Edited version of private ruling

Authorisation Number: 1011515214784

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Ruling

Subject: Pay As You Go (PAYG) withholding - payments to foreign residents

Issue 1

1. Was the Company required by section 12-315 of Schedule 1 to the Taxation Administration Act 1953 (TAA) to withhold an amount of tax from the commission payment it made to a foreign bank?

Yes.

2. Was the Company required by section 12-315 of Schedule 1 to the TAA to withhold an amount of tax from the expense reimbursement and commission payments it made to a foreign company?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Issue 2

Is the Company liable to pay to the Commissioner a penalty for failing to withhold tax from the commission payment it made to a foreign bank?

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

The Company was incorporated.

The Company is an Australian company carrying on an enterprise of property development in Australia.

The Company borrowed funds from a foreign country to undertake the project.

The Company contracted the foreign bank to source the loan. The contract for the sourcing of the loan was entered into after 30 June 2004.

Apart from visiting Australia for two days to inspect the site, the foreign bank performed all the work relating to the sourcing of the loan in the foreign country.

The Company paid the foreign bank commission for sourcing the loan.

The foreign bank has a permanent establishment in the foreign country.

The foreign bank is a foreign resident for tax purposes.

The foreign bank is not covered by an exemption granted by the Commissioner under subsection 12-319(1) of Schedule 1 to the TAA.

The Company contracted the foreign company to sell the properties overseas. The contract for the selling of the properties was entered into after 30 June 2004.

The foreign company performed all the work relating to the selling of the properties in the foreign country.

The Company reimbursed the foreign company for the function expenses it incurred in selling the properties and paid the foreign company commission for the properties it sold.

The foreign company is a marketing company having a permanent establishment in the foreign country.

The foreign company is a foreign resident for tax purposes.

The foreign company is not covered by an exemption granted by the Commissioner under subsection 12-319(1) of Schedule 1 to the TAA.

Relevant legislative provisions

Taxation Administration Act 1953 Schedule 1 Section 12-315.

Taxation Administration Act 1953 Schedule 1 Subsection 12-315(1).

Taxation Administration Act 1953 Schedule 1 Subsection 12-315(2).

Taxation Administration Act 1953 Schedule 1 Subsection 12-319(1).

Taxation Administration Act 1953 Schedule 1 Subsection 15-10(2).

Taxation Administration Act 1953 Schedule 1 Section 16-30.

Taxation Administration Act 1953 Schedule 1 Section 298-20.

Taxation Administration Regulations 1976 Regulation 44C.

Reasons for decision

Issue 1 Question 1

Summary

The Company was required by section 12-315 of Schedule 1 to the TAA to withhold an amount of tax from the portion of the commission payment it made to the foreign bank that relates to the activities the bank performed in Australia.

Detailed reasoning

Part 2-5 (sections 10-1 to 20-80) of Schedule 1 to the TAA relates to the PAYG withholding system.

Section 12-315 relates to payments to foreign residents.

Subsection 12-315(1) provides that an entity (the payer) that carries on an enterprise must withhold an amount of tax from a payment it makes to another entity in the course or furtherance of the enterprise if all of the following conditions are satisfied:

(a)   The entity receiving the payment is covered by subsection (2).

(b)   The payment is of a kind set out in the regulations.

(c)   The payment is not:

(i) a dividend, interest or a royalty;

(ii) a departing Australia superannuation payment;

(iii) a natural resources payment;

(iv) a mining payment; or

(v) a fund payment.

(d)   The entity receiving the payment is not covered by an exemption granted by the Commissioner under subsection 12-319(1).

Subsection 12-315(2) provides that an entity is covered by this subsection if any of the following conditions is satisfied:

(a)   The entity is a foreign resident.

(b)   The payer believes or has reasonable grounds to believe that the entity is a foreign resident.

(c)   The payer has no reasonable grounds to believe that the entity is an Australian resident and:

(i) the entity has an address outside Australia (according to any record maintained by the payer or on the payer's behalf); or

(ii) the payer is authorised to make the payment at a place outside Australia (whether to the entity or to anyone else).

(d)   The entity has a connection outside Australia of a kind set out in the regulations.

Subsection 12-319(1) allows the Commissioner to grant an entity (the payee) an exemption for the purposes of subsection 12-315(1). If the Commissioner grants the exemption, the payer is not required under subsection 12-315(1) to withhold an amount of tax from the payments it makes to the payee.

Subsection 15-10(2) provides that the amount of tax that subsection 12-315(1) requires to be withheld from a payment is to be worked out under the regulations.

Regulation 44C of the Taxation Administration Regulations 1976 (TARs) relates to the withholding of tax from payments to foreign residents for construction and related activities.

Regulation 44C provides that:

· For the purposes of subsection 12-315(1) of Schedule 1 to the TAA, payment under a contract entered into after 30 June 2004 (including payments to subcontractors) for works or related activities is prescribed.

· The amount of tax to be withheld is 5% of each payment.

· In this regulation 'works' includes the construction, installation and upgrading of buildings, plant and fixtures.

· In this regulation 'related activities' includes activities associated with the construction, installation and upgrading of buildings, plant and fixtures.

Taxation Ruling TR 2006/12 considers what constitutes a 'payment under a contract entered into after 30 June 2004 (including payments to subcontractors) for works or related activities' for the purposes of regulation 44C of the TARs.

TR 2006/12 provides that:

The works and related activities covered by regulation 44C are restricted to those performed in Australia.

Related activities will include all activities associated with works, that is, activities which enable the works to be undertaken or are necessary to the works undertaken. Any activities that are in any way related to those works will be included within the meaning of related activities.

TR 2006/12 contains the following example:

Example 5 - road design

RoadCo Ltd is constructing a new highway to the resort NoWhere for $250 million. RoadCo engages RevHead Ltd, an Australian firm, to supply the engineering design and supervision work for $12 million. RevHead subcontracts a German firm SpeedierCo to design the bridging works for the highway for $3 million. Employees of SpeedierCo come to Australia and inspect the site and return to Germany. The employees return at regular intervals for short periods to Australia to confirm testing of soils and other design parameters. However all the plans and drawings are produced in Germany and then transmitted to RevHead.

The activities performed in Australia by SpeedierCo on the bridging design work are related activities. However, only the portion of the payment to SpeedierCo that relates to those activities performed in Australia is subject to FRW of 5%.

Application to your circumstances

We accept that the Company carries on an enterprise of property development and that the Company made the commission payment to the foreign bank in the course or furtherance of the enterprise.

The foreign bank is a foreign resident for tax purposes.

The contract for the sourcing of the loan was entered into after 30 June 2004.

The property development work undertaken by the Company constitutes works for the purposes of regulation 44C of the TARs.

The sourcing of the loan is associated with or related to the property development work undertaken by the Company as the Company obtained the loan to enable to work to be undertaken. Hence, the sourcing of the loan constitutes a related activity for the purposes of regulation 44C of the TARs. Therefore, the contract is for a related activity within the meaning of the regulation.

Apart from visiting Australia for two days to inspect the site, the foreign bank performed all the work relating to the sourcing of the loan in the foreign country.

Therefore, the commission payment made by the Company to the foreign bank is of a kind set out in regulation 44C of the TARs to the extent to which it relates to activities performed by the foreign bank in Australia. Example 5 of TR 2006/12 supports this view.

The payment is not of a kind set out in paragraph 12-315(1)(c) of Schedule 1 to the TAA.

The foreign bank is not covered by an exemption granted by the Commissioner under subsection 12-319(1) of Schedule 1 to the TAA.

Therefore, the Company was required by section 12-315 of Schedule 1 to the TAA to withhold an amount of tax from the portion of the commission payment it made to the foreign bank that relates to the activities the bank performed in Australia.

Issue 1

Question 2

Summary

The Company was not required by section 12-315 of Schedule 1 to the TAA to withhold an amount of tax from the expense reimbursement or commission payments it made to the foreign company.

Detailed reasoning

Part 2-5 (sections 10-1 to 20-80) of Schedule 1 to the TAA relates to the PAYG withholding system.

Section 12-315 relates to payments to foreign residents.

Subsection 12-315(1) provides that an entity (the payer) that carries on an enterprise must withhold an amount of tax from a payment it makes to another entity in the course or furtherance of the enterprise if all of the following conditions are satisfied:

(a)   The entity receiving the payment is covered by subsection (2).

(b)   The payment is of a kind set out in the regulations.

(c)   The payment is not:

(i) a dividend, interest or a royalty;

(ii) a departing Australia superannuation payment;

(iii) a natural resources payment;

(iv) a mining payment; or

(v) a fund payment.

(d)   The entity receiving the payment is not covered by an exemption granted by the Commissioner under subsection 12-319(1).

Subsection 12-315(2) provides that an entity is covered by this subsection if any of the following conditions is satisfied:

(a)   The entity is a foreign resident.

(b)   The payer believes or has reasonable grounds to believe that the entity is a foreign resident.

(c)   The payer has no reasonable grounds to believe that the entity is an Australian resident and:

(i) the entity has an address outside Australia (according to any record maintained by the payer or on the payer's behalf); or

(ii) the payer is authorised to make the payment at a place outside Australia (whether to the entity or to anyone else).

(d)   The entity has a connection outside Australia of a kind set out in the regulations.

Subsection 12-319(1) allows the Commissioner to grant an entity (the payee) an exemption for the purposes of subsection 12-315(1). If the Commissioner grants the exemption, the payer is not required under subsection 12-315(1) to withhold an amount of tax from the payments it makes to the payee.

Subsection 15-10(2) provides that the amount of tax that subsection 12-315(1) requires to be withheld from a payment is to be worked out under the regulations.

Regulation 44C of the TARs relates to the withholding of tax from payments to foreign residents for construction and related activities.

Regulation 44C provides that:

· For the purposes of subsection 12-315(1) of Schedule 1 to the TAA, payment under a contract entered into after 30 June 2004 (including payments to subcontractors) for works or related activities is prescribed.

· The amount of tax to be withheld is 5% of each payment.

· In this regulation 'works' includes the construction, installation and upgrading of buildings, plant and fixtures.

· In this regulation 'related activities' includes activities associated with the construction, installation and upgrading of buildings, plant and fixtures.

TR 2006/12 considers what constitutes a 'payment under a contract entered into after 30 June 2004 (including payments to subcontractors) for works or related activities' for the purposes of regulation 44C of the TARs.

TR 2006/12 provides that:

The works and related activities covered by regulation 44C are restricted to those performed in Australia.

Related activities will include all activities associated with works, that is, activities which enable the works to be undertaken or are necessary to the works undertaken. Any activities that are in any way related to those works will be included within the meaning of related activities.

Application to your circumstances

We accept that the Company carries on an enterprise of property development and that the Company made the expense reimbursement and commission payments to the foreign company in the course or furtherance of the enterprise.

The foreign company is a foreign resident for tax purposes.

The contract for the selling of the properties was entered into after 30 June 2004.

The contract is not for works or related activities within the meaning of regulation 44C of the TARs as it relates to the selling rather than the construction of the properties.

The foreign company performed all the work relating to the selling of the properties in the foreign country.

Therefore, the expense reimbursement and commission payments made by the Company to the foreign company are not of a kind set out in regulation 44C of the TARs.

The payments are not of a kind set out in paragraph 12-315(1)(c) of Schedule 1 to the TAA.

The foreign company is not covered by an exemption granted by the Commissioner under subsection 12-319(1) of Schedule 1 to the TAA.

Therefore, the Company was not required by section 12-315 of Schedule 1 to the TAA to withhold an amount of tax from the expense reimbursement or commission payments it made to the foreign company.

Issue 2

Summary

The Company is not liable to pay to the Commissioner a penalty for failing to withhold tax from the commission payment it made to the foreign bank.

Detailed reasoning

Section 16-30 of Schedule 1 to the TAA provides that an entity (except an exempt Australian government agency) that fails to withhold an amount of tax as required by Division 12 of that Schedule is liable to pay to the Commissioner a penalty equal to that amount.

Section 298-20 of Schedule 1 to the TAA gives the Commissioner the discretion to remit all or part of the penalty.

Law Administration Practice Statement PS LA 2007/22 provides guidelines for determining whether penalties imposed after 22 June 2006 under section 16-30 of Schedule 1 to the TAA for failure to withhold an amount of tax as required by Division 12 of that Schedule should be remitted.

PS LA 2007/22 provides that where an entity voluntarily discloses to the ATO that it has failed to withhold an amount of tax as required by Division 12:

· The penalty should be remitted by 100% to 0% and then increased if necessary.

· The penalty should not be remitted to 0% if the entity has made repeated voluntary disclosures.

· The penalty should be increased by 20% if the entity has been penalised previously for failing to withhold and there has been no lasting improvement in its compliance with its withholding obligations.

The level of penalty imposed should be based upon all relevant circumstances of the entity's case and the principles contained in the ATO's Taxpayers' Charter and Compliance Model.

Application to your circumstances

You made a commission payment to the foreign bank and failed to withhold tax from the payment.

You were required by section 12-315 of Schedule 1 to the TAA and regulation 44C of the TARs to withhold an amount of tax equal to 5% of the portion of the payment that relates to activities performed by the foreign bank in Australia.

Therefore, under section 16-30 of Schedule 1 to the TAA a penalty equal to this amount has been imposed.

However, it is considered that the penalty should be remitted in full for the following reasons:

· The Company voluntarily disclosed to the ATO that it has failed to withhold tax from the payment.

· The Company has not made repeated voluntary disclosures in relation to its failure to withhold tax.

· The Company has not been penalised previously for failing to withhold tax.

· The Company is a new company.

· The amount of tax that the Company was required to withhold is not significant.

Therefore, the Company is not liable to pay to the Commissioner a penalty for failing to withhold tax from the payment.