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Edited version of your private ruling
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Ruling
Subject: Foreign entity services subject to withholding
Question:
Are the payments made by the payer to the foreign entity for services rendered on design work on major construction project in Australia subject to withholding provisions stipulated under section 12-315 Schedule 1 to the Taxation Administration Act 1953 (TAA)?
Answer: Yes
This ruling applies for the following period:
Financial year ending 30 June 2012.
The scheme commenced on
1 July 2011
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
The payer is a joint venture entity which is part of a consortium.
The payer has engaged the services of a foreign entity to assist in the design of a project in Australia.
A copy of the subcontract agreement between the payer and foreign entity has been provided.
Relevant legislative provisions
Taxation Administration Act 1953 (TAA) Schedule 1 Section 12-315.
Taxation Administration Regulations 1976 Regulation 44C
Reasons for decision
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
Section 12-315 Schedule 1 of the TAA provides that an entity that carries on an enterprise must withhold from a payment it makes to another entity in the course or furtherance of the enterprise, if the entity receiving the payment is a foreign resident.
Taxation Ruling TR 2006/12 Income tax: withholding on payments to foreign residents for works and related activities considers what constitutes a payment for works or related activity for the purpose of regulation 44C of Taxation Administration Regulations 1976 (TAR 1976)
Paragraph 2 of TR 2006/12 states;
Sections 12-315 and 12-317 of subdivision 12-FB -'Payments to foreign residents etc' of part 2-5 of Schedule 1 to the Taxation Administration Act 1953 (TAA) impose an obligation on payers to withhold an amount from certain types of payments made to foreign entities or received for foreign entities (called 'payees' in this ruling). This Ruling provides guidance as to when an obligation to withhold an amount arises under sections 12-315 and 12-317.
Paragraphs 4 and 5 of TR 2006/12 states:
4. For the purpose of paragraph 12-315(1)(b) a prescribed payment pursuant to regulation 44C is a payment made under a contract entered into after 30 June 2004 for works or related activities (including payments to subcontractors).
5. 'Works' takes on its ordinary meaning as understood in the construction, infrastructure and resource sectors and specifically includes the construction, installation and upgrading of buildings, plant and fixtures (see definition of 'works' in subregulation 44C(3)). That subregulation provides examples of what are considered works for the purposes of the regulation. The word 'plant' as used in the definition of 'works' in subregulation 44C(3) includes both fixed and movable plant.
Paragraph 12 of the TR 2006/12 states:
Pursuant to subregulation 44C(2), an amount of 5% is to be withheld from each payment for works or related activities.
In example 5 in TR 2006/12, it is stated that bridging design work are related activities. The foreign resident that received the payment was subject to the foreign resident withholding of 5%.
Conclusion:
The foreign entity is subject to a withholding tax of 5% on payments received by it from the payer for design work carried out on a project in Australia.