Kurt Burrows and Andrew Bath, Corporate Tax Specialists, discuss exemption to withholding tax eligibility.
In today’s world, it is commonplace to engage foreign contractors, particularly where construction, substantial repairs or upgrades of specialised equipment is required. Often, internal tax teams won’t initially be aware of, or be consulted in, negotiating terms for these arrangements.
Were you aware that the Really Important Machine was upgraded by the Widget Repair Company from Wakanda? If so, did you think to withhold (and remit) 5 percent tax from the payments? Were you required to gross-up the payments to make the Widget Repair Company whole?
The Widget Repair Company may be eligible for an exemption from withholding – saving you the hassle and also potentially any additional cost due to the gross-up clause. The Commissioner is able to grant an exemption from this withholding for various reasons, the most common of which is that the income is not assessable in Australia (by virtue of a double tax treaty) or because the foreign contractor meets certain conditions to do with their compliance history.
The exemption from withholding needs to be granted by the Commissioner in writing and, as part of the contracting process, you should either request and receive a copy of PAYG foreign resident withholding variation or otherwise plan to withhold and turn your mind to any gross up clause in the contract for service.
Have a chat with your procurement or accounts payable team to understand what contracts may already be impacted and also to agree the process for engaging foreign contractors in the future. As always, we are here to help.