Refunds of certain pay as you go withholding amounts

The pay as you go (PAYG) withholding system requires an entity (the payer) to withhold an amount from certain payments made to, or received for, another entity (recipient) and to pay the withheld amount to us. This system also applies to non-cash benefits and to certain payments of personal services income.

Generally, the recipient will receive a credit, equal to the amount withheld, when an assessment of their income tax in the relevant year has been made. If, on the other hand, the withholding is from a dividend, interest, royalty or a fund payment made to, or received for the recipient, and the recipient is a non-resident [1] who has borne all or part of the amount withheld, the recipient is entitled to a credit equal to all or part of that amount against their non-resident or managed investment trust withholding tax liability.

While complying with their obligations under the PAYG withholding system, a payer may withhold an amount in error or withhold an amount from a purported payment of paid parental leave [2] that was not lawfully payable. When this occurs, the recipient may request a refund of the amount withheld from the payer or from us.

All legislative references in this Practice Statement are to Schedule 1 to the Taxation Administration Act 1953 , unless otherwise indicated.

Subdivision 18-B contains the rules allowing amounts withheld or paid to us in error, purportedly under any of the PAYG withholding provisions, to be refunded to recipients. It also contains rules allowing for amounts that were withheld from a purported payment of paid parental leave that was not lawfully payable to be refunded.

The recipient may obtain a refund from the payer or us, depending upon the circumstances.

Alternatively, the entity entitled to a credit under Subdivision 18-A may receive a refund of that entitlement to the extent that the purported PAYG withholding amount has not been refunded under Subdivision 18-B.

The word 'error' has its ordinary, broad meaning and includes an error of fact and an error of law. An error of fact is one where an error is made by a decision-maker about the existence of a particular fact. An error of law is a misinterpretation or misapplication of a principle of law, or the application of an inappropriate principle of law to an issue of fact.

The following examples illustrate where an amount would be considered to have been withheld in error. • An investor quotes their tax file number (TFN) to an investment body that fails to record it and later withholds from a payment of investment income because a TFN has not been quoted. • An employer misreads the tax tables when an amount is withheld from a payment of salary or wages paid to an employee and consequently withholds an amount at a much higher rate than is required. • An amount is withheld from certain payments that are exempt income or are not assessable and not exempt income in the hands of the recipient. • An amount is withheld from a payment to: - an entity that is not entitled to an Australian business number (ABN) – for example, the supply is made in the supplier's private capacity or in relation to a hobby - a non-resident who derives it in carrying on business in Australia, at or through a permanent establishment, and the payment is a dividend or interest, or - certain suppliers that are not carrying on an enterprise because they have no reasonable expectation of profit or gain. • An amount is withheld from a recipient in one of the exception categories: - the total payment for the supply does not exceed $75 (exclusive of any goods and services tax (GST) payable on the supply), which is the amount currently specified in regulations in force for the purposes of subsection 29-80(1) of the A New Tax System (Goods and Services Tax) Act 1999 (subsection 12-190(4)), or - the supply is wholly input-taxed under GST. • The wrong exchange rate is used in calculating an interest, unfranked dividend or royalty payment to a non-resident and an excess amount is subsequently withheld from these payments. • An incorrect (higher) withholding rate is used in calculating the amount withheld from a payment of an interest, unfranked dividend or royalty to a non-resident (for example, because they did not take account of the rate provided under an agreement or convention covered by the International Tax Agreements Act 1953 ). Subsequently, an excess amount is withheld from these payments. • A purchaser withholds an amount from a payment to a vendor of a capital gains tax (CGT) asset where, prior to settlement, the vendor: - provided the purchaser with a clearance certificate from us [3] - made the purchaser aware of a variation notice from us where the rate used to determine the amount to be withheld exceeds the rate specified by us in that notice [4] , or - provided the purchaser with a vendor declaration. [5]

The following examples illustrate where an amount would be considered to have been withheld correctly. • The payer withholds amounts correctly according to the facts at the time when the payment was made. It is the facts that apply at the time that payment is made that are relevant, as opposed to any facts that may apply at a different point in time. • A payer withholds 46.5% from a payment for a supply because the supplier had not quoted their ABN on an invoice, or some other document relating to the supply. • An employee fails to complete a TFN declaration and the employer withholds an amount from the payments of salary or wages at the higher rate than that which applies to employees who have quoted a TFN. • A purchaser withholds an amount from a payment to a vendor of a CGT asset because that vendor has not done any of the following by the time of settlement: - provided the purchaser with a clearance certificate from us [6] , - made the purchaser aware of a variation notice from us [7] [8] , or - provided the purchaser with a vendor declaration. [9]

In accordance with section 18-65, the payer must (before the end of the financial year in which the amount was withheld or paid to us) refund to the recipient the amount withheld or paid to us in error if either: • the payer becomes aware of the error, or • the recipient applies to the payer for the refund.

Where an amount has been withheld due to an error involving the quotation of a recipient's TFN or ABN, the payer may request the required information to enable the correction of their records before refunding an amount. If the recipient does not provide its TFN or ABN to the payer, or evidence of the basis on which the recipient is taken to have quoted it, the payer is not required to refund the amount.

Where an amount has been withheld from a purported payment of paid parental leave that was not lawfully payable, the payer will be required to (before the end of the financial year in which the amount was withheld or paid to us) refund the amount withheld if either: • the payer becomes aware that the paid parental leave was not lawfully payable, or • the recipient applies to the payer for a refund.

The payer can offset a credit equal to the amount refunded to the recipient against future PAYG withholding liabilities to us, provided the payer has already forwarded the 'incorrectly' withheld amount to us. A payer is entitled, however, to recover the refunded amount from us provided the amount is not recorded by the payer as offset against future withholding liabilities.

The payer must refund to the recipient the amount withheld in error if the payer becomes aware of the error before the end of the financial year in which the amount was withheld or paid to us.

If the recipient has not applied for a refund, or the payer does not otherwise become aware before the end of the financial year in which the amount was withheld or paid to us, the payer is not required to refund under section 18-65. In such a case, the recipient will be entitled to: • claim a credit on assessment for the amount withheld in error (as is the case for amounts correctly withheld), or • if that is not appropriate, for example, because the recipient is not required to lodge a tax return or the amount was withheld purportedly under Subdivision 12-F, apply to us for a refund of the amount.

A recipient may apply to us in accordance with section 18-70 for a refund of: • an amount withheld or paid to us in error, or • the amount withheld from a purported payment of paid parental leave that was not lawfully payable, where - the recipient did not apply to the payer for a refund before the end of the financial year in which the amount was withheld or paid to us in error, or - the payer did not become aware of the error or that the payment of paid parental leave was not lawfully payable before the end of the financial year in which the amount was withheld or paid to us.

We are required to refund the amount withheld in error if: • the amount withheld or paid in error has been paid to us • the application specifies either - the recipient's TFN - the basis on which the recipient is taken to have quoted a TFN to the payer before the amount was withheld (where the recipient did not have a TFN), or - the recipient's ABN (where the payment or non-cash benefit from which the withholding occurred was in respect of a Part VA investment) [10] made in the course or furtherance of an enterprise carried on by the recipient, and • we consider it 'fair and reasonable' to refund the amount.

In determining what is fair and reasonable, we will have regard to: • the circumstances that give rise to the withholding obligation (if any) • the circumstances that gave rise to the unlawful payment of the purported amount of paid parental leave • the nature of the error, and • any other matter we consider relevant.

Generally, if the entity is required to lodge a tax return for the income year in which the error or unlawful payment of paid parental leave was made, it is usually more expedient for the entity to lodge their return and claim the amounts withheld from payment to them under Subdivision 18-A. In considering whether it would be fair and reasonable to refund the amount, we may also have regard to matters including whether: • it is unlikely that the recipient will become entitled to a credit for the amount withheld in error or withheld from an unlawful payment of paid parental leave before the end of the financial year after the one in which the amount was withheld – for example, the recipient is not required to lodge a tax return or is unable to lodge the return before the end of the financial year due to, for instance, delay in receiving relevant information from overseas, or the amount was withheld purportedly under Subdivision 12-F, or • the recipient will suffer hardship if we do not refund the amount. In this context, hardship is where a recipient depends on using the amount of the payment from which an amount has been withheld in error in order to meet their immediate basic living expenses or to maintain the viability of their business.

We may consider that it is not fair and reasonable to refund the amount under section 18-70 if, on the basis of the recipient's application and other relevant information, the nature of the payment subject to the withholding error is assessable income in the hands of a non-resident recipient in the relevant income year.

Where a taxpayer has already claimed a credit for the amount withheld in their tax return, we will not consider it to be 'fair and reasonable' to refund the amount.

A person dissatisfied with a decision made under section 18-70 may object against the decision in the manner set out under Part IVC of the TAA.

For more information on residency refer to: • TR 2023/1 Income tax: residency tests for individuals (published on 7 June 2023) • TR 2018/5 Income tax: central management and control test of residency (published on 21 June 2018)