tax law requirements.
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Penalties, remissions and refunds
Penalties
We can impose various administrative penalties if you don't fulfil your obligations under tax law; for example, if you:
- did not withhold amounts required under PAYG withholding
- did not lodge documents on time
- over declared conduit foreign income
- over declared franking credits.
Remissions
If you do not withhold an amount as required under the PAYG withholding system, you will be liable to pay a penalty equal to the amount that you did not withhold. We will also impose a general interest charge on payments you make to us after the due date, even if you reported that amount to us on time.
You can apply for the penalty and general interest charge to be remitted if you can show the remission is warranted.
Remember, general interest charges are not penalties.
Refunds
If you withhold more tax than you should and you discover the error early, you must refund the extra amount you withheld to the payee, even if you have already paid the amount to us. By discovering the error early we mean either of the following:
- You become aware of the error by no later than 30 June of the relevant year.
- Your payee requests a refund by no later than 30 June of the relevant year.
If you have already paid the amount to us, you can offset the amount against another withholding amount you are liable to pay us in the future for the relevant year. Remember to record this offset in your accounts.
If you have already paid the amount to us and you are not liable to pay us any further withholding amounts for the relevant year, you can apply to us for a refund of the overpaid amount. Your application should provide full details of the circumstances of the over-payment.
Send your application to us at:
If you withhold more tax than you should and you discover the error later than 30 June after the end of the year to which the withheld amount relates, you should not refund the amounts to your payee. In this situation, if you refund the extra amount you withheld, we cannot refund the amount to you.
We will provide the refund to your payee if we are satisfied that it is fair and reasonable to do so. Your payee will need to make an application in writing to us that:
- provides their TFN, if applicable
- shows they are the authorised person to request the refund
- identifies the extra amount withheld and provides an explanation of how the error occurred
- includes supporting documentation of the over-payment
- includes any certificates of payment they have previously received from us in relation to the over-payment.
Your payee should send their application to us at:
What to do/read next
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For more information, refer to:
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To obtain copies of our publications or for more information:
- phone us on 13 28 66 between 8.00am and 6.00pm, Monday to Friday.
- phone our publications distribution service on 1300 720 092.
If you do not speak English well and need help from the ATO, phone the Translating and Interpreting Service on 13 14 50.
If you are deaf, or have a hearing or speech impairment, phone the ATO through the National Relay Service (NRS) on the numbers listed below:
- TTY users, phone 13 36 77 and ask for the ATO number you need
- Speak and Listen (speech-to-speech relay) users, phone 1300 555 727 and ask for the ATO number you need
- internet relay users, connect to the NRS on www.relayservice.com.au and ask for the ATO number you need.
If you would like further information about the NRS, phone 1800 555 660 or email helpdesk@relayservice.com.au
Last Modified: Monday, 19 November 2012
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