Withholding from interest paid to foreign residents
If you pay interest to a foreign resident (that is, someone who is not an Australian resident), the amount paid is subject to a final withholding tax.
A foreign resident can be an individual, company, partnership, trust or superfund.
Interest for withholding tax purposes includes:
- interest payments
- 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.
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.
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. A permanent establishment 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 considered to be 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 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: Exemption for temporary resident
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.
End of example
When to withhold
You should withhold tax from interest you pay to a foreign resident when any of the following occurs:
- you make the interest payment
- you credit the interest 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 the interest payment on behalf of the foreign resident
- have the amount credited to your account
- have the payments otherwise dealt with at the direction of yourself or the 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 10%.
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.
Under Australia's tax treaties with some countries such as 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.
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
- provide you with 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 (currently 49%).
You do not have to withhold amounts from interest if the payee is not liable to pay withholding tax on those amounts.
A payee will not have to pay withholding tax if they are entitled to the foreign income exemption for temporary residents.
Others may be exempt under Subsection 128B(3) of the Income Tax Assessment Act 1936. That section provides a list of excluded income, including interest relating to:
- certain exempt non-resident entities involved in
- charitable, educational or scientific pursuits
- community service
- aviation and tourism promotion
- sports, culture and recreation
- certain non-resident hospitals
- certain non-resident sports, cultural and recreational entities
Some payments which are exempt from income tax in the payee's country of residence:
- certain exempt non-resident charitable institutions
- certified infrastructure borrowings
- trustees, assessed to trustees under particular trust provisions
- a nostro account derived by a non-resident foreign bank
- a non-resident carrying on a business in Australia through a permanent establishment the non-resident has in Australia (excluding certain limited partnership arrangements)
- certain publicly offered company debentures or debt interests
- certain publicly offered unit trust debentures or debt interests
- certain offshore borrowings by offshore banking units
- certain tax avoidance schemes where income is diverted
- certain non-resident superannuation funds for foreign residents
- amounts subject to family trust distribution tax
- trustee income under certain closely held trust provisions
You should refer to the specific provisions in order to determine eligibility for an exemption in these circumstances.
Example: Exemption for foreign resident
PQR is a foreign resident carrying on a business through a permanent establishment in Australia that issues debentures. Provided the debentures meet the public offer test, PQR will not have to withhold tax from the interest they pay to their foreign resident debenture holders
End of example
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 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 need to lodge a revised activity statement. Revised activity statements are available from the Business Portal 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 interest you pay to foreign residents.