Private ruling: PAYG withholding in respect of overseas entertainers
Date of advice: 28 June 2016
Published: August 2016

Ruling: Q1: Is Company X required to withhold from payments, pursuant to subsection 12-315 (1) of the Taxation Administration Act (TAA) , made to Company Y, a Country Y resident, under an agreement, for services provided wholly in Country Y by an entertainer that is a Country Y resident for income tax purposes? | A1: Yes | Q2: If yes, do the provisions of the Country Y tax treaty with Australia ('Country Y Convention') operate to exempt from Australian income tax, payments made by Company X to Company Y? | A2: Yes

Relevant facts and circumstances: Company X, a resident company, carries on an enterprise in Australia. Company X makes payments to Company Y for the services of a Country Y entertainer under a contract. Company Y and the entertainer are Country Y residents for income tax purposes. The entertainer's services will be provided wholly within Country Y and the contract is governed by the laws of Country Y. Company Y has no presence in Australia. The Country Y entertainer will have no presence in Australia in respect of the provision of the services under the contract.

Relevant legislative provisions: Taxation Administration Act 1953 : Section 12-315 | Taxation Administration Regulations 1976: Regulation 44B | Income Tax Assessment Act 1997: Subsection 6-5(3) Relevant provisions of the Country Y treaty with Australia | Question 1 | Australian income tax and withholding provisions | Subsection 6-5(3) of the Income Tax Assessment Act 1997 ('ITAA 1997') provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year. | The PAYG withholding system is contained in Part 2-5 in Schedule 1 to the Taxation Administration Act 1953 (TAA). Section 12-315 in Part 2-5 of the TAA requires an entity that: | • carries on an enterprise, and | • makes a payment that is: | • of the kind prescribed in the Regulations; and • among others, not a dividend, interest, royalty or a departing Australia superannuation payment | to withhold amounts from that payment if it is made to foreign residents. | Regulation 44B of the Taxation Administration Regulations 1976 prescribes payments for entertainment or sports activities for the purposes of subsection 12-315(1). | Prescribed payments under Regulation 44B include appearance fees, player awards, bonuses, endorsement fees, expense reimbursements, match payments, non-cash prizes, performance fees, preparation fees, prize money, promotional fees and sponsorship. Underlying policy | ATO Law Administration Practice Statement 2006/10 (PS LA 2006/10) provides guidance on the administration by the Commissioner of, among others, Regulation 44B in respect of the foreign resident withholding rules ('withholding rules'). | Paragraph 23 of PS LA 2006/10 clarifies that, the withholding rules require amounts to be withheld from the payments prescribed in the Regulations even where those payments may be exempt from Australian tax pursuant to the provisions of a tax treaty, or non-assessable under Australia's domestic taxation laws. | In the present circumstances, Company X carries on an enterprise in Australia. It makes payments to Company Y for a Country Y resident entertainer's services. The payment is a type of payment prescribed under Regulation 44B. The payment is, among others, not a dividend, interest, royalty or a departing Australia superannuation payment. Accordingly, under subsection 12-315 (1) of the TAA, Company X is required to withhold from the payments made to Company Y. | Question 2 | Although section 12-315 of the TAA imposes an obligation to withhold from a prescribed payment made to a foreign resident, it does not follow that the foreign resident is liable to Australian taxation in respect of that payment. | In the present circumstances, while the payment received by Company Y is subject to withholding, the effect of the Country Y Convention is that Australia does not have the right to tax that payment. | Effect of tax treaties | In determining liability to tax on Australian sourced income of a foreign resident, it is necessary to consider not only the income tax laws but also the tax treaty, if any, between Australia and the foreign resident taxpayer's country of residence. In this regard, the provisions of the applicable tax treaty take precedence over domestic income tax law. | In the present circumstances, the relevant provisions of the Country Y Convention will apply in determining the Country Y resident company's and individual's Australian income tax obligations. | Under the relevant provision of the Country Y Convention ('Entertainer's Article), income derived by entertainers from their personal activities, or income from their personal activities accruing to another entity on their behalf, is taxed in the country in which those activities are exercised. | The rules of the Entertainer's Article take precedence over those of the Country Y Convention Articles dealing with the taxation of 'business profits' of a Country Y enterprise ('Business Profits Article') or 'income from services' provided by a Country Y resident individual ('independent personal services (IPS) or dependent personal services (DPS) Articles. | Accordingly, tax may be imposed under the Entertainer's Article even if an entertainer's income would be exempt from tax in Australia under the Business Profits Article and the IPS or DPS Articles of the Country Y Convention. | On the other hand, if the entertainer's income is exempt from tax in Australia under the Entertainer's Article, but would be taxable under the Business Profits Article to Company Y or the IPS or DPS Articles to the Country Y entertainer, tax may be imposed under one of those articles as the case may be. | In the present case, Company Y has entered into a contract with Company X to provide the services of a Country Y resident entertainer. | Company Y does not have a presence in Australia and the Country Y resident entertainer will not be providing the services covered by the contract, in Australia. | In the above mentioned circumstances the application, or otherwise, of the relevant Articles of the Country Y Convention, previously referred to, is explained as follows: | The Entertainer's Article will not apply to tax the payments in Australia, as the activities of the entertainer are not exercised in Australia. | Broadly, business profits of a Country Y enterprise are subject to tax in Australia under the Business Profits Article only if the enterprise carries on its business in Australia through a fixed place of business referred to as a 'permanent establishment' of the enterprise in Australia. | The payments are not subject to Australian income tax in the hands of Company Y under the Business Profits Article as Company Y does not have a presence in Australia to which the payments can be attributed to in the nature of business profits. | Income derived from independent personal services performed in Australia by an individual may be taxed in Australia under the IPS Article. Similarly, the DPS Article allocates taxing rights to Australia in respect of an individual's income from employment where, subject to other conditions, those employment activities are exercised in Australia. | As the Country Y resident entertainer does not exercise his or her activities in Australia, the payments are not subject to Australian income tax under the IPS or DPS Articles. | In summary, the relevant provisions, as previously stated, of the Country Y Convention, do not apply to allocate taxing rights to Australia in respect of the payments received by Company Y for the services of the Country Y resident entertainer under the contract. | As a result, the payments in question are not assessable under subsection 6-5(3) of the ITAA 1997 as they do not represent income of a foreign resident derived directly or indirectly from an Australian source.


Other advice (does not form part of the private ruling): As the payments made by Company X to Company Y are not subject to income tax in Australia, the Commissioner will use the discretion available to him or her under section 15-15 of the TAA to vary the withholding tax rate, otherwise applicable to those payments, to nil.