Commonwealth Numbered Regulations - Explanatory Statements

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INCOME TAX REGULATIONS (AMENDMENT) 1997 NO. 338

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).