Interest, Dividends and Royalties Paid to Foreign Residents: Withholding Tax Basics

Australia generally collects tax from foreign residents on Australian interest, unfranked dividends and royalties through withholding by the payer. The domestic rates are generally 10% for interest and 30% for unfranked dividends and royalties, although a double tax agreement can reduce the applicable rate.

Fully franked dividends are generally exempt from withholding. The treatment of partly franked dividends and trust distributions requires more detailed analysis.

Notify the payer

A foreign resident should give the payer the correct overseas address and residency status. Providing an Australian TFN does not make the person an Australian tax resident, and retaining an old Australian address can lead to incorrect withholding.

Where no tax or the wrong rate was withheld, the issue should be corrected rather than assuming that the payer’s treatment is final.

Treaty rates

Australia’s treaties often cap withholding rates, but the rate depends on the particular treaty, beneficial ownership and sometimes the relationship between payer and recipient. A corporate shareholder may have a different dividend cap from an individual.

Treaty entitlement should be established, not inferred from citizenship or current mailing address.

Do these amounts go in the return?

Where the correct non-resident withholding tax has been applied to interest, unfranked dividends or royalties, the income is generally not included in an Australian return. That differs from ordinary assessable income such as rent.

Exceptions and complications include incorrect withholding, amounts derived through a business or permanent establishment, trust distributions, financial arrangements and a change of residency during the year.

Foreign-country treatment

The country of residence may also tax the income and may allow a foreign tax credit for Australian withholding. That outcome depends on foreign law and the treaty and should be confirmed with a qualified adviser in that jurisdiction.

Practical takeaway

Confirm the recipient’s tax residency, beneficial ownership, income character, treaty article and payer records. A correct withholding result is usually more efficient than attempting to repair the position years later.

Official sources and further reading

• Australian Taxation Office: Interest, unfranked dividends and royalties
• Australian Taxation Office: Income tax treaties
• Australian Taxation Office: Foreign and temporary residents

FOREIGN RESIDENTS