When you make a payment of interest, dividend, royalty, or managed investment trust (MIT) payments to a non-resident, you may have an obligation to withhold tax. Withholding rates vary according to the type of payment, and whether the payee is a resident of a treaty country.
Issues that we've observed in privately owned and wealthy groups include:
- failure to lodge a PAYG withholding from interest, dividend and royalty payments paid to non-residents – annual report or an annual investment income report
- withholding tax hasn't been withheld or paid, or an incorrect amount is withheld or paid
- deductions for interest or royalty payments to an offshore entity are incorrectly claimed or misclassified on tax returns
- withholding tax exemption or tax treaty relief are incorrectly claimed
- inappropriate reliance on the exemption in section 128F or section 128FA of the ITAA 1936 to avoid liability to interest withholding tax – this includes where there was already an arrangement, agreement or understanding, that the debenture or debt interest would be issued to particular parties in a way that makes the offer not truly available to the public
- uncommercial arrangements where entities claim income tax deductions on an accruals basis but withholding tax isn't paid when deductions are claimed
- artificial structuring used to obtain a reduced withholding tax rate under a double-tax agreement
- artificial structuring and interposed offshore entities used to obtain a refund (in full or in part) of the withholding tax already withheld in Australia.
For more information on how the non-resident withholding tax mechanism works, refer to our guidance:
- Investment income and royalties paid to foreign residents
- Interest, dividends, royalties, and MIT payments
- Who withholds
- When to withhold
- Withholding rate
- Obligations
- Taxpayer Alert TA 2018/4 Accrual deductions and deferral or avoidance of withholding tax provides a summary of our concerns regarding arrangements where income tax deductions are claimed on an accruals basis but withholding tax isn't paid when deductions are claimed.
- Taxpayer Alert TA 2020/3 Arrangements involving interposed offshore entities to avoid interest withholding tax provides a summary of our concerns regarding arrangements that use offshore entities to avoid interest withholding tax.
- Taxpayer Alert TA 2022/2 Treaty shopping arrangements to obtain reduced withholding tax rates provides a summary of our concerns regarding arrangements designed to obtain the benefit of reduced withholding tax rates in relation to royalty or dividend payments from Australia. These arrangements may involve an interposed entity.