Commonwealth Numbered Regulations - Explanatory Statements

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TAXATION ADMINISTRATION AMENDMENT REGULATIONS 2004 (NO. 1) 2004 NO. 112

Section 18 of the Taxation Administration Act 1953 (the Act) provides that the Governor-General may make regulations, not inconsistent with the Act, prescribing all matters which by the Act are required or permitted to be prescribed, or which are necessary or convenient to be prescribed for giving effect to the Act.

The purpose of the Regulations is to amend the Taxation Administration Regulations 1976 to prescribe payments to be subject to the foreign resident withholding arrangements in Subdivision 12-FB of Schedule 1 to the Act.

Paragraph 12-315(1)(b) of Schedule 1 to the Act provides that an entity that carries on an enterprise must withhold an amount from a payment it makes to another entity, or other entities jointly, in the course or furtherance of the enterprise if the payment is of a kind set out in the regulations.

The objective of the foreign resident withholding arrangements is to improve the compliance of foreign residents with their Australian income tax obligations through the use of withholding. The foreign resident withholding arrangements facilitate the efficient collection of income tax, but do not impose a new tax.

The foreign resident withholding arrangements require amounts to be withheld by entities making payments of a kind prescribed by the regulations to a foreign resident. Withholding is also required where an entity receives a payment prescribed in the regulations on behalf of a foreign resident.

The three groups of payments prescribed in the regulations are:

•       payments for promoting or organising casino gaming junket arrangements. These are arrangements for bringing people to a casino to gamble or for arranging for people to go to a casino to gamble;

•       payments for entertainment and sports activities. These are activities of a performing artist or sportsperson. Withholding is also required from payments to support staff for certain activities relating to the activity of the performing artist or sportsperson, such as the activity of a choreographer, coach, director of photography, musical director, sports psychologist or similar activities; and

•       payments under contracts for the construction, installation and upgrading of buildings, plant and fixtures and for associated activities.

These three groups of payments are prescribed because there is a high risk of non-compliance by foreign residents receiving these payments with their Australian income tax obligations. Additionally they are distinct areas of business activity and the new withholding arrangements can be easily applied. The groups also involve a relatively small number of Australian payers, which will limit the compliance impact of the new arrangements. Details of the regulations to prescribe the three groups of payments are explained in the Attachment.

The rates of withholding are also specified in the Regulations. The rates are 3 per cent from payments for casino junket tour activities and 5 per cent from payments for construction and related activities. The rates of withholding for these two groups of payments have been chosen to ensure that the amounts withheld approximate the tax payable on the payments in a broad range of circumstances. The rates take into account expenses, profit margins, and other characteristics in each of the groups. The rates for entertainers, sportspersons and their associates are the non-resident marginal rates for individuals or the company rate where the foreign resident is a company. These rates ensure that a sufficient amount is withheld from each payment to cover the expected income tax liability.

Subsection 12-315(3) of Schedule 1 to the Act provides that before the Governor-General may make a regulation prescribing payments for withholding, the Minister must be satisfied that the payment is of a kind that could reasonably be related to the assessable income of foreign residents. The Minister recommended these three groups of payments on the basis that the payments satisfy that condition.

The regulations require withholding from payments for casino junket tour activities and for entertainment and sport from 1 July 2004. Withholding is required from payments for construction and related activities under contracts entered into after 30 June 2004.

The Regulations commenced on gazettal.

ATTACHMENT

DETAIL OF THE AMENDMENTS IN TAXATION ADMINISTRATION AMENDMENT REGULATIONS 2004 (No. 1)

Regulation 1 - Name of Regulations

Regulation 1 provides that these Regulations are the Taxation Administration Amendment Regulations 2004 (No. 1).

Regulation 2 - Commencement

Regulation 2 provides that these Regulations commence on 1 July 2004.

Regulation 3 - Amendment of Taxation Administration Regulations 1976

Regulation 3 provides that Schedule 1 amends the Taxation Administration Regulations 1976.

Regulation 4 - Application

Regulation 4 provides that the amendments made by Schedule 1 would apply to payments made or received on or after 1 July 2004.

Schedule 1 - Amendments (regulation 3)

Item 1 Division 5 Withholding - payment for work or services

Item 1 alters the title of Division 5 of Part 5 of the Taxation Administration Regulations 1976. This ensures that the title of the Division more accurately describes the payments prescribed in the Division as payment for work or services.

Item 2 Division 6 Withholding - payments to foreign residents etc

Item 2 inserts Division 6 into Part 5 of the Taxation Administration Regulations 1976. The Division prescribes the payments subject to withholding under the foreign resident withholding arrangements.

Payment for casino junket tour activities

Regulation 44A prescribes payments for casino junket tour activities. Specifically Subregulation 44A(1) prescribes payments for operating or promoting a junket. Examples of the types of payments covered include monetary payments and non-cash benefits such as accommodation, airline tickets, car-hire, and food and beverage.

Casino junket tour activities may include, but are not limited to, contracting with casinos, contracting with players, recording player gambling statistics, credit and debt management, local funds management, casino settlement and liaison, repatriation of funds and providing customer liaison services such as translating and interpreting. They may also include associated services such as arranging accommodation, entertainment and transportation.

The regulation does not apply to payments, rewards or commissions (however characterised) made by a casino in relation to a gambler gambling with the casino where there has been no involvement by a foreign resident third party in arranging for the gambler to undertake the gambling.

Subregulation 44A(2) specifies the rate of withholding from the payments at 3 per cent. The rate of 3 per cent approximates the lowest current rate negotiated between the Australian Taxation Office (ATO) and a casino under the existing agreements.

Subregulation 44A(3) defines `junkets' for the purposes of the Regulations. The first element of a junket is that it is an arrangement for the promotion or organising of gaming in one or more casinos, whether or not any of the casinos is required by the agreement to make a payment, by which an individual or a group of people come to Australia for the purpose of gaming at particular casinos. The second element of a junket is that the entity receives a payment from one or more of the casinos that is a reward made in relation to arranging for the individual or the people to go to a casino for gaming or is a commission based on the gaming or losses of the individual or group of people.

The term `gaming' is also defined in Subregulation 44A(3). Gaming means playing a game of chance or a game that is partly a game of chance and partly a game of skill. Games that are wholly games of skill do not represent gaming.

The definitions of the terms `gaming' and `junket' in the proposed Regulation are broadly based on the definitions used in the New South Wales and Victorian State Casino Control Acts. These meanings have been used and widely understood in the Australian casino industry.

Background

Currently casinos that operate junket tour programs have entered into special agreements with the ATO under which they make payments to the ATO in respect of the income tax liabilities of junket tour operators. The payments are based on the commissions paid by casinos to junket tour operators. Under the agreements, the junket tour operators are not registering for, or paying, goods and services tax (GST) as generally the casinos have entered into voluntary agreements with junket tour operators that effectively. take them out of the GST. The junket tour operators are not lodging income tax returns in Australia.

Payments for entertainment or sports activities

Regulation 44B prescribes payments for entertainment or sports activities to be subject to withholding. Examples of the types of payments covered are provided in the regulation. These include appearance fees, bonuses, reimbursements, match payments, performance fees and prize money.

The activities of support staff relating to entertainment or sport activities are also prescribed. These activities include the activities of a choreographer, coach, director, and the provider of any other similar services.

Payments for support activities provided by individuals who are engaged as employees are not within the scope of the new withholding arrangements. These payments are instead covered by the current withholding provisions in section 12-35 of Schedule 1 of the Taxation Administration Act 1953.

The foreign resident withholding rules require amounts to be withheld from payments that may be exempt income of the entity receiving the payment. This is a specific design element to ensure that where taxpayers claim their income is exempt, that it can be verified by the ATO. This rule addresses the risk that taxpayers may self assess themselves out of withholding on the basis of unverified claims that the income is exempt, for example due to the operation of a double tax agreement.

The mechanism for verifying the exempt nature of income is the variation process in section 15-15 of Schedule 1 to the Taxation Administration Act 1953. Where the taxpayer believes that the income is exempt and should not be subject to withholding, or that withholding should be at a lower rate, they may apply to the Commissioner of Taxation (Commissioner) for a variation of the amount to be withheld, including to nil. The Commissioner may grant a variation where appropriate. Such an application could be made where, for example, support staff of a film production believe the income they derive in Australia is exempt on the basis of the operation of a double tax agreement. The ATO will implement an electronically transmittable internet variation application form to minimise the compliance impact on the resident payers and the payees in these situations.

The withholding rules do not override the operation of a double tax agreement as they do not impose a liability to tax. Rather, the withholding arrangements facilitate the efficient collection of amounts towards discharging the taxpayer's liability on assessment. Where the income tax liability on assessment is less than the amounts withheld during the income year the taxpayer is entitled to a refund of the excess amounts withheld.

Subregulation 44B(2) provides that entertainment and sports activities may include giving a speech or a sports commentary. This extends the activities covered by withholding to speaking engagements and the activity of a television or radio sports commentator that are of an entertainment nature.

Subregulation 44B(3) specifies the amount of withholding from payments for entertainment or sports activities. Where the payee is a corporate entity the rate of withholding is the company tax rate specified in section 23 of the Income Tax Rates Act 1986, currently 30 per cent. The rate of withholding is the non-resident individual marginal tax rates where the payment is made to an individual. These rates are specified in Part 2 of Schedule 7 of the Income Tax Rates Act 1986.

Entertainment or sports activities are defined in Subregulation 44B(4). The activities are those of a performing artist or a sportsperson within the meaning given by section 405-25 of the Income Tax Assessment Act 1997 or those of certain support staff. Section 405-25 provides for income averaging by certain professionals and is not directly related to the current foreign resident withholding rules. However, the meanings of performing artist and sportsperson are used in the new regulation as they represent the activities of foreign residents that Regulation 44B targets. Additionally, these meanings are widely understood within the entertainment and sports sectors.

Background

Foreign resident entertainers and sportspersons who derive income in Australia are liable to pay income tax in Australia on that income, either under a double tax agreement or the general provisions of the income tax law. They are required to lodge an income tax return in Australia.

High profile entertainers and sportspersons, and those who participate in high profile events, generally have a high level of compliance with their Australian income tax obligations. This is largely the result of the professional management of the events and of the individuals participating in them.

The high general level of compliance by high profile individuals is supplemented by the ability of the Commissioner to require a person making a payment to a foreign resident to retain an amount and pay that amount to the ATO under section 255 of the Income Tax Assessment Act 1936. This power has been used successfully to collect tax from the high profile individuals.

There are also large numbers of lower profile foreign resident entertainers and sportspersons who derive income in Australia and are liable to pay Australian income tax. There is generally a much lower level of compliance by these taxpayers. They come to Australia for short periods, derive income and leave without lodging returns, and paying tax. Although the amount of income earned by each is generally much less than the high profile individuals, the aggregate tax payable on their income is considerable. Unlike high profile individuals, the Commissioner does not always have the opportunity to issue a section 255 notice to the entities making payments to these taxpayers.

Income derived by foreign residents who provide support in the entertainment and sport sector may be subject to Australian income tax under the business profits and independent personal services articles in double tax agreements. The tax is collected from these taxpayers on assessment after the taxpayer lodges an income tax return in Australia.

In those cases where a foreign resident taxpayer does lodge an income tax return, and tax has not been withheld, there is still no certainty that the tax liability on assessment will be paid. If the taxpayer leaves Australia, they move outside the jurisdiction of Australian law. Legal enforcement of the tax debt is difficult in these cases.

Payments for construction and related activities

Regulation 44C prescribes that payments under contracts, including payments to subcontractors for works or related activities are subject to withholding. The payments covered are those under a contract for work performed and for services and equipment provided. Withholding is required from all payments under the contract and related contracts regardless of the total value of the payments under the contracts.

The regulation will only require withholding from payments under contracts entered into after 30 June 2004. This ensures that entities do not need to re-negotiate existing contracts.

Subregulation 44C(2) prescribes a rate of withholding of 5 per cent. Withholding is required from the whole amount of the payment.

Section 15-15 of Schedule 1 to the Act provides that where taxpayers believe that the rate of withholding is too high or low they may apply to the ATO for a variation of the amount to be withheld to another amount, including to nil.

The term `works' is broadly defined by Subregulation 44C(3) to include the construction, installation and upgrading of buildings, plant and fixtures. The meaning of works for the purposes of the regulation is the ordinary meaning that is used and understood in the construction, infrastructure and resource sectors. This is broadly the activity of creating or altering a physical asset such as a building or structure, changing the form of the earth such as earthworks, or a combination of these activities.

Examples of `works' are provided in the regulation. These examples are dams, electricity links, mine site development, natural gas field development, natural resource infrastructure, oilfield development, pipeline construction, construction of power generation infrastructure, railway or road development, residential building, resort development, retail and commercial development, upgrading airports, upgrading telecommunications equipment and construction of water treatment plant.

The term `related activities' is also defined in Subregulation 44C(3). Related activities include activities associated with the construction, installation and upgrading of buildings, plant and fixtures. Examples of these activities include administration, assembly, costing, fabrication, project management, site management and warranty repairs.

Background

Income derived by foreign residents in the construction industry may be subject to the business profits and independent personal services articles in double tax agreements.

Business profits of a foreign resident derived in Australia are only taxable in Australia if the enterprise is carried on through a permanent establishment in Australia. Independent personal services income (for example income derived by visiting engineers) is generally taxable in the country of residence of the recipient, but may be taxed in Australia where one or more of a number of conditions are satisfied. These are (depending on the terms of the applicable tax treaty) that the income is attributable to a fixed base in Australia, the services are performed for 183 days or more, the income is deductible in determining profits in the source country, and/or the income exceeds a prescribed limit.

Unverified claims for exemption on the basis of double tax agreements have created administrative difficulties and have been observed by the ATO to be common in the construction industry.

There are also foreign residents from countries with which Australia does not have a double tax agreement. The income that these foreign residents derive in Australia is taxable in Australia under the income tax law. Tax is collected from the taxpayers only on assessment after they lodge an income tax return. However, in many instances the taxpayers leave Australia without lodging a return and paying tax.

Limits on the amount withheld from payments to foreign residents

Regulation 44D will prevent double withholding from the payments prescribed in the regulations for withholding purposes. Under the foreign resident withholding rules there is a possibility that a resident payer may believe that they are making a payment to a foreign resident when they are actually making the payment to a resident intermediary, such as an agent. In these circumstances the resident payer would withhold from the payment. As well the resident intermediary may also withhold from the payment on the basis that they have received the payment on behalf of a foreign resident. Withholding may therefore occur twice from the same payment. The intention is that withholding should only occur once from a particular payment under the foreign resident withholding rules.

Subregulation 44D(1) provides that the rule to prevent withholding from occurring twice specified in Subregulation 44D(2) applies where an amount is required to be withheld from a payment if any amounts are already withheld from the payment under the foreign resident withholding rules.

Subregulation 44D(2) provides that an amount to be withheld in circumstances where an amount has already been withheld from the payment is reduced by the amount previously withheld from the payment. For example, if $10 is required to be withheld by a payer and $10 is also required to be withheld by an agent that receives a payment, the amount to be withheld by the agent is reduced to nil.

REGULATION IMPACT STATEMENT

Policy objective

1.       The objective of the foreign resident withholding arrangements is to improve the compliance of foreign residents with their Australian income tax obligations by withholding amounts from payments prescribed in the regulations.

2.       The new regulations prescribe certain payments to foreign residents within three broad groups to be subject to the foreign resident withholding arrangements. The three groups of payments are the first payments to be prescribed under this measure and are:

•       payments for promoting or organising casino gaming junket arrangements. These are arrangements for bringing people to a casino to gamble or for arranging for people to go to a casino to gamble;

•       payments for entertainment and sports activities. These are activities of a performing artist or sportsperson. Withholding is also required from payments to support staff for certain activities relating to the activity of the performing artist or sportsperson, such as the activity of a choreographer, coach, director of photography, musical director, sports psychologist or similar activities; and

•       payments under contracts for the construction, installation and upgrading of buildings, plant and fixtures and for associated activities.

3.       Further regulations could be introduced as other payments to foreign residents are identified as presenting a risk of non-compliance.

4.       The regulations do not impose a new tax on foreign residents, they facilitate the more effective collection of existing income tax liabilities from foreign residents by using the existing pay as you go (PAYE) system.

Implementation options

5.       The legislative framework for the foreign resident withholding arrangements is part of the PAYG system which is contained in Part 2-5 of Schedule 1 to the Taxation Administration Act 1953. The withholding arrangements require amounts to be withheld by persons making prescribed payments to foreign residents. Withholding is also required where a person receives a prescribed payment on behalf of a foreign resident. It is therefore necessary to prescribe in the regulations the payments to be subject to withholding. The new regulations apply to payments made on or after 1 July 2004.

6.       The three groups prescribed in the regulations, payments for promoting or organising casino gaming junket arrangements, payments for entertainment and sports activities and related activities, and payments under contracts for construction and related activities were chosen as the initial areas to be prescribed because of the high risk of non-compliance with their Australian tax obligations by foreign residents receiving these payments. Prescribing these payments to foreign residents addresses demonstrated compliance risks identified by the Australian Taxation Office (ATO). The new withholding arrangements also put in place a more efficient system for those taxpayers currently complying with the law.

7.       Consultation with stakeholders from each of the three groups affected by the regulations has been undertaken. This ensured that the regulations accurately describe the payments taking into account all other relevant factors, and that the rate of withholding is appropriate for the types of payments prescribed.

Assessment of impacts

8.       Each of the regulations will impact on enterprises that make payments of the kind prescribed to foreign residents. The withholding provisions describe who is to be treated as a foreign resident for the purposes of the withholding obligation.

9.       Each of the three groups of payments prescribed is assessed separately below.

Impact group identification

Junket Tour Operators

10.       The payers are Australian casinos operating junket tour programs. The casinos pay commissions and other amounts (including non-cash benefits) to junket tour operators who bring gamblers to the casino from overseas. In most cases, voluntary withholding agreements have been developed between the ATO and the casinos concerned. There are currently four casinos that make commission and other payments to junket tour operators.

11.       The payees are foreign resident junket tour operators bringing gamblers into Australia. Approximately 300 foreign resident junket tour operators are licensed with the relevant State Casino Control Boards.

Entertainers and sportspersons

12. The payers include all entity types that operate in the sporting, athletic, entertainment and performing arts fields and require the services of the payees described below. There are approximately 12,000 payers.

13.       The payees include foreign resident individuals and entities that enter Australia to carry out activities within the sporting, athletic, entertainment and performing arts segments. It also includes support staff within these segments, for example, coaches, stylists, hairdressers and trainers. There are approximately 26,000 payees each year.

Construction and related activities

14.       The payers include Australian companies and project managers who manage construction projects and contractors making payments to other persons for construction works and related activities. The number of payers involved is estimated to be small.

15.       The payees are foreign residents receiving payments under contracts for work performed, services and equipment provided or for related activities in connection with construction projects in Australia. It is estimated that there are around 800 foreign resident contractors involved in current projects.

Analysis of costs / benefits

Administrative costs

16.       There will be an increase in administration costs for the ATO as a result of the three initial groups of payments. They include costs in developing and delivering internal training to staff, external communication products and additional costs in processing variation and exemption applications.

17.       It is also likely that there will be an increase in the number of tax returns that are lodged by foreign residents.

18.       Some of the costs will be offset by a decrease in the current costs in identifying and encouraging compliance from foreign residents receiving these regulated payments. Many of the costs to the ATO will be minimised by the use of existing administrative arrangements for the PAYG system.

Compliance costs

19.       It is expected that most payers will already be using the PAYG withholding system, for example for their Australian employees, and as such only few payers will be required to newly register as withholders or become familiar with the system. In the case of junket tour operators withholding is already occurring from commission payments to the extent that they are covered by the settlement agreements reached with the ATO.

20.       For payers who already use the PAYG withholding system, there may be some changes to systems to account for the foreign resident payees. It is expected that these costs would be minimal.

21.       For payers who do not currently use the PAYG system, there will be costs involved in registering as a withholder, having systems in place to withhold and remit amounts to the ATO and to provide payment summaries and annual reports when required. The number of payers who are in this situation is expected to be small.

22.       There may be increased costs for payees to obtain advice on their Australian tax obligations and to lodge variation or exemption requests and tax returns. It is expected that there will be an increase in the number of tax returns lodged by foreign residents. Costs of compliance for foreign residents would be similar to those of Australian residents. The ATO provides web-based information and advice products that are accessible around the world through www.ato.gov.au. A number of transactions can also be performed on-line such as Australian Business Number applications, foreign resident withholding variation applications and lodgement of individual income tax returns.

Government revenue

23.       As a result of increasing the compliance of foreign residents with Australian tax laws, the measure is expected to result in an increase in revenue collected. The estimated revenue impacts for the measure commencing from 1 July 2004 are detailed in the following table.

Estimated revenue impact

	2004-2005	2005-2006	2006-2007	2007-2008
	($million)	($million)	($million)	($million)
Junket tour operators	10	10	10	10
Entertainment and sports	30	30	35	35
Construction	85	90	95	100
Impact on forward estimates	125	130	140	145

Economic costs

24.       The requirement to withhold from the three groups of payments will put foreign residents on a more equal footing with Australian residents participating in the affected industries by facilitating the collection of tax from the foreign residents. This will remove the competitive advantage that foreign residents may currently have, compared to residents, from not complying with their Australian income tax obligations. Enforcement of Australia's taxing rights is not contrary to government policy on foreign investment.

25.       As current settlement agreements require casinos that make payments to junket tour operators to withhold, the new withholding obligation should have minimal impact on the industry. The tour operators appear to be making significant profits from these activities even with the existing settlement agreements.

26.       In the sports and entertainment industry, the ATO currently has a compliance program that targets the large end of the market (for example, prize money from major sporting events). Therefore, the new withholding obligation will simplify the current compliance activities in this area, but is not expected to have a significant effect on discouraging foreign resident sportspersons and entertainers from coming to Australia. However, at the smaller end of the market the current rate of compliance is estimated as being fairly poor. Therefore the new withholding obligations may have a more significant effect in this area of entertainment and sports.

27.       Any economic effect of discouraging non-residents from working or investing in Australia is likely to be most noticed in the construction industry. This area is currently estimated to have a low level of compliance with Australian tax obligations, therefore an increase in compliance is expected. Any improvement in compliance will place non-residents in these areas on a more equal footing with Australian residents (who are generally more compliant) and will therefore reduce any unfair advantage.

Consultation

28.       Targeted consultation was conducted with industry representative groups and participants in the affected industries. The consultation covered issues such as the description of payments to be prescribed in the regulations and the broader impacts that withholding will have on the particular industry. The most appropriate rate of withholding for the types of payments to be prescribed was also considered.

Payments to junket tour operators

29.       In the consultation on payments to casino junket tour operators (JTOs) the casino industry did not agree that payments to JTOs should be subject to the new foreign resident withholding arrangements. Instead, the industry supported the continuation of the voluntary agreements that the casinos have entered into with the ATO (although the casinos say they are paying too much). This position was not supported because there are three key weaknesses of the current agreements that mean they are not sustainable. The agreements can be terminated (generally by either party giving 90 days notice). They do not comprehensively cover the rewards received by JTOs, and a fresh agreement is required for each new casino starting a JTO program. The new withholding arrangements are the most appropriate way of collecting tax on these payments, and will introduce uniform rules for the collection of the liabilities of the JTOs.

30.       The industry also said that a 30 per cent rate, as recommended by the Ralph Review of Business Taxation, would be too high. The proposed rate of withholding is 3 per cent to address the concerns of the industry. The industry also expressed the view that the withholding obligation should only apply to those payments that are covered by the current voluntary agreements. This view was not supported because this approach would not comprehensively cover the rewards received by the JTOs.

Entertainers and sportspersons

31.       The consultation on payments to entertainers and sportspersons raised the least concerns about the introduction of withholding. Some participants (who were mainly Australian payers) said that withholding would reduce their compliance costs while others thought it would make little difference. The new withholding arrangements are a more appropriate and uniform method of collecting the tax.

32.       There was some concern about the dates for remitting amounts withheld (which are the normal remittance dates for PAYG withholding) because some Australian payers are currently using funds retained under the current notice arrangements provided by section 255 of the Income Tax Assessment Act 1936 before remitting the funds to the ATO. The normal remittance dates are appropriate.

33.       The inclusion of payments to support staff for withholding was generally opposed on the basis that the parties consulted, particularly the film industry, believed that the payments would not be taxable. There are some groups of support staff coming to Australia who may not be taxable in Australia because they derive business profits or independent personal services that are exempt due to the operation of double tax agreement. Withholding is required in these cases, including where payments may be exempt income of the taxpayer, to ensure that the payer is not required to consider the payee's specific circumstances. It also prevents the payee from self assessing themselves out of the withholding system.

34.       The taxpayer receives a credit for the amounts withheld in their annual income tax assessment. Therefore the amount withheld is not the final tax liability. The legislation for the withholding arrangements provides that the Commissioner of Taxation may vary the amount to be withheld from a payment to a particular person or a class of persons.

35.       There was some support for the rates of withholding to be the non-resident marginal rates for individuals. These rates are specified in the regulations, along with the company tax rate. A number of parties preferred the inclusion of a standard rate of withholding for individuals, such as 30 per cent, to align with the rates of withholding from similar payments in foreign jurisdictions. However, this would result in the under collection of tax from large payments.

Construction payments

36.       In the consultation on payments for construction and related activities there was some opposition to the introduction of withholding based on the expectation of resistance from overseas contractors. The key issue raised was the application of withholding to payments under existing contracts. The industry opposed the new withholding arrangements applying to payments under contracts in existence at the time of regulation. To address this concern withholding will only apply to payments under contracts entered into on or after the commencement of the regulations.

37.       The other significant issue was the rate of withholding. The 30 per cent rate proposed by the Ralph Review of Business Taxation was considered to be excessive. A rate of withholding of 1.5 percent was suggested. This rate is not supported. The rate of withholding is 5 per cent to cover the broad range of construction and related activities. If the standard rate of withholding for this group of payments is set too low, there is a risk that the resident payers would simply pay the amount themselves, instead of withholding from the payment to the foreign resident. This would greatly undermine the objective of improving the compliance of the foreign resident taxpayers with their Australian income tax obligations.

38.       The ATO participated in these consultations and has considered the implementation issues arising from the consultations. The ATO has also considered the most effective means of communicating with and educating payers and payees who will be affected.

Conclusion

39.       The three groups of payments are the first payments to be prescribed in the regulations to be subject to the foreign resident withholding arrangements. These three groups have been prescribed because there is an identified high risk of non-compliance by foreign residents receiving these payments with their Australian income tax obligations.

40.       Regulations bringing additional payments within the foreign resident withholding system may be considered in the future.