If you pay investment income or royalties to foreign residents, you may need to withhold tax.
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.
Temporary residents who are Australian residents for tax purposes do not have to withhold tax from payments they make to foreign lenders.
Example: Exemption for a 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 monthly mortgage payments. 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. 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
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 (not including 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.
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:
- 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
- industrial, commercial or scientific equipment
- motion picture films, television films or video tapes, or tapes for radio broadcasting
- satellite, cable, optic fibre or similar technology in television and radio broadcasting, whether or not such material is edited or the broadcast is delayed
- the supply of scientific, technical, industrial or commercial knowledge or information
- services that are related to, or part and parcel of enabling the above property, rights, equipment or knowledge to be applied or enjoyed
- receiving, or the right to receive, public transmissions by satellite, cable, optic fibre or similar technology
- an undertaking that any of the above property or rights will not be granted or supplied to anyone else
- film and video tape royalties.
A managed investment trust (MIT) is a type of unit trust in which members of the public collectively invest in passive income activities, such as shares, property or fixed interest assets. A trust qualifies as an MIT if it meets certain requirements for the income year it is in operation.
The rate of tax to be withheld from payments to non-resident members will vary according to whether the member is a resident of a country that has a tax treaty or exchange of information agreement with Australia, and whether the amount is:
- a payment of dividends, interest and royalties
- a 'fund payment'.