House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 5 - Foreign resident withholding - application to alienated personal services payments

Outline of chapter

5.1 Schedule 5 to this bill amends section 12-7 of Schedule 1 to the TAA 1953 to ensure that the foreign resident withholding rules will apply to alienated personal services payments that are payments of a kind prescribed to be covered by the foreign resident withholding rules. The purpose of the amendment is to facilitate the efficient collection of tax.

Context of amendments

5.2 Section 12-7 of Schedule 1 to the TAA 1953 provides that Division 12 of Schedule 1, which includes the foreign resident withholding rules in Subdivision 12-FB, does not apply to alienated personal services payments.

5.3 An alienated personal services payment is a payment received by an entity that relates to an amount that is included in the assessable income of an individual under Division 86 of the ITAA 1997. These payments may also be payments of a kind prescribed to be covered by the foreign resident withholding rules.

5.4 Currently, it is arguable that no tax will be collected through withholding from an alienated personal services payment due to the operation of section 12-7. The entity receiving the payment may be liable to pay an amount to the Commissioner under Division 13 of Schedule 1.

5.5 The intention is to remove any doubt that the foreign resident withholding rules apply to alienated personal services payments. The amendment will achieve this result.

Summary of new law

5.6 This amendment to the TAA 1953 will ensure the foreign resident withholding rules apply to payments made to entities receiving personal services income, in addition to the alienated personal services rules in Division 13. The rules collect different tax liabilities. Division 13 collects the liability of the service provider under the personal services income rules. Subdivision 12-FB will collect the tax liability of the personal services entity.

Detailed explanation of the amendments

5.7 Section 12-7 currently excludes all provisions of Division 12 from applying to alienated personal services payments. To ensure that certain withholding rules can apply to these payments, the introductory paragraph of section 12-7 is amended to except from the broad exclusion the provisions of Division 12 that are specified in subsection 12-7(2). [Schedule 5, item 1]

5.8 Subsection 12-7(2) is inserted to specify the provisions of Division 12 that will apply to alienated personal services payments. Paragraph 12-7(2)(a) specifies Subdivision 12-FB, the foreign resident withholding rules. Section 12-7 also currently prevents the operation of general rules in Division 12, some of which are necessary for the proper application of Subdivision 12-FB. Paragraph 12-7(2)(b) is inserted to ensure the general rules of Division 12 will apply to the extent that they apply in relation to Subdivision 12-FB. The amendment will ensure that, for example, section 12-15 will apply to require amounts withheld under Subdivision 12-FB to be expressed in Australian currency. [Schedule 5, item 2]

5.9 The amendments commence on Royal Assent and will apply to payments made after commencement.