Private ruling: Pay As You Go Withholding - Foreign Resident Employee
Date of advice: 22 March 2016
Published: May 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are you required to withhold tax from foreign residents engaged to work in sports and entertainment activities? | A1: Yes | Q2: Are you required to withhold an amount referred to as "No ABN withholding" under Division 12 of Schedule 1 to the Taxation Administration Act 1953 (TAA) from a payment to an entity that provides a Statement by a Supplier as a non-resident who is not carrying on an enterprise in Australia? | A2: No | Q3: Does the Australian Double Tax treaty with Country X impact on whether to withhold from payments from suppliers who are Country X residents in relation to sports and entertainment activities? | A3: Yes

Relevant facts and circumstances: The organisation is a not for profit incorporated association. The association organises tournaments in Australia. The association may hire foreign residents to work in various jobs. The association held a large tournament in 20XX. At the tournament, the association engaged the services of two Country X residents. One of the residents was a director whose main job is to adjudicate disputes. The other resident is a journalist whose job is to edit and compile a daily news bulletin which is distributed to all participants of the tournament. Over a XX day period, the association will pay the employees' wages. They are also reimbursed travel costs from Country X to Australia and provided hotel accommodation.

Relevant legislative provisions: Taxation Administration Act 1953 Schedule 1, Division 12. | Taxation Administration Act 1953 subsection 12-190(4 ) to (6) of Schedule 1 | International Tax Agreements Act 1953

Reasons for decision: Summary: 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 your case, you are making payments to foreign residents who work in the sports and entertainment industry, the sporting director and journalist, and are required to withhold a portion of their payment. 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: | Detailed Reasoning - 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. | Detailed Reasoning - Question 2: The PAYG withholding system, contained in Part 2-5 in Schedule 1 to the TAA 1953, was introduced for paying instalments during the income year towards an expected income tax liability for any business and investment income. The table in section 10-5 in Schedule 1 to the TAA 1953 provides a summary of payments and other transactions covered by PAYG. Where a supplier does not provide their ABN or a statement that they are not carrying on an enterprise, the payer should withhold 46.5% of the payment unless one of the exceptions in subsections 12-190(4 ) to (6) of Schedule 1 to the TAA 1953 applies. You do not need to withhold an amount from a payment if the supplier has given you a written statement that states the supplier is not entitled to an ABN as they are not carrying on an enterprise in Australia. However, you should withhold if you have reasonable grounds to believe that the statement supplied is false or misleading. Suppliers cannot use the "Statement by a Supplier" form if any of the following apply: • they are receiving payments for the supply as an employee • their activity is not wholly of a private or domestic nature • they are receiving payments for the supply as a company director or office holder • they are receiving payments for the supply under a labour hire arrangement or specified payment • they are receiving payments for the supply as a religious practitioner • they are entitled to an ABN for the relevant activity. In your case, if the individuals provide a "Statement by a supplier" stating the reason for not quoting an ABN is that they are non-resident who is not carrying on an enterprise in Australia and you have no reason to believe the statement is false or misleading, you will not be penalised if it is subsequently found that a false or misleading statement was made. | Detailed Reasoning - Question 3: There is a double tax agreement in force between Australia and Country X (the Country X Agreement) which operates to avoid the double taxation of income received by residents of Australia and Country X. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision of an Agreement that is listed in section 5 of the Agreements Act has the force of law. The Country X Convention (the full title of which is the Convention between Australia and Country X for the avoidance of double taxation with respect to taxes on income and fringe benefits and the prevention of fiscal evasion) is listed in section 5 of the Agreements Act as being a current Agreement that has the force of law. Article 14 of the Country X Convention specifies that salaries, wages and other similar remuneration derived by a resident of Country X shall be taxable only in Country X unless the employment is exercised in Australia and that when such employment is exercised in Australia, then the income earned from that employment may also be taxed in Australia. Article 23(2) of the Country X Convention provides that tax paid under the law of Australia and in accordance with the Country X Convention, in respect of income derived by a taxpayer who is a resident of Country X from sources in Australia, shall be allowed as a credit against Country X tax payable in respect of that income. | Detailed Reasoning - Application to your circumstances: The director and journalist are Country X residents for taxation purposes and earn income from contract employment in Australia. Despite the fact that they pay tax on this income in Australia, the income is also included in their assessable income in Country X under the provisions of Article 14 of the Country X Convention. Because the income they derive from their employment in Australia is assessable in Country X, they will be entitled to a foreign tax credit to the equivalent of the Australia income tax they pay on that income.