Application of RWT
Who is Affected?
On September 25 2002 the Australian Taxation Office issued Draft Taxation Ruling 2002/D11, which was circulated for comment until November 8 2002.
The draft ruling considers the application of the royalty withholding tax (RWT) provisions to various commercial arrangements used by non-residents of Australia who lease or charter ships and aircraft to residents.
The draft ruling considers three categories of commercial arrangement as far as ships and aircraft are concerned:
- demise charterparty (including bareboat, dry charterparty or dry leases);
- time charterparty (including wet charterparty or wet lease); and
- voyage charterparty where the charterer is also the shipper.
The principal features of the draft ruling are as follows:
- Payments made under demise and time charterparties will be subject to RWT.
- Payments made under voyage charterparties are not royalties and are thus not subject to RWT.
- Freight paid by a shipper to a carrier under a bill of lading, as in the case of liner services, is not considered a royalty payment and not subject to RWT.
RWT is payable on the gross amount of the royalty paid by a resident to a non-resident at the present rate of 30%, reduced to 10% under most existing Australian double taxation agreements.
RWT only applies to royalty payments. A royalty is defined to include payments for "the use of, or the right to use, any industrial, commercial or scientific equipment".
This covers the lease of equipment such as ships or aircraft. If the payment includes some element of service (ie, a crew), then it may not be a royalty. Alternatively, as suggested in the draft ruling, if the payment can be apportioned between a royalty and other payment, RWT will apply to the royalty component.
The draft ruling distinguishes time charterparties and characterizes such contracts as being essentially similar to demise or bareboat charters (for this purpose). It determines that (i) such contracts are for "the use of industrial or commercial equipment", and (ii) the shipowner's obligations to the crew and to operate the ship are ancillary to the supply of the equipment. Accordingly, the draft ruling determines that charterers will be liable to withhold and remit RWT in respect of hire payments under time charterparties (and demise and bareboat contracts).
While the liability to pay RWT clearly lies with the non-resident recipient, there is an obligation on the (resident) payer to withhold the tax and remit it to the Australian Taxation Office.
The draft ruling may affect the existing and future contractual obligations of both Australian residents, permanent establishments or branches of foreign businesses that charter or lease ships and aircraft from non-residents, as well as the non-residents themselves.
The draft ruling seeks to apply retroactively. However, the Australian Taxation Office has now stated that it will amend the ruling to withdraw any retroactive application.
If issued as a final ruling it will apply to those commercial arrangements from September 25 2002.
For further information on this topic please contact Lyn Nicholson at Ebsworth & Ebsworth by telephone (+61 2 9234 2366) or by fax (+61 2 9235 3606) or buy email ([email protected]).