Withholding from royalties paid to foreign residents
If you pay royalties 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 super fund.
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.
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.
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 royalties 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 royalties you pay to a foreign resident when any of the following occurs:
- you make a royalty payment
- you credit the royalty amount 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 royalty payment on behalf of a 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.
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.
You do not have to withhold amounts from royalty 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 royalty payments 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 royalty 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 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 royalties you pay to foreign residents.