Australia and the United States treaty - key points
The 'Convention between Australia and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income' was signed on 6 August 1982. This convention was amended by a Protocol which was signed on 27 September 2001. The following is a summary of the amendments made to the convention by the Protocol.
Date of effect
For withholding taxes, the Protocol has effect in relation to payments made on or after 1 July 2003.
For other taxes covered, the Protocol has effect in respect of income, profits or gains of years of income beginning on or after 1 July 2004.
The Protocol updates the list of taxes covered by the convention. In the case of the US, the Protocol removes references to the accumulated earnings tax and the personal holding company tax as US federal income taxes not covered by the convention. In the case of Australia, the Protocol deletes the undistributed profits tax and includes specific references to Australia's tax on capital gains and petroleum resource rent tax.
Taxation of business profit derived through transparent entities
The Protocol inserts a new provision into the Business Profits Article to ensure that profits derived through a permanent establishment of a fiscally transparent entity (for example, a trust) can be taxed in the country where the permanent establishment is located. The term 'fiscally transparent entity' is used in the provision to cover any entity that may be taxed on a look-through basis (for example, US limited liability companies treated as partnerships for US tax purposes).
Shipping and aircraft profits
The Protocol amends Article 8 (Shipping and Air Transport) by extending the circumstances where exclusive residence country taxation will apply to profits from the bare boat lease (that is, the lease of a vessel without the captain and crew) of ships and aircraft used in international traffic and from the use and maintenance of containers used in international traffic.
The Protocol provides for a number of broad exceptions to the general rate limit of 15% for source country taxation on dividends.
- No tax is chargeable in the source country on dividends where a beneficially entitled company resident in the other country holds 80% or more of the voting power of the company paying the dividends and satisfies certain conditions, including the public listing requirements under the Limitation on Benefits Article, and
- a limit of 5% will apply for other company shareholdings of 10% or greater (that is, non-portfolio dividends).
These limits apply to both franked and unfranked dividends.
There is no limit on the tax the US can charge Australian residents on dividends paid on certain substantial holdings in US real estate investment trusts (REITs). In practical terms, this means that tax on these dividends will increase from 15% to the current US domestic law rate of 30%. The 15% rate is retained for REIT investments made by certain listed Australian property trusts subject to the underlying ownership requirements not exceeding certain levels. Existing investments in REITs by listed Australian property trusts acquired before 26 March 2001 are protected from the increased rate.
The limit on source country taxation on interest under the Protocol remains at 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).
The limit on source country taxation of royalties is reduced under the Protocol 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. Exclusive residence country taxation applies to amounts derived from the leasing of containers used for international transport. Amounts derived from other types of equipment leasing are treated as business profits.
Consistent with the extension of the convention to cover capital gains tax, the Protocol amends the Alienation of Property Article so as to deal comprehensively with 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. New rules are also included in the Article which remove double taxation of capital gains for departing residents and ensure that foreign tax credit rules operate effectively for them.
Limitation on benefits
The Limitation on Benefits Article (Article 16) seeks to prevent residents of third countries from using interposed companies or other entities resident in one of the treaty countries to inappropriately access treaty benefits (that is, treaty shopping).
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