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).

ATO ruling

The ruling sets out the ATO's approach to the administration of construction withholding tax; the key points are:

  • 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.

An example

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 all.

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.