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Edited version of your written advice
Authorisation Number: 1012984764683
Date of advice: 22 March 2016
Ruling
Subject: Withholding from payments made to persons earning income from sports or entertainment activities
Question 1
Is the game a sports or entertainment activity as defined by Regulation 44B of the Taxation Administration Regulations 1976?
Answer
Yes
Question 2
If foreign residents (not from the overseas country) play in tournaments run by an Australian registered entity, does the payment of prize money to them qualify as a payment attracting withholding?
Answer
Yes
Question 3
Is the prize money awarded to foreign residents taxed at the rate of 32.5c for each $1 as per the withholding schedule?
Answer
Yes
This ruling applies for the following period:
Year ending 30 June 2016
The scheme commences on:
1 July 2015
Relevant facts and circumstances
The organising body is a not for profit incorporated association.
The association organises tournaments in Australia.
The tournaments are open to all comers including teams with foreign residents.
The association held a large tournament in the relevant financial year.
This tournament offered prize money.
The tournament attracted a professional team comprising foreign residents.
The team is sponsored by an overseas entrepreneur who pays the team expenses and professional fees.
The team won the tournament and won prize money.
Relevant legislative provisions
Taxation Administration Act 1953 Schedule 1, Division 12.
Taxation Administration Regulations 1976 Division 6 Regulation 44B
Income Tax Assessment Act 1997 section 405-25
Reasons for decision
Regulation 44B defines entertainment or sports activities as the activities of a performing artist or a sportsperson within the meaning given by section 405-25 of the Income Tax Assessment Act 1997.
This section defines a sporting competition as a sporting activity to the extent that:
(a) Human beings are the only competitors in it; and
(b) Participation in it by human competitors involves primarily exercising physical prowess, physical strength or physical stamina.
The Double Tax Agreement between Australia and the overseas country discusses the entertainment character of a number of sports and entertainment activities.
Article 17 of the Convention applies to income whether it is of a business or employment nature. In particular, Article 17(1) of the Convention applies to activities where an entertainment character is present.
The Commentary on Article 17 provides guidance on how this Article should be interpreted. Specifically, the Commentary provides a number of examples of activities which will be classified as having an 'entertainment character', including billiards, snooker, chess and bridge tournaments. The examples provided are all capable of being played in front of an audience and are forms of entertainment which require mental skill and exertion.
In your case, the tournament was played in front of an audience, and is a form of entertainment that required mental skill and exertion.
Question 2
The foreign resident withholding tax (FRWT) rules contained in Subdivision 12-FB of Schedule 1 to the Taxation Administration Act 1953 (TAA) apply to certain payments made by an entity in the course of carrying on an enterprise.
An FRWT obligation arises (under s 12-315(1) in Sch 1 TAA) if an entity carrying on an enterprise makes a payment in the "course or furtherance of the enterprise" and all the following apply:
(a) the payee entity is a foreign resident;
(b) the payment is prescribed in the regulations;
(c) the payee entity is not covered by an FRWT exemption given under s 12-319(1); and
(d) the payment is not an excluded payment (ie dividends, interest, royalties, a departing Australian superannuation payment, a natural resources payment or a mining payment).
Payments made for entertainment or sports activities are prescribed payments for FRWT purposes. Regulations have been made under the TAA to subject the following payment to FRWT:
payments for entertainment and sports activities, including appearance fees, player awards, bonuses, endorsement fees, expense reimbursements, match payments, non-cash prizes, performance fees, preparation fees, prize money, promotional fees and sponsorship (regulation 44B).
In this case, the foreign residents have received prize money which is a prescribed payment for FRWT purposes.
Question 3
The withholding tax rate is the company tax rate for payments to companies and the foreign resident marginal tax rates for payments to individuals. The current tax rate for companies is 30%.
The tax rates for foreign residents for the 2015-16 income year are as follows:
Taxable income |
Tax on this income |
0 - $80,000 |
32.5c for each $1 |
$80,001 - $180,000 |
$26,000 plus 37c for each $1 over $80,000 |
$180,001 and over |
$63,000 plus 45c for each $1 over $180,000 |
Foreign residents are not required to pay the Medicare levy.
In your case, as the payment is under $80,000.00, the correct amount of withholding tax is 32.5c for each $1.
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