Withholding from dividends paid to foreign residents
If you pay dividends to a foreign resident (that is, someone who is not an Australian resident), the unfranked component of each of those payments is subject to a final withholding tax.
A foreign resident can be an individual, company, partnership, trust or super fund.
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.
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:
- the payment is made to an entity which has an address outside Australia
- your company is authorised to pay the dividend to any entities outside Australia.
Australian payers must withhold amounts from the payments they make. An Australian payer can be either an Australian resident or foreign resident with a permanent establishment in Australia.
A permanent establishment means a fixed place through which a business entity carries on their business activities in part or in full, and can include a:
- place of management
- branch or office
- 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.
Temporary residents of Australia who pay dividends 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.
When to withhold
You must 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 Australian agent of a foreign resident, you should withhold tax when you:
- receive a dividend payment on behalf of the foreign resident
- have the amount credited to your account
- have the payments otherwise dealt with at the direction of your foreign resident payee.
You do not have to lodge this annual report if you have correctly reported interest or dividend payments to foreign residents in an annual investment income report (AIIR).
Registering for PAYG withholding
You must be registered for pay as you go (PAYG) withholding before you withhold tax.
If the payment is made to a resident of a country which has a tax treaty with Australia, that treaty sets the rate of withholding which is required. If there is no tax treaty the rate will be 30%.
Tax treaties are special agreements that Australia has entered into with over 40 countries. The tax treaties help 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 is both:
- a resident of the particular tax treaty country
- beneficially entitled to that income.
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 at the top rate of tax (47% from 1 July 2017).
You do not have to withhold amounts from dividend payments you make to a foreign resident of a treaty country if both of the following circumstances apply – the:
- foreign resident payee carries on a business in Australia through a permanent establishment
- payment you make is effectively connected with the payee's business.
This means that the payee will need to include the dividend payment in the assessable income of the payee's business in Australia. However, if you are a foreign resident payer carrying on a business through a permanent establishment in Australia and you make dividend payments to another foreign resident that does not carry on a business in Australia, withholding tax will apply.
Foreign residents do not have to pay us any more tax if their only Australian income is from interest, dividends and royalties which have had the correct amount of withholding tax withheld.
Foreign resident payees must lodge an Australian tax return if they have assessable income other than interest, dividends or royalties in Australia.
Certificates of payment
A foreign resident payee may require a certificate of payment to provide to the tax authorities in their home country.
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:
- 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 need to lodge a revised activity statement. Revised activity statements are available in Online services for business if you are a registered user or you can phone us on 13 28 66 to obtain a revised activity statement form.
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, do not refund the amounts to your payee – if you do we cannot refund the amount to you.
Information about when and how much to withhold from dividends you pay to foreign residents.