Australia and the United Kingdom treaty - key points
The 2003 United Kingdom Convention1 (and associated Exchange of Notes) is Australia's third comprehensive tax treaty with the United Kingdom (UK). The convention was signed on 21 August 2003 and it replaces the earlier agreement concluded in 1967 and amended by a protocol in 1980. The first treaty between Australia and the UK was signed in 1946.
The following is a summary of the key features of the convention and the features unique to the UK convention.
Date of effect
For withholding taxes, the convention has effect in relation to payments made on or after 1 July 2004.
For fringe benefits tax, the convention has effect in respect of fringe benefits provided on or after 1 April 2004.
For other taxes covered, the convention has effect in respect of income, profits or gains of years of income beginning on or after 1 July 2004.
The convention extends the operation of the treaty to Australian tax on capital gains, which was not covered in the previous treaty. Its operation is also extended to cover Australia's resource rent tax and fringe benefits tax (FBT).2
Dual listed companies
Under Article 4 (Residence), a special provision has been included to deem a participant in a 'dual listed company arrangement' to be resident only in the country of incorporation, provided that the participant has its primary stock exchange listing in the same country. (A 'dual listed company arrangement' is one which consists of two public companies which, while retaining their status as separate legal entities, seek to broadly operate as one company.)
Taxation of business trusts and spectrum licences
In relation to the Business Profits Article, the exchange of notes to the convention ensures that profits derived by a non-resident beneficiary through a permanent establishment of a trust can be taxed in the country where the permanent establishment is located.
The exchange of notes to the convention also clarify that payments made for the use of spectrum licences are treated under Article 7 as business profits, and not as royalties.
The Convention provides for the following two exceptions to the general rate limit of 15% for source country taxation on dividends.
- No source country taxation on intercorporate dividends where the dividend recipient is a company that holds directly at least 80% of the voting power of the company paying the dividend, and satisfies certain conditions including holding and listing requirements.
- A limit of 5% for other company shareholdings of 10% or greater (that is, non-portfolio dividends).
These limits apply to both franked and unfranked dividends.
The limit on source country taxation on interest under the convention continues to be 10%. However, no tax will be chargeable in the source country on interest derived by:
- a government body of the other country (including a body exercising governmental functions or a bank performing central banking functions), or
- a financial institution resident in the other country (subject to certain safeguards).
Under the convention, the limit on source country taxation of royalties is reduced from 10% to 5%. Payments for the use of industrial, commercial or scientific equipment cease to be treated as royalties for the purposes of the convention. Amounts derived from equipment leasing are treated as business profits.
Consistent with the extension of the convention to cover capital gains tax, the convention includes a comprehensive Alienation of Property Article for the taxation of gains from the alienation of property. In accordance with Australia's current treaty practice, this Article includes a source country sweep-up provision that allows the source country to tax capital gains not otherwise dealt with in the Article. Australia will thus continue to be able to tax, for instance, capital gains derived by UK residents on the disposal of Australian entities.
A departing resident provision is also included to give taxpayers the option to pay capital gains tax on certain assets only in their new country of residence.
Article 15 (Fringe benefits) seeks to avoid double taxation of fringe benefits by providing that the benefits will only be taxable in the country which would have the primary taxing right if the benefit had been paid as ordinary employment income.
The convention clarifies, in light of the UK decision in Padmore v Inland Revenue Commissioners, that partnerships3, other than Australian limited partnerships, are not persons covered by the treaty and neither country is prevented from taxing their resident partners on the partners' share of income or gains.
The exchange of notes to the convention make it clear that income or gains derived under employee share option plans are 'other similar remuneration' for the purposes of Article 14 (Income from Employment). Such benefits accruing up until the time when the option is exercised are treated as income from employment, and are therefore subject to the rules in Article 14 of the convention. Any increase in the value of any shares acquired as a result of the exercise of the options fall for consideration under Article 13 (Alienation of Property).
Article 25 (Non-discrimination) is included to protect nationals of one country from tax discrimination in the other country. This is the first non-discrimination article to be included in an Australian tax treaty that gives taxpayers private rights of appeal4. The Article does not preclude either country from applying its anti-avoidance rules (including thin capitalisation measures), research and development concessions, consolidation rules or capital gains deferral rules.
Limitation on relief
Limitations on the benefits that a country is obliged to provide under the Convention apply under Article 23 (Limitation of Relief) of the Convention where income or gains are taxed in the other country on a remittance basis or where income or gains of temporary residents are exempted from tax.
What to read/do next
Further information relating to this and other Australian Tax Treaties can be found on the Treasury Website
Visit the International tax agreements homepage
1 The full title of the treaty is the Convention between the Government of Australia and the Government of United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains
2 Australia's tax treaty with New Zealand is the only other tax treaty at this time that covers Australian FBT. The Taxation Code of the Timor Sea Treaty between Australia and East Timor also covers fringe benefits tax.
3 (1989) Simon's Tax Cases 493
4 The Non-discrimination Article in the US treaty only applies at the level of the governments of each of the contracting states.