Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)
Chapter 5 Foreign resident withholding
5.1 Schedule 5 to this bill amends the TAA 1953 introduce new obligations to withhold from payments, to be prescribed by regulation, that are made to foreign residents.
5.2 References in this chapter are references to provisions in Schedule 1 to the TAA 1953 unless stated otherwise.
5.3 The Review of Business Taxation (Ralph Review) concluded that there are high levels of non-compliance by foreign residents who do not have a permanent presence in Australia with their Australian income tax obligations. The Ralph Review recommended the introduction of a uniform withholding regime on all taxable Australian source income and capital gains derived by foreign residents.
5.4 In the Minister for Revenue and Assistant Treasurer's Press Release C57/02 of 14 May 2002, the Government announced a modified approach under which new PAYG withholding obligations will apply to certain payments to foreign residents.
5.5 The new PAYG withholding obligations will minimise the compliance burden on Australian businesses by requiring withholding only for certain payments. The payments from which amounts must be withheld will be prescribed by regulations. These regulations will be made where there is a demonstrated compliance risk and after consultation with affected taxpayer groups. The new withholding obligations will be supported by the existing PAYG withholding system.
5.6 The new withholding obligations will apply to certain payments made to foreign residents, to be prescribed by regulation. Amounts withheld will be available as a credit against an assessment of income tax.
5.7 The new provisions set out the circumstances when withholding will be required and from whom a payer will be required to withhold. There is also a provision that requires withholding by an intermediary who receives an amount on behalf of a foreign resident.
5.8 The existing generic withholding rules will cover such things as when the withheld amount must be paid to the Commissioner (Subdivision 16-B), entitlement of the recipient to a credit for the amount withheld (Subdivision 18-A) and offences (Subdivision 20-B).
5.9 The new withholding requirements will not affect the existing tax obligations of foreign residents such as the requirement to lodge a tax return. They will also not affect the assessment of a foreign resident's tax return other than to allow credits for amounts withheld.
5.10 Schedule 5 to this bill inserts Subdivision 12-FB into Schedule 1 to the TAA 1953. This Subdivision creates two new withholding obligations in respect of foreign residents.
5.11 The new withholding obligations will require withholding in two different circumstances where payments are prescribed by regulation:
- where the payment is made to a foreign resident; and
- where the payment is received for a foreign resident.
Requirement to withhold where the payment is made to a foreign resident
5.12 The new obligation to withhold from a payment to a foreign resident is set out in section 12-315. [Schedule 5, item 6, section 12-315]
Payments made in carrying on an enterprise
5.13 Withholding will be required only where the entity making the payment (the payer) does so in carrying on an enterprise. This will exclude, from the scope of withholding payments, activities that are of a private or domestic nature for the payer. This is consistent with the scheme of the existing PAYG withholding system that generally does not require individuals and households to withhold. [Schedule 5, item 6, subsection 12-315(1)]
Who is subject to withholding?
5.14 Withholding will be required where the recipient is a foreign resident. This rule will address circumstances where the payer knows the status of the recipient as a foreign resident. [Schedule 5, item 6, paragraph 12-315(2)(a)]
5.15 There are also situations where the payer will not know whether the payee is a foreign resident. Residency can be a complex question of fact and degree, even if the payer knows all the relevant primary facts - which they often will not. To overcome this difficulty for payers, additional tests to determine when amounts should be withheld have been included.
5.16 One of these tests is where the payer has no reasonable grounds to believe that the recipient is an Australian resident and either:
- the recipient has an address outside Australia according to any record that is in the payer's possession, or is kept and maintained on the payer's behalf, about a transaction to which the payment relates; or
- the payer is authorised to make the payment at a place outside Australia (whether to the recipient or to anyone else).
[Schedule 5, item 6, paragraph 12-315(2)(c)]
5.17 This test will ensure that where there are reasonable grounds to believe that the recipient is an Australian resident, withholding will not be required, even if an amount is paid outside Australia, or the recipient has an address outside Australia.
5.18 However, if there are no reasonable grounds to believe that the recipient is an Australian resident, and the amount is to be paid outside Australia, or the recipient has a foreign address, withholding will be required.
5.19 Whether or not there are reasonable grounds to believe that a recipient is an Australian resident will be considered on an objective basis. The question is whether a reasonable person in the shoes of the payer would have thought that there were reasonable grounds to believe that the recipient of the payment is an Australian resident.
5.20 The two tests specified in paragraph 12-315(2)(c) are not by themselves sufficient to perform the intended compliance function of the new withholding obligations. It is relatively easy for a non-resident to obtain an Australian address and bank account. To address this risk withholding will also be required where the payer believes, or has reasonable grounds to believe, that the recipient is a foreign resident. Once again this will be taken from the objective point of view of a reasonable person standing in the shoes of the payer. [Schedule 5, item 6, paragraph 12-315(2)(b)]
5.21 The entities subject to withholding will include a recipient with a connection outside Australia of a kind prescribed in the regulations. This will permit a regulation detailing a specific connection for a particular type of payment covered by the withholding obligation. For example, if the existing conditions in subsection 12-315(2) prove to be insufficient to prevent avoidance of the withholding obligations, additional conditions may be made by regulation to ensure the integrity of the withholding system. [Schedule 5, item 6, paragraph 12-315(2)(d)]
5.22 This chapter refers to 'foreign resident' as a shorthand term for the entity that is the ultimate recipient of payments subject to withholding. In some cases the entity may not be a foreign resident. For example, a payer may withhold an amount from a payment to an entity because they believe that the conditions in paragraph 12-315(2)(c) are satisfied, but it turns out that the entity was in fact a resident of Australia. In such circumstances the resident will receive a credit for this amount in a subsequent assessment.
Which payments are subject to withholding?
Payments to be prescribed in the regulations
5.23 Withholding will be required from payments of a kind that are prescribed in the TAR 1976. This will enable payments to be prescribed progressively after consultation with affected groups as they are identified as presenting a compliance risk. [Schedule 5, item 6, paragraph 12-315(1)(b)]
Payments that are excluded
5.24 Withholding is not required from payments to the extent that the payment is a living-away-from-home allowance benefit or an expense payment benefit. These payments are excluded from withholding because they are subject to the fringe benefits tax and do not give rise to an income tax liability for the recipient. [Schedule 5, items 2 and 3, subsections 12-1(2) and (3)]
5.25 A number of specific types of payments are excluded from the scope of the new withholding obligations. Existing withholding provisions already cover these payments. However, in some cases the existing withholding includes carve-outs and there is no intention to use these new withholding provisions to pick up those carve-outs.
5.26 The payments specifically excluded are:
- payments of dividends, interest and royalties;
- departing Australia superannuation payments;
- natural resource payments; and
- mining payments.
[Schedule 5, item 6, paragraph 12-315(1)(c)]
Procedural requirement when making regulations
5.27 Regulations made under these provisions prescribing payments to which withholding applies can only be made where the Minister is satisfied the payment could reasonably be related to assessable income of foreign residents. This requirement relates to the nature of the payment itself, not the characterisation of the payment in the hands of a particular recipient. [Schedule 5, item 6, subsection 12-315(3)]
5.28 For example, some payments are exempt income regardless of who receives them, such as interest on a judgment debt. However, some payments are exempt income if they are derived by particular entities, such as pay and allowances paid to a Defence Force member performing duties in operational areas. This second type of payment (for pay and allowances) could reasonably be related to assessable income, despite the fact that in the hands of particular recipients it is not.
5.29 Similarly, payments that are reasonably related to CGT events that happen could reasonably be related to the assessable income of foreign residents, despite the fact that in certain cases no capital gain will arise.
Requirement to withhold where payment is received for a foreign resident
5.30 The new withholding regime for payments to foreign residents will also apply where a payment is received by an entity on behalf of a foreign resident. The withholding obligation will prevent the deferment or avoidance of withholding by a foreign resident having an Australian resident entity, for example a nominee company, receiving and accumulating the relevant monies in Australia on behalf of the foreign resident. [Schedule 5, item 6, section 12-317]
5.31 The obligation to withhold will apply where an entity (the intermediary) receives a payment that meets the requirements of paragraph 12-315(1)(b) (it is of a kind set out in the regulations) and paragraph 12-315(1)(c) (it is not one of the listed payments) on behalf of a foreign resident. [Schedule 5, item 6, subsection 12-317(1)]
5.32 The obligation to withhold arises only if the intermediary is a person in Australia or an Australian government agency and a foreign resident is or becomes entitled:
- to receive the payment (or part of it) from the intermediary, or to receive the amount of the payment (or part of it) from the intermediary; or
- to have the intermediary credit to the foreign resident, or otherwise deal with on the foreign resident's behalf or as the foreign resident directs, the payment or part of it, or the amount of the payment or part of it.
[Schedule 5, item 6, paragraphs 12-317(1)(a) and (b)]
5.33 The intermediary must withhold the amount:
- if the foreign resident is so entitled when the intermediary receives the payment - just after receiving the payment; or
- if the foreign resident becomes entitled after the intermediary receives the payment - just after the foreign resident becomes entitled to the payment.
[Schedule 5, item 6, subsection 12-317(2)]
5.34 Tests similar to those in subsection 12-315(2), which describe the entities from whom withholding is required, are included in this provision. In many cases an intermediary may know whether the other party is a foreign resident, but this may not always be the case. Therefore, these tests are also appropriate here to assist the intermediary to know when to withhold. [Schedule 5, item 6, subsection 12-317(3)]
Exemption from withholding
5.35 The Ralph Review recommended an exemption for non-residents that have a permanent presence in Australia on the basis that there is an ongoing business or there are business assets sufficient to meet Australian tax liabilities. This recommendation is unsuitable for a self-assessed withholding obligation because the payer will generally not know enough about the payee's activities and assets to know whether they would be sufficient to meet their tax liabilities.
5.36 Instead the amendments provide that the Commissioner may grant an exemption from withholding if the Commissioner is satisfied that the entity has an established history of compliance with its obligations under taxation laws, and that the entity is likely to continue to comply with those obligations. This reflects the Ralph Review's recommendation that withholding not apply to non-residents with a permanent presence in Australia. According to the Review, these were a lower risk group of non-residents as they were more likely to comply with their Australian tax obligations. [Schedule 5, item 6, section 12-319]
5.37 The Commissioner will grant the exemption for a specific period that will be stated in the exemption notice. [Schedule 5, item 6, subsection 12-319(2)]
5.38 While not limiting the matters that the Commissioner may have regard to, the Commissioner may have regard to the following matters in deciding whether to grant an exemption:
- whether in the current income year and in the two previous income years the foreign resident is or was liable to pay a PAYG instalment;
- the amount of any tax-related liabilities of the foreign resident that are currently due and payable; and
- the record of the foreign resident (and its associates) in meeting its Australian tax obligations in the current income year and previous two income years.
[Schedule 5, item 6, subsection 12-319(3)]
5.39 The intention is that an exemption will not be granted to those entities who have no history of compliance with Australian taxation obligations, including with the PAYG instalments system.
5.40 The record of the foreign resident and its associates in meeting Australian taxation obligations in the past two years would include consideration of things such as:
- whether the foreign resident and associates have complied with all obligations under the PAYG instalments system;
- whether the foreign resident is liable to general interest charge, or to an administrative penalty or has committed a taxation offence in respect of the two immediately preceding income years; and
- if the foreign resident has employees, whether they have complied with taxation obligations in respect of them, such as PAYG withholding or superannuation guarantee charge.
5.41 The Commissioner must give a copy of the notice to the entity to which it relates. However, failure to provide the notice to the entity does not affect the validity of the exemption. [Schedule 5, item 6, subsections 12-319(4) and (5)]
5.42 In many cases an exemption from withholding will mean that the payments are subject to the PAYG instalments system. Foreign residents who are granted an exemption from withholding are still expected to comply with their obligations under the PAYG instalments system.
Withholding from payments to partnerships and other joint entities
5.43 The new withholding obligation will apply to a payment to a partnership if one or more of the partners in the partnership satisfy the conditions specified in subsection 12-315(2). Similarly, the measure will apply to a joint venture if one or more of the persons in the joint venture satisfies one of the conditions. The withholding rules will apply in this way to ensure that foreign residents may not avoid withholding by entering into partnerships or joint ventures with residents.
5.44 This is achieved by the use of the phrase to another entity, or to other entities jointly. [Schedule 5, item 6, subsection 12-315(1)]
5.45 However, these words have not been used in section 12-317, which requires withholding where an amount is received for a foreign resident. If an entity receives an amount on behalf of a partnership or joint venture the entity receives the amount for each and every one of the partners or joint venturers. Therefore, if one or more of the partners or joint venturers satisfies any of the tests in paragraph 12-317(1)(c) the entity receiving the amount on their behalf must withhold in accordance with section 12-317.
Distributions from trusts
5.46 Subsections 98(3) and (4) of the ITAA 1936 relate to trust estates where a beneficiary is a non-resident at the end of the year of income. In these cases the trustee is liable, and will be assessed on that share of the trust income that is:
- attributable to the period when the beneficiary was a resident; and
- attributable to the period when the beneficiary was a non-resident and the income was from sources in Australia.
5.47 These existing provisions will continue to apply to distributions from trust estates to non-resident beneficiaries.
5.48 The new withholding provisions have not been included in the general exception from withholding for exempt income in subsection 12-1(1). Therefore withholding from prescribed payments to foreign residents will be required regardless of whether the amount is exempt income.
5.49 However, the foreign resident may apply to the Commissioner for a variation of the amount withheld under the existing variation provisions in section 15-15 (including a variation to nil), on the basis that the income is exempt (e.g. because of a double tax agreement). Where the income is exempt the amount withheld will not reflect the ultimate tax liability of the foreign resident and a variation under subsection 15-15(1) can be made based on the special circumstances of the particular foreign resident.
5.50 The current PAYG withholding obligations in Part 2-5 will have priority over the new foreign resident withholding obligations, except for the voluntary agreements provision (section 12-55). The reason for this is that if withholding is already required by an existing provision then the desired outcome, for withholding to occur, is already achieved. The new obligations will only apply to payments that fall outside the existing PAYG withholding system. The table in subsection 12-5(2) is amended to ensure that all the withholding provisions in Division 12 apply in priority to the new withholding obligations. It is not necessary to mention the voluntary agreements withholding obligation because the note after the table explains that it covers a payment only if no other provision requires the payer to withhold. [Schedule 5, items 4 and 5]
5.51 The new withholding obligations will have priority over the voluntary agreements withholding obligation, which is designed so that payees who are not otherwise covered by withholding can 'volunteer' into withholding, if they and the payer agree. The voluntary agreements withholding obligation only operates if no other provision in Division 12 requires the paying entity to withhold an amount from the payment (paragraph 12-55(1)(b)). Consequently, no amendment is needed to give these new withholding obligations for foreign residents priority over the voluntary agreements withholding provision.
Amount to be withheld under the new withholding obligations
5.52 The amount to be withheld under the new obligations will be specified in the regulations.
5.53 This is achieved by including the new withholding obligations within the scope of subsection 15-10(2), which allows regulations to be made specifying the rate at which amounts are to be withheld. Subsection 15-10(2) is amended to include a reference to Subdivision 12-FB. [Schedule 5, item 7]
5.54 Rates of withholding will be determined as regulations are developed.
Penalties and offences
Failure to withhold - civil penalty
5.55 The existing civil penalty for failure to withhold by an entity other than an exempt Australian government agency, specified in section 16-30, will apply for the new withholding provisions. No amendment is required. This is because section 16-30 imposes a penalty where there is a failure to withhold as required by Division 12, and the new withholding obligations created by these amendments are inserted into Division 12.
5.56 There are existing civil penalties for failure to withhold by an exempt Australian government agency. These are specified in section 16-35 for a payment other than of a dividend, interest or a royalty and in section 16-40 for payments that are dividends, interest and royalties. The penalty specified in section 16-35 will not apply where there is a failure to withhold from a payment to a foreign resident under Subdivision 12-FB. [Schedule 5, item 10]
5.57 Instead, a new civil penalty provision for exempt Australian government agencies will mirror the existing penalty in section 16-40 for failure to withhold from a dividend interest or royalty payment. The amount of the penalty is the amount that the exempt Australian government entity failed to withhold, and is due at the time when the agency would have had to pay to the Commissioner the amount required to be withheld. [Schedule 5, item 13, section 16-43]
5.58 Amendments are made to include references to new section 16-43 in the following provisions:
- the notes following subsections 16-25(1) and (2) [Schedule 5, items 8 and 9]
- section 16-45 (about remission of penalties) and section 16-50 (about GIC on unpaid penalty amounts) [Schedule 5, items 14 to 16]
- subsection 250-10(2) (list of tax related liabilities) [Schedule 5, item 29]
5.59 The offence provision of section 20-35 will apply to the new withholding obligations.
5.60 References to the new withholding provision where an amount is received for a foreign resident are inserted into paragraphs 20-35(2)(a) and 20-35(2)(b) to ensure that it will not be an offence for a foreign resident to claim a credit for amounts withheld on their behalf under section 12-317. [Schedule 5, items 26 and 27]
Annual reports about withholding payments
5.61 The existing annual reporting requirements specified in section 16-153 will apply to payments from which withholding is required by sections 12-315 or 12-317. The requirements will be the same as those for payments covered by dividend, interest and royalty withholding, no ABN withholding, mining withholding and natural resource payment withholding. Accordingly, the entity affected (generally the payer) will give a report to the Commissioner in the approved form not later than 31 October after the end of the financial year.
5.62 Paragraphs 16-153(1)(a) and (b) are amended to refer to the new withholding obligation for payments to foreign residents. Paragraphs 16-153(1)(c) and (d) are amended to refer to the new withholding obligation where an amount is received for a foreign resident. [Schedule 5, items 17 to 20]
5.63 Payers will be required to provide annual payment summaries, and part-year payment summaries where requested, in the approved form in relation to amounts withheld from payments to foreign residents under the new withholding obligations. Paragraph 16-155(1)(a) (that explains when it is necessary for a payer to provide an annual payment summary to a recipient) is amended and paragraph 16-155(1)(baa) is inserted, to include references to the new withholding provisions. [Schedule 5, items 21 to 22]
5.64 Many foreign residents will only have short term or one-off payments for which a payee may want a part-year payment summary. Paragraph 16-160(1)(a) is amended and paragraph 16-160(1)(ba) is inserted, to include references to the new withholding provisions. [Schedule 5, items 23 to 24]
Credits for amounts withheld
5.65 The recipient of a payment from which an amount is withheld under the new withholding obligations will be entitled to a credit for the amounts withheld. The entitlement to a credit arises when the Commissioner makes an income tax assessment (or determines that no income tax is payable) for the income year.
5.66 No amendment is necessary for the crediting of amounts withheld under section 12-315 from payments to foreign residents because Subdivision 18-A (crediting amounts against liability for income tax, withholding tax or mining withholding tax) can already achieve the desired result. The main crediting provision would be section 18-15, with section 18-20 applying where the recipient is a partnership and section 18-25 where the recipient is a trust.
5.67 The crediting rules will also apply to amounts withheld where an amount is received for a foreign resident. An amendment is necessary to enable this to occur. Subsection 18-10(2) is inserted to provide that if an amount is withheld under section 12-317, sections 18-15, 18-20 and 18-25 are applied in the same way as if the payment has been made to the likely foreign recipient. This rule will ensure that the foreign resident may obtain a credit for the amount withheld. [Schedule 5, item 25]
5.68 Division 3 of Part IIB of the TAA 1953 sets out how the Commissioner must treat a credit. These generic rules will apply to credits for amounts withheld under the new withholding events.
Recovery, through estimates and director penalties, of amounts withheld but not remitted
5.69 There are rules in Division 8 of Part VI of the ITAA 1936 thatfacilitate the recovery of amounts that have been withheld under Division 12 but not remitted to the Commissioner. The rules empower the Commissioner to make an estimate of the amount and recover the amount of the estimate. Division 9 of Part VI of the ITAA 1936 deals with penalties for directors of companies that fail to remit amounts to the Commissioner as required by the PAYG withholding system. These rules will also apply for the recovery of amounts withheld but not remitted under the new withholding obligations for payments to foreign residents. No amendment is required because the rules currently apply for the recovery of amounts withheld under Division 12.
5.70 A reference to subsection 12-319(1) is inserted as new item 1A into the table in section 20-80 to ensure that the decision not to grant an exemption from withholding is one which can be objected to under Part IVC of the TAA 1953. [Schedule 5, item 28]
5.71 The new withholding arrangements will apply to payments made on or after 1 July 2003. Due to the nature of withholding, the new obligations will only apply prospectively. [Schedule 5, item 30]
5.72 The table in section 10-5 of Schedule 1 to the TAA 1953 provides a summary of the withholding payments that are covered by the PAYG withholding system. References to the two new withholding events, sections 12-315 and 12-317, that will apply to payments to foreign residents are inserted. [Schedule 5, item 1, section 10-5, items 22B and 22C in the table]
5.73 A consequential amendment is made to subsection 16-40(2) and the note following to amend the reference to 'entity' to 'exempt Australian government agency'. [Schedule 5, items 11 to 12]
5.74 The objective of this measure is to improve the compliance of foreign residents with their Australian tax obligations through the use of withholding arrangements that can be tailored to address risks of non-compliance.
5.75 The Review of Business Taxation concluded that there are high levels of non-compliance by non-residents without a permanent presence in Australia, with their Australian income tax obligations. Recommendation 21.6 of A Tax System Redesigned recommended a new withholding systems for collecting tax from non-residents in respect of Australian source income and gains on the disposal of assets.
5.76 On 14 May 2002 the Minister for Revenue and Assistant Treasurer announced that the Government had decided to adopt a modified approach to the Review of Business Taxation recommendation. The approach minimises the compliance burden on Australian businesses by allowing withholding obligations to be developed as required for specific payments.
5.77 The proposed measure is designed to address non-compliance by foreign residents in a manner that is proportionate to specific areas of non-compliance and that recognises the need to minimise the impact of those measures on Australian and foreign resident taxpayers who do meet their obligations.
5.78 The measure is intended to improve the overall compliance of foreign residents, reaching a balance between revenue protection and costs of compliance.
5.79 The proposed measure will introduce new withholding obligations to apply to certain payments made to foreign residents, that will be prescribed by regulation. A regulation to specify a particular payment to which withholding will apply would be made where there is non-compliance with Australian tax obligations and after consultation with affected parties. Foreign residents for whom an amount has been withheld will be entitled to a credit on assessment for the amount withheld. This measure is considered to be the only feasible method of achieving the objective of collecting tax from foreign residents in receipt of certain payments and ensuring that they comply with their obligations under Australian tax law.
5.80 The new withholding obligations will be supported by the existing PAYG withholding system. The existing generic withholding rules will cover such things as when the withheld amount must be paid to the Commissioner (Subdivision 16-B of Schedule 1 to the TAA 1953), entitlement of the recipient of the payment to a credit for the amount withheld (Subdivision 18-A of Schedule 1 to the TAA 1953) and offences (Subdivision 20-B of Schedule 1 to the TAA 1953).
5.81 The new PAYG withholding obligations will provide for amounts to be withheld from payments derived in Australia by foreign residents. It will not cover interest, dividend and royalties. These are already subject to withholding under specific provisions of the current law.
Impact group identification
5.82 The measure will introduce obligations to withhold from certain payments to foreign residents, and from payments received for foreign residents, that are prescribed in the regulations. The broad impact groups who may be affected by the measure include:
- Australian resident payers, and residents in receipt of amounts for foreign residents;
- foreign residents who receive payments prescribed in the regulations; and
- the ATO, who will administer the new arrangements.
Analysis of costs / benefits
Australian resident payers
5.83 Australian resident individuals and entities who make payments to foreign residents of the kind to be prescribed in the regulations will have new obligations under the measure. These payers will be required to withhold from the payments for which there is not currently a requirement to withhold. They will then be required to pay the amounts to the Commissioner. The new withholding obligations are accompanied by requirements to provide payment summaries to the payee and annual reports to the ATO. These obligations will increase the work required by these entities to comply with the law. However, it is expected that most of these resident entities will have existing obligations under the PAYG withholding system, for example, to withhold from payments of salary or wages to their employees. Therefore the increase in work is expected to be minimal in most cases.
5.84 There is expected to be a compliance impact on the small number of payers who are not currently payers in the withholding system. The payers will need to familiarise themselves with the new requirements and register as withholders. They will then have to withhold, pay amounts to the Commissioner and report. This will moderately increase their costs of compliance.
5.85 There will also be new obligations to withhold by those residents who receive payments for foreign residents of the kind prescribed in the regulations on behalf of foreign residents. These obligations are the same as those for the resident payers, including the requirement to provide payment summaries and annual reports.
5.86 Payments will only be regulated where there is a risk of non-compliance. The targeting of specific payments is intended to ensure that there is no unnecessary burden placed on Australian businesses in instances where foreign residents are already meeting their Australian tax obligations.
Foreign residents who receive payments specified in the regulations
5.87 Foreign residents who receive payments of a kind specified by regulation will be affected by the measure. These foreign residents will only receive the net amount of the payment, rather than the gross amount. In order to claim a credit for the amount withheld they will need to lodge a tax return in Australia. The obligation to lodge the return already exists under Australian income tax law for those foreign residents who derive income that is taxable in Australia. There will be an increased compliance burden only for these foreign residents who are not meeting their existing obligations.
5.88 Foreign entities will be able to apply for a variation to the amount to be withheld, including to nil, if the rate specified in the regulations is unlikely to reflect the taxpayers' ultimate tax liability. Foreign residents who have an established record of compliance with the PAYG instalments system and their other tax obligations in Australia will also be able to apply to be exempt from withholding. The process of applying for the variation or exemption will be similar to that currently in place under the PAYG withholding system.
5.89 Withholding may, in some cases, occur from payments to foreign residents who will ultimately have no tax liabilities in Australia, usually due to the operation of a Double Tax Agreement. These foreign residents may apply for a variation to nil. If they do not do this then amounts that are withheld can be claimed by lodging an income tax return.
5.90 The key benefit of the measure is the facilitation of the collection of tax from certain payments to foreign residents through withholding, and the resulting increase in compliance of those foreign residents with their income tax obligations in Australia.
Australian Taxation Office
5.91 The ATO will be responsible for the administration of the new arrangements. The ATO administers the existing PAYG withholding systems and will administer the new obligations using existing resources and administrative systems. A new variation processing system is being developed which includes internet based applications.
5.92 There will also be an initial increase in the ATO's workload. The approach of regulating specific payments will allow for focused support and education by the ATO to be directed to those who fall within the regime in an industry specific manner.
5.93 There will be an initial increase in the administrative work of the ATO due to an increased number of applications for exemptions and variations from foreign residents who claim to either have established a history of compliance with the PAYG instalment system in Australia or feel that the rate of withholding will not accurately reflect their final tax liability.
5.94 The proposal will increase revenue collections by increasing the compliance of foreign residents with Australian tax laws. The magnitude cannot be estimated until the specific payments to be covered by the measure have been determined.
5.95 The new withholding obligations are a means of tightening current collection arrangements, and are not a new tax. However, some foreign residents may find contracts in Australia less attractive under the new arrangements. This would be offset by the improved competitiveness of resident individuals and entities participating in the industries for which payments are prescribed. The new withholding requirements will remove the advantage that some foreign residents currently have from lower costs through not paying tax in Australia compared to the costs of residents.
5.96 Consultation on the framework legislation took place on 28 November 2002. Representatives attended the consultation from Treasury, the ATO and the tax professional bodies. Consultation will also take place with affected parties throughout the regulation making process. Once sectors are identified as a compliance problem consultation will take place to determine how to best support affected parties in meeting their tax obligations.
5.97 The proposal put forward is considered to be the only method for achieving the objective that foreign residents understand and meet their Australian tax obligations. Use of the existing PAYG arrangements will minimise implementation costs for Australian businesses and the ATO.
5.98 The proposal will also protect the revenue by implementing a collection mechanism that is particularly suited to foreign-resident taxpayers. Withholding is particularly suitable because the tax is collected from the resident payer in Australia before it is paid offshore. This contrasts with other collection systems, including the PAYG instalment system, which rely on the foreign resident to pay the tax from outside Australia.
5.99 The annual reporting will facilitate the collection of complete and up to date information on foreign resident taxpayers which will allow the ATO to better support this group in meeting their tax obligations.
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