Dividend withholding tax – basic concepts
Dividend withholding tax is a final tax imposed on certain dividends paid by resident companies in Australia to non residents.
What are dividends?
For the purpose of withholding tax, dividends include:
Any distribution made by a company to its shareholders in the form of money or other assets.
- Any amount that a company credits to its shareholders.
- Returns on all types of ownership interests, including dividends for equity shares.
However, it’s important to note that dividends paid for non-equity shares subject to interest withholding tax are not included.
When a company pays dividends to its shareholders or payees, it must provide a statement that specifies whether the dividend is franked (indicating that corporate taxes have been paid) or constitutes conduit foreign income.
This statement helps shareholders understand the tax status of the dividend they’ve received.
Companies do not have to withhold tax if the dividends they pay are either fully franked or if they are considered conduit foreign income. In such cases, withholding tax is not applicable.
What are franked dividends?
Franked dividends are characterized by the fact that the company distributing them to its shareholders has already paid corporate income tax on the profits from which the dividends are being paid. In other words, the tax has been “franked” or credited at the corporate level.
Shareholders who receive franked dividends are entitled to a tax credit, known as a franking credit or imputation credit, equal to the amount of tax already paid by the company on its earnings. This credit helps offset or reduce the individual shareholder’s tax liability on the dividend income. In some cases, shareholders may even receive a tax refund if their overall tax liability is lower than the franking credits attached to the dividends.
The franking system is designed to prevent double taxation of corporate profits. Without franking, corporate income would be taxed at both the corporate and individual levels, resulting in potentially higher overall taxation.
When is dividend withholding tax applicable?
Dividend withholding tax must be withheld when an unfranked or partially franked dividend is paid by an an Australian resident company (or a foreign resident company with a permanent establishment in Australia) to an entity located outside Australia, and the dividend is not classified as conduit foreign income.
What is the dividend withholding tax rate?
The dividend withholding tax rate is 30% of the dividend amount. However, if the recipient is a resident of a country that has a double taxation agreement (DTA) with Australia, the rate is often reduced to 15%.
Gross dividend amount
Dividend withholding tax is imposed on the gross amount of the dividends. This means that no deductions can be made from the dividends before calculating the tax. The flat rate withholding tax is applied irrespective of whether the non-resident recipient has other income subject to Australian tax under the regular assessment process.
Applicability regardless of circumstances
Dividend withholding tax is applicable in various situations:
- It doesn’t matter whether the dividends are received directly by a shareholder or indirectly through a nominee or trustee.
- The source of the profits used to pay the dividends is irrelevant.
- The location of the share register where the shares generating the dividends are held has no impact on this tax.
Anti-avoidance measures
To prevent tax avoidance, the scope of the general anti-avoidance provisions of the Income Tax laws has been extended to include schemes that are primarily designed to avoid paying dividend withholding tax.
This aims to discourage creative financial arrangements aimed at reducing tax liability.
Tax treatment with tax-exempt bodies
When one or more tax-exempt entities are situated between an Australian resident payer and a non-resident recipient, withholding tax is calculated as if the dividends were paid directly to the non-resident recipient. This means that withholding tax is payable unless the non-resident recipient itself is exempt from the tax.
Treatment of Non-Equity Shares
Dividends paid in relation to non-equity shares are treated as interest for tax purposes. This highlights the distinction in tax treatment between different types of shares.
Exemptions from dividend withholding tax
Certain types of dividends in Australia are exempt from withholding tax. These exemptions aim to provide relief from withholding tax for various categories of dividend recipients and specific situations in the interest of fairness and policy objectives. These exemptions include:
- Franked Dividends: Dividends that have been fully franked are generally exempt from withholding tax. However, exceptions apply when the tax authority determines that the company has inappropriately structured the dividends or engaged in a franking credit scheme.
- Unfranked Dividends as “Conduit Foreign Income”: Unfranked dividends paid by resident companies to non-residents can be exempt from withholding tax if they are declared as “conduit foreign income.”
- Dividends to Certain Registered Foreign Organizations: Dividends paid to specific foreign charitable, scientific, educational, and non-profit cultural, sporting, and friendly societies are exempt from withholding tax if they meet certain criteria. These organizations usually need to have a presence in Australia, focus their activities in Australia, or be listed as institutions for deductible gifts.
- Dividends to Certain Foreign Non-Profit Associations: Dividends paid to foreign non-profit associations engaged in aviation, tourism, agriculture, or manufacturing are exempt.
- Dividends Paid by PDFs: Certain dividends paid by PDFs (Public Development Funds) are exempt.
- Dividends Derived by Trusts with Tax Liability: Dividends derived by a trust estate where the trustee is liable to be assessed are not subject to withholding tax.
- Dividends from Assets of Non-Resident Life Insurance Companies: Dividends derived from assets held in the insurance funds of non-resident life insurance companies operating branches in Australia are exempt from withholding tax.
- Dividends Subject to Special Tax Avoidance Provisions: Dividends subject to special provisions addressing tax avoidance schemes involving tax-exempt entities are exempt.
- Dividends Received by Non-Resident Foreign Superannuation Funds: Dividends received by non-resident foreign superannuation funds from resident companies are exempt if they are tax-exempt in their home country.
- Dividends Subject to Family Trust Distribution Tax: Dividends on which family trust distribution tax has been paid are exempt from withholding tax.
- Dividends to Overseas Charitable Institutions by Offshore Banking Units: Certain dividends paid by offshore banking units or trustees of trusts managed or controlled by such units to overseas charitable institutions may be exempt.
- Dividends from Former Exempting Companies: Dividends paid by former exempting companies (exempt entities and companies owned by non-residents) may be exempt to the extent they are franked as “exempted dividends.”
- Certain Non-Frankable Non-Share Dividends: Specific non-frankable non-share dividends paid by resident authorized deposit-taking institutions are exempt.
Dividend withholding tax – other issues
Private company loans treated as deemed dividends
Loans extended by private companies to non-residents, which are treated as deemed dividends under the Income Tax laws, are not subject to withholding tax. This means that the tax treatment for these loans is different from typical dividend payments.
Dividends from non-resident companies
Dividends paid by non-resident companies to non-resident shareholders, using profits sourced from Australia and subject to the regular assessment process, are not subject to withholding tax. This implies that these dividends go through the standard tax assessment process.
Liability for withholding tax upon declaration of dividend
The declaration of a dividend triggers a liability for withholding tax, even if the right to receive the dividend by the non-resident shareholder is subsequently assigned. This emphasizes that the tax liability arises at the declaration stage.
Taxation of dividends indirectly received through nominee or trustee
Dividends from non-resident companies that are received indirectly by a non-resident through a nominee or trustee are subject to Australian tax only if the source of those dividends is within Australia.
In other words, the taxation depends on the origin of the dividend income.
Dividends attributable to foreign-owned branches
Dividends paid by non-resident companies to non-resident shareholders come from profits sourced in Australia. These dividends undergo the regular assessment process, which means they are not subject to withholding tax.
Directing dividends away from foreign residents
When Australian companies pay franked dividends to foreign resident shareholders, they usually have an exemption from withholding tax, which would otherwise be around 15% based on tax treaties.
However, these franking credits, which enable the exemption, originate from the Australian company paying taxes at a 30% rate. This means that when franked dividends are paid to a foreign resident from a 15% tax treaty country, only 50% (15% out of 30%) of the franking credit’s value is effectively utilized.
Importantly, the foreign resident shareholder doesn’t receive a refund for the unused portion of the franking credit.
This situation creates a preference for foreign resident shareholders to receive unfranked dividends or to trade the benefit of the franking credits with Australian resident shareholders who can make better use of them.
To address this issue and prevent certain practices, measures have been put in place:
- Preventing Companies from Steering Franked Dividends Away: Measures are implemented to discourage companies from directing franked dividends away from foreign resident shareholders.
- Restricting Foreign Residents from Trading Franking Credits with Australian Residents: Additional measures are in place to limit foreign resident shareholders from having franking credits that they can exchange with Australian resident shareholders.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.
