Withholding from payments to foreign residents for construction and related activities
What is foreign resident withholding?
A foreign resident is someone who is not an Australian resident.
If you pay a foreign resident for construction and related activities you may be required to withhold amounts from their payments under the pay as you go (PAYG) withholding system.
If you are in the building and construction industry and you make payments to foreign resident contractors which are subject to withholding, do not report these payments in the Taxable payments annual report.
Terms we use:
- Payer – we mean an individual or entity who makes a payment
- Payee –we mean an individual or entity who receives the payment
- Financial year – we mean the period starting 1 July and ending 30 June.
Which payments are subject to withholding?
You are required to withhold amounts when making payments to foreign residents for construction and related activities.
Payments covered are those made under a contract for construction works or related activities. Withholding is required from all payments, including payments to subcontractors.
Works include the construction, installation and upgrading of buildings, plants and fixtures.
Examples of construction works include, but are not limited to:
- electricity links
- mine site development
- natural gas field development
- natural resource infrastructure
- oilfield development
- pipeline works
- power generation infrastructure
- railway or road works
- residential building
- resort development
- retail or commercial development
- road and rail developments
- airport upgrades
- telecommunications equipment upgrades
- water treatment plant works.
In addition to construction, other activities such as commissioning of infrastructure, training and support of personnel to operate infrastructure and supervision during the initial phase of operation are included. Where payments are made under the contract or a related contract for these activities, these payments are also subject to withholding.
Examples include, but are not limited to:
- decommissioning plant
- commissioning and operation of facilities
- hook up
- project management
- site management
- supervision and provision of personnel
- supply of plant and equipment
- warranty repairs.
In some circumstances, you may have to make payments to an agent on behalf of a foreign resident. You should withhold from payments made to an agent as though the payment were made directly to the foreign resident. This is the case even if the agent is a resident in Australia.
If an agent, who is an Australian resident, receives a payment subject to foreign resident withholding on behalf of an overseas resident and an amount has not already been withheld from that payment, the agent must withhold from the payment.
Your obligations as a payer
If you make any of the payments mentioned previously, you must:
How much to withhold from payments to foreign residents for construction and related activities
You have to withhold 5% of the total payment made to foreign residents for construction and related activities.
What if the payment is made in a foreign currency?
If you have to pay a payee in a foreign currency, you need to calculate the equivalent Australian dollar value of the payment at the time you make the payment.
After converting the foreign currency payment to Australian dollars, you then calculate the amount to withhold at the required rate. The amount you report and pay to us will always be the Australian dollar value.
Annual reporting for payments to foreign residents for construction and related activities
If you withhold from payments to a foreign resident, you have specific end of financial year reporting obligations and you must do all of the following:
Your reporting obligations are different depending on whether you withheld an amount for foreign resident withholding or withheld an amount where an ABN wasn't quoted.
How much to withhold when a payee doesn't quote an ABN
In general, a payee carrying on an enterprise in Australia must supply you with an ABN. If they don't, you must withhold 49% from any payments to them.
There are some limited circumstances where a payee is not required to supply an ABN, including where the income is exempt income for the payee.
Where the foreign resident payee believes they don't need an ABN, you still need to consider whether you are required to withhold from the payment and the payee may need to apply for a variation.
The withholding requirements where an ABN is not quoted take precedence over the foreign resident withholding requirements. If you have withheld because an ABN was not quoted, you do not also withhold under foreign resident withholding.
Even if a payee has supplied you with an ABN, or you are satisfied that the payee doesn't need to supply an ABN, you may still need to withhold from payments to foreign residents for construction and related activities.
Reporting amounts withheld where an ABN was not quoted
If you withheld amounts because a foreign resident did not provide their ABN, you must give them a PAYG payment summary - withholding where ABN not quoted at the same time as you pay them the net amount or as soon as practicable after this. At the end of the financial year you need to separately report details of all amounts you withheld because an ABN was not quoted. You can lodge this report:
Foreign resident payees can ask us to vary the required rate of withholding if that required rate is lower or higher than the expected actual end of year tax liability.
If a variation has been granted, the amount to withhold from a payment may be different. We will send the payer a written notice confirming how much they should withhold from payments to that payee.
A payer must not vary the rate of withholding for a foreign resident payee unless we have notified them to do so. Instead they should withhold at the required rate. If a payer receives more than one variation notice for a foreign resident payee, the most recent notice supersedes all previous notices.
Record keeping requirements
Under tax law, you must keep all records that explain your PAYG withholding transactions. Records must be:
- in English (or in a form that can be translated into English)
- readily accessible (written or electronic).
You must keep your business records for at least five years.
This following provides information on withholding from payments made to foreign residents for construction and related activities.