The Australian Taxation Office (ATO) has released a ruling
(TR 2006/12) which explains its view of the operation of the
construction withholding tax provisions.
What is construction withholding tax?
Construction withholding tax was introduced in 2004. It
applies to payments for 'works and related activities',
which are given extensive definitions in the tax regulations.
Broadly speaking, it requires a principal or intermediary to
withhold 5 per cent of payments to a foreign contractor under a
construction contract, and pay it to the ATO. The 5 per cent
can be offset against the foreign contractor's income tax
liability for the year, or refunded to the contractor if they
are not required to pay Australian tax (say, if a double tax
treaty applies to them).
The ruling sets out the ATO's approach to the
administration of construction withholding tax; the key points
work done outside Australia does not attract construction
withholding tax, although related work performed in Australia
can be caught
payments under a contract can be apportioned so that only
the part relating to works or related activities is subject
to construction withholding tax
the ATO can provide a variation of the withholding rate,
including to nil. This will be particularly important where
the contractor would otherwise be entitled to the benefit of
a double tax treaty.
If AusCo contracts with USCo to supply and install a
substantial item of plant, which is to be constructed by USCo
in the US, and then installed by USCo in Australia, only that
part of the contract price which relates to
installation will be subject to withholding. The
remainder of the price, relating to the supply of the
plant, will not be subject to withholding. This is a
substantial change from the draft ruling, which provided that
the whole contract price would be subject to withholding.
The ruling does not suggest how the apportionment should be
made. Presumably, an apportionment which is consistent with the
break-up of payments under the contract will be acceptable.
If USCo believes that it will not be subject to Australian
tax on the installation of the plant in any event, as a result
of the operation of a double tax treaty, then it can apply to
the ATO for a variation of the withholding rate to nil. If the
variation is granted, then no amounts need be withheld at
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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