Income Tax Regulations (Amendment) 1997 No. 338
EXPLANATORY STATEMENT
Statutory Rules 1997 No. 338
Income Tax Assessment Act 1936
Income Tax Regulations (Amendment)
The Governor-General may make regulations under section 266 of the Income Tax Assessment Act 1936 (the Act) for the purpose of the Act.
The taxation of Australian sourced royalties paid or credited to non-residents is subject to the provisions contained in Division 11A of Part III of the Act. These provisions enable, in conjunctions with the relevant Rates Act, that the non-resident recipient of royalty income is subject to withholding tax, at a rate of 30 percent, on the gross amount paid or credited. These rates may be reduced, however, if Australia has concluded a Double Tax Agreement with the recipient's country of residence.
The general intent of Division 11A is to impose tax on non-residents deriving Australian sourced royalty income. However, the Division now imposes royalty withholding tax where an Australian resident derives royalty income in carrying on business through an offshore permanent establishment (PE). Subsection 128B(2C), which is designed to counter arrangements which exploit a technical deficiency in the law, was inserted into the Act by Income Tax Amendment Act (No. 2) 199 7.
Under new subsection 128B(2C) there will be a liability to royalty withholding tax where an Australian resident derives royalty income in carrying on business through an offshore PE (for example a branch) and the royalty is paid
* by an Australian resident where the payment is not an outgoing wholly incurred in carrying on business through an offshore PE; or
* by a non-resident where the payment is an outgoing incurred in carrying on business through a PE in Australia.
Although the liability to withholding tax is imposed on the recipient of royalty income, section 221YL of the Act requires that the payer of the royalty deduct the withholding tax from the payment. The amount deducted is determined by applying to the payment the percentage specified in regulation 137A of the Income Tax Regulations.
The purpose of the proposed amendment to regulation 137A is to specify 30 per cent of a royalty as the amount of withholding tax deductible under section 221YL where the liability arises by virtue of subsection 128B(2C).
The amendment to regulation 137A will have effect from 20 August 1996. In this regard, a transitional provision was enacted as part of the Income Tax Amendment Act (No. 2) 1997 to override subsection 48(2) of the Acts Interpretation Act 1901 to allow the first regulation made to take effect from a date before the notification of the regulations.
Details of the Regulations are as follows.
Regulation 1 provides that the proposed Regulations will be taken to have commenced at 7.30 pm on 20 August 1996.
Regulation 2 provides that the proposed Regulations will amend the Principal Regulations.
Regulation 3 will specify 30 per cent of a royalty. as the amount of withholding tax deductible under section 221YL where the liability arises by virtue of subsection 128B(2C).
Overview
The Income Tax Regulations (Amendment) 1997 No. 338 was enacted to address a gap in the taxation of Australian sourced royalties paid or credited to non-residents, particularly when the income is derived through an offshore permanent establishment. This amendment was introduced to counter arrangements that exploited a technical deficiency in the law, thereby ensuring that Australian residents carrying on business through an offshore permanent establishment are subject to royalty withholding tax at a rate of 30 percent. The regulation was enacted by the Governor-General under section 266 of the Income Tax Assessment Act 1936 and aims to clarify the tax obligations for such transactions, ensuring compliance with Australian tax laws. The amendment specifies that 30 percent of the royalty should be deducted as withholding tax where the liability arises by virtue of subsection 128B(2C) of the Act.
Scope and Application
The Income Tax Regulations (Amendment) 1997 No. 338 pertains to the Income Tax Assessment Act 1936 and applies to the taxation of Australian sourced royalties paid or credited to non-residents, as well as to Australian residents deriving royalty income in carrying on business through an offshore permanent establishment (PE). The regulations specifically address the imposition of withholding tax at a rate of 30 per cent on the gross amount of such royalties, with potential reductions under applicable Double Tax Agreements. The amendments introduced by this Act ensure that the withholding tax is deducted by the payer of the royalty, in accordance with section 221YL of the Act, and specify the rate of withholding tax under section 128B(2C) as 30 per cent of the royalty amount. These regulations extend across the Commonwealth of Australia and apply to all entities and individuals subject to the Income Tax Assessment Act 1936. The transitional provisions allow the regulations to take effect from 20 August 1996, overriding certain sections of the Acts Interpretation Act 1901. The amendment to regulation 137A will have effect from this date, ensuring that the withholding tax rate is correctly applied as per the legislative intent.
Key Provisions
The Income Tax Regulations (Amendment) 1997 No. 338 introduces amendments to the Income Tax Regulations under the Income Tax Assessment Act 1936 (the Act). Specifically, the amendment targets the withholding tax on Australian sourced royalties paid to non-residents, particularly focusing on scenarios where royalty income is derived through an offshore permanent establishment (subsection 128B(2C)) (subsection 128B(2C)). Under the existing Division 11A of Part III of the Act, non-residents are generally subject to a 30 percent withholding tax on the gross amount of Australian sourced royalty income, though this rate may be reduced under applicable Double Tax Agreements.
The new amendment to regulation 137A specifies that the payer of the royalty must deduct 30 percent of the royalty as withholding tax when the liability arises due to subsection 128B(2C). This means that if an Australian resident derives royalty income in carrying on business through an offshore permanent establishment, or if a non-resident pays royalties that are an outgoing incurred in carrying on a business through a permanent establishment in Australia, the payer must withhold tax at this rate. This amendment reflects the intent to ensure that such income is appropriately taxed, preventing tax avoidance that exploits technical deficiencies in the law.
The Act imposes several obligations on parties involved in the payment and receipt of royalties. For payers of royalties, it is mandatory to deduct withholding tax at the specified rate when the conditions under subsection 128B(2C) are met. Failure to comply with this obligation can result in significant consequences. For recipients of royalties, while the withholding tax is technically deducted by the payer, they may still need to account for this tax in their own tax filings, particularly if claiming credits or deductions under applicable Double Tax Agreements.
In terms of penalties, while the specific penalties for non-compliance are not detailed in the explanatory statement, breaches of the withholding tax requirements under the Income Tax Assessment Act 1936 can result in both civil and criminal consequences. Civil penalties typically include fines, interest on unpaid tax, and additional assessments. Criminal penalties can include imprisonment, particularly for wilful or deliberate non-compliance. The exact penalties can vary depending on the nature and severity of the breach, and are determined in accordance with the broader provisions of the Act.