House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, The Rt. Hon. Phillip Lynch, M.P.)

Notes on Clauses

INCOME TAX (INTERNATIONAL AGREEMENTS) AMENDMENT BILL 1977

Clause 1: Short title and citation

This clause formally provides for the short title and citation of the amending Act and of the Principal Act.

Clause 2: Commencement

Section 5(1A) of the Acts Interpretation Act 1901 provides that unless the contrary intention appears every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent. By this clause the Amending Act will come into operation on the day on which it receives the Royal Assent, thus enabling early implementation of the agreements.

Clause 3: Interpretation

Section 3 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act. Paragraphs (a) and (b) of clause 3 effect purely formal amendments to section 3 by inserting in section 3 definitions referring to the airline profits agreement with Greece and the comprehensive agreement with Belgium (which are being incorporated as schedules to the Principal Act by clause 6 of the Bill).

Clause 4: Agreements with Greece and Belgium

This clause proposes the insertion in the Principal Act of two sections - sections 11B and 11C - which will give the force of law in Australia to the agreements with Greece and Belgium. Each agreement will be given the force of law with effect from the times indicated in each agreement itself (see explanations of Article 4 of the Greek agreement and Article 28 of the Belgian agreement).

By sub-section (1) of new section 11B, the agreement with Greece will, when the agreement enters into force, have effect in respect of Australian tax from 1 March 1972 (see notes on Article 4 of the Greek agreement).

By sub-section (1) of new section 11C the agreement with Belgium will, when the agreement enters into force, have effect for Australian tax -

(a)

in respect of dividends and interest subject to withholding tax that are derived on or after 1 January in the calendar year immediately following that in which the agreement enters into force;

(b)

in respect of other income, for any year of income beginning on or after 1 July in the calendar year immediately following that in which the agreement enters into force.

(See notes on Article 28 of the Belgian agreement)

Sub-section (2) of each of the new sections provides for the notification in the Gazette of the dates on which the agreements are to enter into force. The purpose of these provisions is to provide a readily available and authoritative source from which persons may ascertain the fact and date of entry into force of these agreements. Because of the manner in which, under the terms of agreements, those agreements will enter into force, it is not possible to indicate the dates of entry into force in this Bill.

Clause 5: Provisions relating to certain income derived from sources in the United Kingdom, Singapore, Japan, New Zealand, Germany, the Netherlands, France and Belgium

The primary purpose of this clause is to apply the credit system of relief of double taxation to interest and royalties that are derived by residents of Australia from Belgium and in respect of which, under the agreement, the Belgian tax is limited. Section 12 of the Principal Act, which is to be amended by this clause, already achieves a corresponding result for interest and royalties derived by residents of Australia from the United Kingdom, Singapore, Japan, New Zealand, the Federal Republic of Germany, the Netherlands and France where the double taxation agreements with those countries limit the foreign tax on the income.

Section 23(q) of the Income Tax Assessment Act provides an exemption from Australian tax for foreign-source income (other than dividends) of Australian residents that is taxed in the country of source. Section 12 of the Principal Act gives effect to a policy that this exemption is not to apply to interest or royalties derived (either directly or through a trustee) from another country where the double taxation agreement with that country limits the tax it may charge. Once the exemption provision is made inapplicable, the interest or royalties become assessable income for the general purposes of the Income Tax Assessment Act, but the agreement in each case requires Australia to credit against its tax the limited tax of the other country. Sections 14 and 15 of the Principal Act govern the allowance of the credit.

Clause 5 will apply this policy to interest and royalties derived by Australian residents from Belgium after the commencement of the year of income to which the agreement is first to apply.

Paragraph (a) of clause 5 will effect a formal drafting amendment consequent on the addition to sub-section 12(1) of the Principal Act of new paragraph (ag).

Paragraph (b) will insert the new paragraph in section 12(1) of the Principal Act. This section sets out classes of income to which the exemption under section 23(q) of the Income Tax Assessment Act is not to apply.

The new paragraph (ag) will ensure that interest or royalties derived from Belgium by a resident of Australia, the Belgian tax on which is limited by the agreement to 10 per cent, will not be exempt from Australian tax. Paragraph (ag) will apply to income derived on or after 1 July in the calendar year immediately following that in which the agreement enters into force.

In some circumstances Belgium treats interest as a dividend and taxes it accordingly. The interest is, when derived by an Australian resident, to be subject under Article 10 (the dividend article) to Belgian tax of no more than 15 per cent and the reference in new paragraph (ag) of sub-section (1) to Article 10 of the Belgian agreement will mean that double taxation relief in respect of such interest will be given in Australia by the credit method.

Clause 6: Schedules 12 and 13

This clause adds the two new agreements as Schedules to the Principal Act.