You should withhold tax from interest, dividends and royalties you pay to a foreign resident when any of the following occurs:
- you make the payment
- you credit the payment to the foreign resident's account
- you 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 payment on behalf of the foreign resident
- have the amount credited to your account
- have the payments dealt with at the direction of yourself or the foreign resident payee.
Some interest, dividend and royalty payments may be exempt from withholding.
You do not have to withhold amounts from interest if the payee is not liable to pay withholding tax on those amounts, for example if a payee is entitled to the foreign income exemption for temporary residents.
Other exemptions may include 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
- non-resident hospitals
- non-resident sports, cultural and recreational entities
Some payments exempt from income tax in the payee's country of residence include payments relating to:
- certain exempt non-resident charitable institutions
- 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
- 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)
- 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 a 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 holdersEnd of example
Royalty and dividend exemptions
You do not have to withhold amounts from royalty or dividend payments you make to a foreign resident of a treaty country if 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 or dividend 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 or dividend payments to another foreign resident that does not carry on a business in Australia, withholding tax will apply.
- Subsection 128B(3) of the Income Tax Assessment Act 1936