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Edited version of your written advice
Authorisation Number: 1012808178803
Ruling
Subject: Withholding tax - PAYG
Question
Is company X obligated to withhold tax from payments made to individual service providers in Country Y?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
The scheme commences on:
1 July 2013
Relevant facts and circumstances
Company X (the company) is a company incorporated in Australia and taken to be registered for the purposes of the Corporations Act 2001.
The company is a resident of Australia for taxation purposes.
The core business of the company is to assist Australian based clients gain access to a large pool of highly skilled employees in Country Y.
The Australian clients pay the company a fee for the use of Country Y service providers. The company then pays the service providers on agreed remuneration.
Country Y service providers undertake all work in Country Y.
Country Y service providers are solely tax residents of Country Y.
Relevant legislative provisions
Taxation Administration Act 1953 Subsection 12-1(1) of Schedule 1
Taxation Administration Act 1953 Section 12-60 of Schedule 1
Income Tax Assessment Act 1997 Section 6-20
International Tax Agreements Act 1953
Agreement between the Government of Australia and the Government of Country Y for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on income
Reasons for decision
Subsection 12-60(1) of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) states that an entity that carries on the business of arranging for persons to perform work or services directly for clients is liable to withhold an amount from payments it makes to an individual in the course of the enterprise. For withholding to apply, the payment must be made under an arrangement that, in whole or in part, involves the performance of work or services by the individual directly for a client of the entity, or directly for a client of another entity.
However, subsection 12-1(1) of Schedule 1 to the TAA 1953 states that there is no requirement to withhold an amount from a payment if the whole of the payment is exempt income of the entity receiving the payment.
Section 6-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.
In determining ability to Australian tax, it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).
Article 15 of the Agreement between the Government of Australia and the Government of Country Y for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on income (the agreement) provides that salary, wages and other similar remuneration derived by a resident of Country Y shall be taxable only in that country unless the employment is exercised in Australia.
In this case, the service providers are foreign residents for Australian taxation purposes; they undertake all work in Country Y. The remuneration paid to service providers is exempt income. Therefore, the company is not obligated to withhold tax from payments made to individual service providers in Country Y.