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Withholding for foreign residents: an ATO focus area

13th Sep, 2024

Does your business or investment structure make payments such as interest, dividends or royalties to any foreign residents? You may be required to withhold tax from these payments. The ATO is currently focusing on ensuring that taxpayers are aware of these obligations.

If these withholding requirements apply to you, you’ll need to lodge a PAYG annual report or an annual investment income report, and withhold and pay the correct amount of tax.

Figuring out whether an obligation to pay withholding tax arises from a particular payment can be complex. Assuming your structure is resident in Australia, the starting point is that the withholding tax regime generally applies to interest, dividends and royalties derived by foreign residents, unless an exemption applies. This means the withholding tax obligation arises whether you make the payment to the foreign resident, credit it to their account, or deal with the payment on their behalf or at their direction. (Certain payments can also be captured if your structure is not resident but has a permanent establishment in Australia.)

However, a number of exemptions apply. These can be technical in operation, so it’s important to seek advice specific to your circumstances if you make any payments to non-residents.

The ATO is alert to payers who have not withheld and paid amounts (or have withheld and paid incorrect amounts), incorrectly relied on an exemption or treaty relief, or misclassified deductions for interest or royalty payments to an offshore entity.

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