House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

NOTES ON CLAUSES

INCOME TAX ASSESSMENT AMENDMENT BILL 1980

Clause 1: Short title, etc.

By this clause the amending Act is to be cited as the Income Tax Assessment Amendment Act 1980 and the Income Tax Assessment Act 1936, as previously amended, as the "Principal Act".

Clause 2: Commencement

By reason of section 5(1A) of the Acts Interpretation Act 1901 an amending Act comes into operation on the twenty eighth day after the date of Royal Assent, unless other provision is made. To avoid any delay in the making of assessments that may be affected by an amending Act it is customary for an income tax amending Act to operate from date of Assent.

In this case, clause 2 proposes that the amending Act come into operation on the day following the day on which the Income Tax Laws Amendment Act 1980 comes into operation. This recognises that section 78 of the Principal Act is to be amended by the Income Tax Assessment Amendment Bill (No. 6) 1979 (to be re-titled the Income Tax Laws Amendment Bill 1980) and by the Income Tax Assessment Amendment Bill 1980. As both amendments propose the insertion of new sub-paragraphs in section 78, clause 2 proposes that the Bill containing the later amendment come into operation on the day following that on which the Bill containing the earlier amendment commences to operate.

Clause 3: Interpretation

By this clause it is proposed to make two technical amendments to the definition of the term "royalty" or "royalties" in section 6 of the Principal Act. Amendment of the definition, which applies for purposes of taxing royalty income derived by residents of other countries from sources in Australia, is necessary to remedy two deficiencies exposed by a Victorian Supreme Court decision in the case of Aktiebolaget Volvo v Federal Commissioner of Taxation.

One arises from the Court's decision that the opening words of the definition, which specify that the term includes "any payment .... to the extent to which it is paid ....", for the right to use a copyright, patent, know how, etc. do not extend to an amount that is credited but not paid. To remedy this deficiency, paragraph (a) of sub-clause (1) will amend the opening words of the definition to specify that the term includes "any amount paid or credited .... to the extent to which it is paid or credited ....".

Secondly, the Court's decision opens up the prospect that a payment to a person in return for a forbearance by that person to grant to third persons rights to use property specified in the royalty definition, so that in substance the payer is making a payment for the exclusive right to use the property, may not be a royalty as defined. By contrast, a payment made directly in return for the exclusive right to use the property would be a royalty. To meet this situation, paragraphs (b) and (c) of sub-clause (1) will amend the royalty definition to include amounts paid or credited in return for total or partial forbearance in respect of the use of, or the right to use, property covered by the definition.

By sub-clause (2) the amendments made by sub-clause (1) will have effect in relation to income derived after the date of introduction of the Bill.

Clause 4: Election expenses of candidates

Sub-clause (1) of clause 4 proposes an amendment to section 74 of the Principal Act to authorise a deduction for expenditure incurred in contesting an election for membership of the Legislative Assembly of the Northern Territory. Section 74 already provides for deductions for expenditure incurred in contesting elections to the Commonwealth or a State Parliament.

By sub-clause (2) the amendment proposed by sub-clause (1) is to apply to assessments in respect of income of the 1979-80 and subsequent years of income.

Clause 5: Gifts, calls on afforestation shares, pensions, etc.

The purpose of this clause is to provide an income tax deduction for gifts made to the Child Accident Prevention Foundation of Australia and to extend from 30 to 90 days before and after the making of a gift, the period for valuing property donated to The Australiana Fund or to a public library, museum or art gallery.

Section 78 of the Principal Act authorises an income tax deduction for gifts of the value of $2 and upwards of money, or of property other than money that was purchased by the tax-payer within twelve months preceding the making of the gift, to a fund, authority or institution specified in section 78(1)(a). The deduction in respect of gifts of property other than money is limited to the lesser of the value of the property at the time the gift was made and the amount paid by the donor for the property.

Section 78(1)(aa) provides for the deduction under liberalised conditions under the Taxation Incentives for the Arts Scheme of gifts of certain property to The Australiana Fund or to a public library, public museum or public art gallery. Gifts made on or after 1 January 1978 and on or before 31 December 1980 to that Fund or to a public library, museum or art gallery of property, other than money or an interest in land or buildings, that is to form part of a collection maintained or established by the Fund or institution, qualify for deduction irrespective of how or when the property was acquired by the donor.

During this period, the deduction will generally be based on the value of the property at the time the gift was made. Determination of that value is based on the average of two or more valuations obtained from approved valuers within 30 days before or after the making of the gift.

Paragraph (a) of sub-clause (1) of clause 5 will insert a new sub-paragraph - sub-paragraph (lii) - in section 78(1)(a) of the Principal Act to specify the Child Accident Prevention Foundation of Australia as a fund to which the income tax gift deduction authorised by section 78(1)(a) applies.

Paragraph (b) of sub-clause (1) will amend section 78(6B)(b) of the Principal Act to extend the valuation period under the Taxation Incentives for the Arts Scheme from 30 to 90 days before and after the making of the gift. The Commissioner of Taxation will continue to have authority to extend in appropriate circumstances the period prescribed for obtaining valuations of property donated under the Scheme.

Sub-clause (2) will ensure that gifts made to the Child Accident Prevention Foundation of Australia both before and after the enabling legislation becomes law will be eligible for the deduction proposed by paragraph (a) of sub-clause (1).

The Child Accident Prevention Foundation of Australia was incorporated on 9 March 1979. Sub-clause (3) will ensure that the Commissioner of Taxation has authority to re open an income tax assessment made before the enabling legislation becomes law if this should be necessary to allow a deduction for a gift made to the Foundation before that time.

Clause 6: Purchase of prospecting or mining rights or information

This clause proposes an amendment to section 124AB of the Principal Act that is consequential upon amendments proposed to be made by clauses 7 and 8 to sections 124AR and 160ACA for the extension of the off-shore shareholder rebate scheme to include on-shore petroleum exploration and development operations.

Under section 124AB, the vendor and purchaser in a transaction for the disposal of a petroleum prospecting or mining right or petroleum prospecting or mining information may, in effect, agree to transfer from the vendor to the purchaser the vendor's rights to deductions for capital expenditure in respect of petroleum exploration and mining. Sub-section (6) of section 124AB at present ensures that the amount of deductions which may be transferred to the purchaser takes account of earlier action by the vendor under the off-shore petroleum rebate scheme (or the earlier sections 77A or 77D) to forgo its deduction entitlements in favour of its shareholders. If the vendor company has taken such action it is of course not appropriate for the purchaser to be able to have rights to deductions that were not available to the vendor.

The amendments being made by clause 6 will simply apply the principles of the existing section 124AB(6) to any declaration made under the rebate scheme as extended to on-shore operations. "Net declared petroleum capital" is a term being defined by clause 7 to cover amounts of share capital subscribed under the extended scheme.

Clause 7: Reduction of allowable deductions where certain declarations lodged

This clause is one of the measures necessary to extend on-shore the present scheme of rebates for share capital subscribed towards off-shore petroleum exploration and development. It proposes amendments to section 124AR of the Principal Act to authorise appropriate reductions in a company's entitlement to deductions under the special petroleum mining provisions of Division 10AA where it has made a declaration under proposed new sub-section (3A), (7A) or (13A) of section 160ACA to be inserted in the Principal Act by clause 8 in respect of both off-shore and on-shore petroleum exploration and mining. The amendments are consistent with the operation of the existing section 124AR where a company makes a declaration under the existing provisions of section 160ACA for the purposes of the present off-shore shareholder rebate scheme.

The clause also proposes a number of amendments to section 124AR to facilitate the necessary distinctions between capital subscriptions specified in declarations for the purposes of the present off-shore rebate scheme and those specified in declarations under the proposed extended rebate scheme, and will separately identify the deductions otherwise allowable under Division 10AA that are to be reduced by amounts declared in respect of the relevant capital subscriptions.

Accordingly, the paragraphs of sub-clause (1) of clause 7 will insert in section 124AR(1) of the Principal Act a number of new definitions and will effect consequential amendments to some existing definitions.

Paragraph (a) of sub-clause (1) will insert three new definitions -

'eligible payments' is to have the same meaning as it is to have under the amendments proposed to section 160ACA. It corresponds with the term 'prescribed payments' that is defined in section 160ACA in relation to the off-shore rebate scheme and means broadly payments to an eligible petroleum mining company by a company interposed between that company and its shareholders that will be applied as paid-up capital by the mining company and expended on petroleum outgoings (defined to include both off-shore and on-shore outgoings).

'eligible petroleum company' is to have the same meaning as that term is to have under the amendments to section 160ACA. Shortly stated it means a company that is a petroleum mining company as presently defined in section 160ACA for purposes of the existing off-shore rebate scheme, or a company that holds a valid licence, permit etc. or an interest therein to explore or mine for petroleum in an on-shore area of Australia.

'eligible petroleum deduction' : This term specifies the kinds of deductions for "petroleum outgoings" that, in relation to a company, may be reduced by the amount of net declared petroleum capital arising from declarations lodged by the company under proposed new sub-section (3A), (7A) or (13A) of section 160ACA. The deductions specified comprise, broadly -

•

deductions available under sections 124ADB, 124AH or 124AM for allowable capital expenditures that constitute petroleum outgoings incurred after 21 August 1979, i.e., exploration, prospecting or mining operations for petroleum in Australia (both off-shore and on-shore); and

•

depreciation allowances on plant for use in both off-shore and on-shore petroleum operations the expenditure on which is incurred after 21 August 1979 and in respect of which the company has elected for depreciation, in lieu of deductions available under Division 10AA of the Principal Act, for the cost of the plant.

Excluded from the scope of this definition are deductions for capital expenditure that is, pursuant to proposed new sub-sections (4) or (5) of section 124AR, deemed to have been incurred out of unexpended moneys paid on shares that were specified in declarations lodged under section 77A or 77D or under sub-section (3), (7) or (13) of section 160ACA. This expenditure will form part of the amount that constitutes prescribed deductions or prescribed petroleum deductions that are presently defined for the purposes of the former shareholder concessions and the existing off-shore rebate scheme in section 124AR(1).

Paragraph (b) of clause 7(1) will insert a definition of 'net declared petroleum capital'. This term, in relation to an eligible petroleum company, will mean the sum of any amounts specified in declarations lodged by the company in pursuance of new sub-section (3A), (7A) or (13A) of section 160ACA, other than amounts that have been expended or that the Commissioner of Taxation is satisfied will be expended in making eligible payments to other eligible petroleum companies, and which remain to be applied in reduction of deductions allowable for petroleum outgoings incurred after 21 August 1979.

The amount of net declared petroleum capital will be ascertained by applying the same principles as apply in ascertaining the amount of net eligible declared capital for the purposes of the present off-shore rebate scheme.

Paragraph (c) of clause 7(1) will amend the definition of 'net eligible declared capital' to restrict the operation of that term to amounts declared under the existing provisions of section 160ACA for purposes of the off-shore rebate scheme. This amendment is consequential on the proposed extension of the off-shore rebate scheme to encompass both off-shore and on-shore petroleum exploration and mining operations.

Paragraph (d) of clause 7(1) proposes a further amendment of a technical nature to the definition of 'net eligible declared capital'. This amendment is designed to ensure that where an interposed company has declared that it proposes to expend all or a part of the moneys specified on prescribed payments to petroleum mining companies but as at the end of the year of income has not done so, the amount so declared will be excluded from the calculation of the amount of net eligible declared capital of the interposed company, provided the Commissioner is satisfied that the amount will be spent in accordance with the declaration within the 2 months period allowed for the making of such payments. This amendment will make it clear that an interposed company that is itself engaged in petroleum exploration or mining operations is not to lose its entitlement to deductions in respect of declared amounts that the Commissioner is satisfied will be passed on as prescribed payments within the terms of the law to petroleum exploration or mining companies.

By reason of clause 7(2) the amendment proposed by paragraph (d) is to apply to moneys specified in declarations lodged under section 160ACA(7) after 24 August 1977, i.e., the date on which the off-shore rebate scheme commenced to operate.

Paragraph (e) of clause 7(1) will insert a definition of 'petroleum outgoings'. This term is to have the same meaning as in section 160ACA. Broadly it means expenditure of an eligible petroleum company incurred in carrying on exploration or mining operations for petroleum in off-shore or on-shore areas of Australia that is allowable capital expenditure or exploration expenditure under the provisions of Division 10AA. It does not however include expenditure on the acquisition of a petroleum prospecting or mining right or petroleum prospecting or mining information. This term corresponds with the existing definition of 'mining or prospecting outgoings' but, unlike that latter term which is restricted to expenditures in off-shore areas, will apply to expenditures in both off-shore and on-shore areas of Australia.

The purpose of the amendments proposed by paragraphs (f), (g) and (h) to the definitions of 'prescribed deduction' and 'prescribed petroleum deduction' is to ensure that those terms do not encompass deductions for capital expenditure incurred in off-shore or on-shore areas of Australia after 21 August 1979 ('eligible petroleum deductions'). These eligible petroleum deductions are to be treated separately and reduced by amounts declared under proposed new sub-section (3A), (7A) or (13A) of section 160ACA by the operation of the proposed new sub-section (2B) to be inserted in section 124AR of the Principal Act by paragraph (p) of clause 7.

Paragraph (j) will insert definitions of -

'section 77A moneys'

'section 77D moneys'

'section 160ACA off-shore moneys'

'section 160ACA petroleum moneys'.

These terms will identify amounts specified in declarations lodged under the different shareholder deduction or rebate schemes in force at particular times. The purpose of this identification is to facilitate the reduction of allowable deductions in a specified order under section 124AR where a company has more than one kind of declared moneys. The expressions are generally self-explanatory with the term 'section 160ACA petroleum moneys' referring to moneys specified in declarations lodged under the proposed extended section 160ACA rebate scheme.

Paragraph (k) of clause 7(1) will insert three new sub-sections - sub-sections (1A), (1B) and (1C) - in section 124AR.

The broad purpose of these three new sub-sections is to enable deductions for allowable capital expenditures incurred after 21 August 1979 (eligible petroleum deductions) to be offset first against capital specified in declarations under section 77A or section 77D (net declared capital) and secondly against capital specified in declarations under the present section 160ACA off-shore rebate scheme (net eligible declared capital) in circumstances where those amounts of declared capital would not otherwise be capable of being applied to reduce prescribed deductions or prescribed petroleum deductions under sub-section (2) and (2A) of section 124AR. This is to be done by increasing the amounts of prescribed deductions or prescribed petroleum deductions and reducing by the same amount deductions that would otherwise be available (eligible petroleum deductions) for offset against net declared petroleum capital under the extended rebate scheme.

Sub-section (1A) is intended to apply where, at the end of a year of income, a company has an amount of net declared capital, does not hold unexpended section 77A moneys or section 77D moneys and its entitlement to prescribed deductions is less than the amount of net declared capital. Where the company is entitled to eligible petroleum deductions in respect of that year of income, the effect of the proposed sub-section will be to reduce those deductions, and increase the amount of prescribed deductions, by the amount by which the prescribed deductions are less than the net declared capital. Section 124AR(2) of the Principal Act will then operate to apply the net declared capital in reduction of those prescribed deductions.

Sub-section (1B) is to perform a similar function where a company has an amount of net eligible declared capital that exceeds its entitlement to prescribed petroleum deductions. However, in this case, the reduction in eligible petroleum deductions is to be made only to the extent that those deductions constitute mining or prospecting outgoings (i.e., off-shore outgoings) as this is not a case where the moneys have been misapplied, e.g., by being spent on-shore. Section 124AR(2A) of the Principal Act will then operate to apply the net eligible declared capital in reduction of the increased prescribed petroleum deductions.

Sub-section (1C) is designed to apply where, at the end of a year of income, there is an amount of net eligible declared capital under the present off-shore scheme which exceeds the sum of prescribed petroleum deductions and the amount of unexpended off-shore moneys and the company has been given a notice in respect of a misapplication of declared moneys. In these circumstances, the sub-section is designed to increase the prescribed petroleum deductions and reduce the eligible petroleum deductions by so much of the eligible petroleum deductions as have been spent on-shore but limited to the excess amount of the net eligible declared capital.

The net eligible declared capital can then be applied under section 124AR(2A) in reduction of the increased prescribed petroleum deductions.

Paragraphs (m) and (o) of clause 7(1) will effect amendments to existing sub-sections (2) and (2A) of section 124AR that are consequential on the insertion of new sub-sections (1A), (1B) and (1C) by paragraph (k).

Paragraph (n) of clause 7(1) will amend section 124AR(2A) to ensure that the sub-section applies only where a company has lodged a declaration under the existing off-shore rebate scheme.

Paragraph (p) of clause 7(1) proposes the omission of sub-section (3) of section 124AR of the Principal Act and the insertion of two new sub-sections - sub-sections (2B) and (3) - in that section.

Sub-section (2B) will perform the same function in relation to eligible petroleum deductions and net declared petroleum capital under the extended rebate scheme as sub-section (2A) of section 124AR now does in respect of prescribed petroleum deductions and net eligible declared capital under the present off-shore scheme. It will, in a corresponding way, state the circumstances in which the eligible petroleum deductions are to be reduced and will quantify the amount of the reductions.

The proposed new sub-section (3) of section 124AR is substantially a replica of the existing sub-section (3), modified to take account of the extension of the present rebate scheme.

Paragraph (q) of clause 7(1) proposes the omission of sub-section (4) of section 124AR of the Principal Act and the insertion of three new sub-sections - sub-sections (4), (5) and (6) - in that section. These new sub-sections will apply to expenditure incurred on or after 22 August 1979, which is the date for the commencement of the extended rebate scheme.

Sub-section (4) is a provision designed to regulate the order in which unexpended moneys paid on shares, being section 77A moneys, section 77D moneys or section 160ACA off-shore moneys are to be treated as having been outlaid on mining or prospecting outgoings.

Sub-section (4) will apply in advance of new sub-section (5) where the tests set out in paragraphs (a) and (b) of the sub-section are met, that is, where -

(a)

a company incurs expenditure on mining or prospecting (i.e., off-shore) outgoings after 21 August 1979; and

(b)

apart from the application of new sub-section (5) and immediately before the expenditure was incurred the company held unexpended moneys paid on shares that consisted of or included one or more of the following - section 77A moneys, section 77D moneys and section 160ACA off-shore moneys.

In these circumstances the sub-section requires that the expenditure on mining or prospecting outgoings mentioned in paragraph (a) (referred to as the relevant expenditure) be deemed, for the purposes of section 124AR, section 77D(20) and section 160ACA to have been expended by the company out of those unexpended moneys in the manner prescribed in paragraphs (c) to (g) of the sub-section.

Broadly, the effect of the provision will be that mining or prospecting outgoings will be deemed to have been expended out of the unexpended moneys in the following order until either the outgoings or the unexpended moneys are exhausted:

(i)

section 77A moneys;

(ii)

section 77D moneys;

(iii)

section 160ACA off-shore moneys.

To the extent that mining or prospecting outgoings are deemed by sub-section (4) to have been expended out of each kind of unexpended moneys, those outgoings will constitute prescribed deductions or prescribed petroleum deductions, as the case may be, that are to be reduced under sub-section (2) or (2A), respectively, by the amount of net declared capital or net eligible declared capital.

Sub-section (5) is to perform a similar function to sub-section (4), but in relation to a company that incurs expenditure after 21 August 1979 on petroleum outgoings (i.e., both off-shore and on-shore) and that has, immediately before the expenditure was incurred, unexpended moneys paid on shares, being section 77A moneys, section 77D moneys or section 160ACA petroleum moneys. As both sub-sections (4) and (5) provide for the holding of section 77A moneys and 77D moneys, it is intended that sub-section (4) will operate to deal with those moneys before any application of sub-section (5).

This order of operation of sub-sections (4) and (5) will also apply where a company, that holds unexpended section 160ACA off-shore moneys and section 160ACA petroleum moneys, incurs expenditure on mining or prospecting outgoings. As such outgoings are also "petroleum outgoings", this order of application will mean that the mining or prospecting outgoings are dealt with, firstly, under sub-section (4) and, should there be an amount of such outgoings remaining after the application of that sub-section, then the remainder will be dealt with under sub-section (5).

Sub-section (6) is designed so that moneys that have been expended before lodgment of a declaration in which they are specified will, for the purposes of sub-sections (4) and (5), be treated as having been specified in a declaration prior to the expenditure being incurred. The effect of this will be that the moneys specified will come within the meaning of either section 160ACA off-shore moneys or section 160ACA petroleum moneys that are referred to in sub-sections (4) and (5) respectively.

As already mentioned, clause 7(2) governs the application of the amendment proposed by paragraph (d) of sub-clause (1) to the definition of net eligible declared capital. The amendment is to apply to moneys specified in declarations lodged under sub-section 160ACA(7) at any time after 24 August 1977. As the existing rebate scheme commenced on 25 August 1977, this application clause will ensure that any companies that have lodged such declarations do not lose their entitlements to deductions that were not intended to be forgone when the declarations were lodged. The only companies that could have been adversely affected by this situation are companies that were interposed companies for the purposes of the rebate scheme and that themselves carried on petroleum exploration or mining operations.

Sub-clause (3) of clause 7 governs the application of new sub-sections (4), (5) and (6) of section 124AR. These sub-sections are to apply to expenditure incurred on or after 22 August 1979, the date proposed for the commencement of the extended rebate scheme, while the existing sub-section (4) that is to be omitted by the amendment to be made by paragraph (q) of sub-clause (1) will apply to expenditure incurred before that date.

Clause 8: Rebate for moneys paid on shares for the purpose of petroleum exploration, prospecting or mining

Introductory note

The principal purpose of this clause is to amend section 160ACA of the Principal Act to extend the existing income tax concession, for capital subscribed to companies engaged in off-shore petroleum exploration or mining operations, to include capital subscribed to companies engaged in such operations in on-shore areas of Australia.

Section 160ACA presently authorises a rebate of 30 cents for each dollar of share capital subscribed after 24 August 1977 as paid-up capital to a company exploring or mining for petroleum in an off-shore area of Australia where the company has declared that those capital subscriptions will be spent on off-shore petroleum operations before the expiration of the second year of income following the year of income in which the capital was received. By lodging such a declaration the company forgoes its entitlement to the special deductions available to it under Division 10AA for such expenditure.

By the amendments proposed to be made to section 160ACA, capital subscribed after 21 August 1979 to a company exploring or mining for petroleum in off-shore or on-shore areas of Australia will be eligible for a similar rebate where the company lodges an appropriate declaration that the capital specified in the declaration has been or will be expended on such operations in any of those areas. In addition, the period within which the specified capital subscribed after 21 August 1979 will be required to be expended is to be extended by two years to the end of the fourth year of income following the year of income in which the capital was received.

Capital subscribed on or before 21 August 1979 that has been specified in declarations under the existing provisions of section 160ACA will continue to be required to be expended on off-shore petroleum exploration and mining operations before the expiration of the present period of two years following the year of income in which the subscriptions were received.

Apart from these changes and the proposed insertion of some additional safeguards, the extended rebate scheme will operate in similar fashion to the existing scheme.

A more detailed explanation of the proposed amendments to section 160ACA is contained in the notes that follow.

Paragraphs (a) and (b) of clause 8 will insert in sub-section (1) of section 160ACA of the Principal Act the following new definitions -

'eligible payments' : This definition broadly corresponds with the existing definition of 'prescribed payments' in section 160ACA(1), except that the existing definition applies only in relation to off-shore activities. It will mean payments to an eligible petroleum company by a company that is interposed between its shareholders and the eligible petroleum company that will be applied as paid up capital of the eligible petroleum company and expended on petroleum outgoings (being defined to cover off-shore and on-shore outgoings).

'eligible petroleum company' is defined as meaning -

(a)

a petroleum mining company (as defined under present law) i.e., one that qualifies under the existing off-shore rebate scheme; or

(b)

a company that is the holder of a current authority, licence, permit, right or lease issued under the relevant State or Territory mining law or has an approved interest in such a licence, authority, permit, right or lease and that carries on, or that the Commissioner of Taxation is satisfied proposes to carry on eligible petroleum operations (as defined).

'eligible petroleum operations' : By this definition the operation of the shareholder rebate scheme is to be extended beyond 'eligible operations' (presently defined as applying to petroleum operations in off-shore areas) to cover operations in on-shore areas of Australia. It will mean exploration, prospecting or mining for petroleum in off-shore and on-shore areas of Australia.

'petroleum outgoings' : This expression, the equivalent of which in the existing scheme is 'mining or prospecting outgoings', is designed to specify in relation to an eligible petroleum company (as defined) the manner in which moneys paid on shares after 21 August 1979, and specified in declarations lodged by it under new sub-sections (3A), (7A) or (13A) of section 160ACA, may be expended. It means expenditure that -

•

is incurred in carrying on eligible petroleum operations (as defined to include both off-shore and on-shore operations); and

•

is allowable capital expenditure within the meaning of section 124AA of the Principal Act or is exploration expenditure referred to in section 124AH of that Act.

Broadly, it covers all those expenditures for which special deductions are allowable under Division 10AA of the Principal Act other than expenditure on the acquisition of a petroleum prospecting or mining right or petroleum prospecting or mining information.

Paragraph (c) of clause 8 proposes an amendment to sub-section (3) that will have the effect of limiting the moneys paid on shares which may be specified in a declaration by a petroleum mining company to the moneys subscribed to it before 22 August 1979 or, in the case of moneys received from a company interposed between its shareholders and the petroleum mining company, the moneys received as prescribed payments before 22 October 1979. This amendment thus effects a cut-off for moneys subscribed under the existing off-shore scheme, to make way for the new extended scheme. The date 22 October recognises that an interposed company is given 2 months to pass on prescribed payments to an operating company.

Paragraph (d) of clause 8 will insert new sub-section (3A) in section 160ACA. This sub-section will perform the same function in respect of capital subscribed after 21 August 1979 as sub-section (3) performs in respect of capital subscribed on or before that date.

Sub-section (3A) will allow an eligible petroleum company (as defined) that has received moneys paid on shares after 21 August 1979 to lodge with the Commissioner of Taxation a written declaration that the company has spent, or proposes to spend those moneys in the year of income in which those moneys were received or before the expiration of the four years of income of the company next succeeding that year of income, on petroleum outgoings (as defined).

The lodgment of such a declaration will be a prerequisite to the allowance of rebates to shareholders who have paid the moneys concerned. (The rebate will be authorised by new sub-section (5A) of this section.) A complementary provision in section 124AR of the Principal Act, already described in these notes, will result in a corresponding reduction in the allowances for capital expenditure to which the company would otherwise be entitled under Division 10AA.

Paragraph (e) of clause 8 proposes to omit section 160ACA(4) and insert three new sub-sections - sub-sections (4), (4A) and (4B) - in its stead.

The proposed new sub-section (4) will operate, like the existing sub-section (4), as a safeguarding measure in relation to the present scheme. It will mean that where a company specifies in a declaration lodged under sub-section (3) or (7) of section 160ACA, part only of the moneys paid on shares that were received by the company during a year of income, the amount so specified will need to be expressed as a percentage of the total of all moneys paid on shares that were received in that year. Where a declaration excludes moneys paid on particular shares or a particular class of shares or by particular shareholders, the declaration will be invalid.

By virtue of the operation of proposed new sub-section (4B), capital subscriptions received by a petroleum mining company from an interposed company by way of prescribed payments are to be excluded from the moneys paid on shares to which sub-section (4) will apply.

Proposed new sub-section (4A) will perform the same safeguarding function in relation to declarations lodged under sub-section (3A) or (7A) of section 160ACA for the purposes of the extended scheme. Similarly, by the operation of proposed new sub-section (4B) the moneys paid on shares that are received by an eligible petroleum company from an interposed company by way of eligible payments (as defined) will not be taken into account for the purposes of the safeguard.

As it is possible for a company to receive, in the year of income in which 22 August 1979 occurs, capital subscribed for the purposes of the existing scheme and capital subscribed for the purposes of the extended scheme, the new provisions are designed to ensure that there is an appropriate distinction between the two kinds of capital. This is to be achieved by restricting the operation of the new sub-section (4) to declarations lodged under the present off-shore scheme while the new sub-section (4A) will apply in respect of declarations lodged under the extended scheme.

Proposed new sub-section (4B) will operate to exclude from the moneys paid on shares received in a year of income by a petroleum mining company or an eligible petroleum company amounts received as prescribed payments under the existing scheme or eligible payments under the extended scheme from interposed companies for the purposes of the safeguarding provisions of proposed new sub-section (4) and (4A). This exclusion is to be effected because declarations under sub-sections (3) and (3A) specifying such payments will not directly give rise to any rebate entitlements. In such a case the rebate entitlement will arise from the declaration made under sub-section (7) or (7A).

Paragraph (f) of clause 8 will insert a new sub-section - sub-section (5A) - in section 160ACA as the operative provision under which a shareholder will, for the purposes of the proposed extended rebate scheme, be entitled to a rebate of tax of 30 cents for each dollar subscribed as moneys paid on shares to an eligible petroleum company that has made a declaration under sub-section (3A). The new sub-section will apply in respect of the extended scheme in the same way as the present sub-section (5) applies for the off-shore scheme.

Paragraphs (g) and (h) of clause 8 will effect amendments to sub-section (6) of section 160ACA that are consequential on the insertion of new sub-sections (3A) and (5A).

Paragraph (j) of clause 8 proposes an amendment to sub-section (7) which confines the eligibility of moneys paid on shares, that may be specified in a declaration by a company interposed between its shareholders and a petroleum mining company, to moneys paid before 22 August 1979.

The need for the restriction of the operation of sub-section (7) arises from the proposed extension of the existing off-shore rebate scheme to cover both off-shore and on-shore petroleum operations. Declarations by an interposed company under the extended scheme will be authorised by proposed new sub-sections (7A), (12A), (13A) and (14A).

Paragraph (k) of clause 8 proposes the insertion of new sub-section (7A) in section 160ACA.

New sub-section (7A) will apply for the purposes of the extended rebate scheme in accordance with the same principles as presently apply under sub-section (7) in respect of the off-shore scheme.

The lodgment of a declaration under this sub-section is a prerequisite to the allowance under sub-section (15A) of rebates to shareholders for capital subscribed by them to an interposed company.

A complementary reduction is to be effected (by the proposed amendments to section 124AR of the Principal Act) in the deductions to which the company using the money on petroleum outgoings may otherwise be entitled in relation to its capital expenditure.

Paragraph (m) of clause 8 proposes to omit sub-section (8) of section 160ACA and substitute a new sub-section (8) that will take account of the proposed insertion of new sub-section (7A).

The existing sub-section (8) imposes a qualification on the eligibility of an interposed company to lodge a declaration under sub-section (7) in respect of prescribed payments made to an operating exploration or mining company. The new sub-section (8) will impose the same qualification in respect of a declaration lodged under the new sub-section (7A).

Paragraph (n) of clause 8 will effect a consequential amendment to sub-section (9) that will cause it to apply for the purposes of proposed new sub-sections (7A) and (8) as it does now for the purposes of the existing sub-sections (7) and (8).

Paragraphs (p) to (s) of clause 8 propose to insert four new sub-section - sub-sections (12A), (13A), (14A) and (15A) - in section-160ACA to govern the manner in which eligible payments are to be made to eligible petroleum companies and authorise the rebate entitlements of the shareholders in an interposed company lodging a declaration under sub-section (7A).

These new sub-sections will operate for the purposes of the extended scheme in the same way as existing sub-sections (12), (13), (14) and (15) operate in respect of the present off-shore scheme.

Paragraphs (t), (u) and (w) of clause 8 will insert three new sub-sections - sub-sections (16A), (17A) and (18A) - in section 160ACA that are designed to perform, in relation to capital subscribed to interposed companies after 21 August 1979 for expenditure under the extended scheme, a similar function to that which existing sub-sections (16) to (18) perform in respect of capital subscribed before that date for expenditure on off-shore petroleum operations. Paragraph (v) of clause 8 will effect a technical amendment to section (18) to clarify the operation of paragraph (b) of that sub-section.

Paragraph (x) of clause 8 of the Bill proposes the insertion of a new sub-section - sub-section (19A) - in section 160ACA.

In the same way as existing sub-section (19) applies to declarations under sub-section (3) or (7), sub-section (19A) will apply where a company has, perhaps inadvertently, lodged a declaration under either of the sub-sections (3A) or (7A) and wishes to lodge a declaration under the other sub-section. The sub-section enables the company to lodge a further declaration under the other sub-section in respect of the same moneys, with the approval of the Commissioner. It also provides that the first declaration shall be deemed not to have been duly lodged where a second declaration under a different sub-section is approved.

Paragraph (y) of clause 8 will amend sub-section (22) to introduce references to new sub-sections (5A) and (15A).

Paragraphs (z), (za) and (zb) of clause 8 will amend sub-sections (24), (25), (26) and (27) to insert references to new sub-sections (5A), (7A), (13A) and (15A). This will enable those sub-sections to apply under the extended scheme in the same way as they apply under the present scheme.

Paragraph (zc) of clause 8 proposes the insertion of four related new sub-sections - sub-sections (28), (29), (30) and (31) - in section 160ACA that are complementary to existing sub-section (25) of that section, and which will have effect in relation to shares acquired after 2 October 1979, being the date of announcement of these safeguards against "rebate stripping". The relevant background is that if a person sells shares within 12 months of acquiring them and makes a profit that is subject to tax under section 26AAA, the person (having had the cost of the shares taken into account in arriving at the amount of the profit) ceases to be entitled to any rebate for capital subscribed when acquiring the shares.

Proposed new sub-section (28) is intended as a further safeguard against abuse of the extended shareholder rebate scheme and is designed to withdraw an entitlement to a rebate in circumstances where sub-section (25) does not apply. In broad terms, sub-section (28) is designed to deny a rebate where a person has paid moneys on shares acquired after 2 October 1979 and the shares are sold within 12 months of acquisition in circumstances where the existing safeguard in sub-section (25) does not apply, e.g., if the shares are sold for cost or less.

Sub-section (29) is designed as a supplementary safeguard to new sub-section (28) to meet the case where shares acquired after 2 October 1979 are sold or otherwise disposed of more than twelve months after the date on which they were acquired, but were sold in pursuance of an option granted or an agreement entered into before the expiration of that period. In a case of that kind the sale or other disposal will be treated as having been made within the period of twelve months following the acquisition of the shares for the purposes of sub-section (28).

Sub-section (30) is a drafting measure to ensure that a reference to a sale or other disposal of a share in sub-sections (28) and (29) includes a sale or other disposal of a beneficial interest in a share.

Sub-section (31) is expressed so that the reference to an agreement in sub-section (29) shall also include an arrangement or understanding, and will not be read down on grounds of informality.

Clause 9: Sale of shares in petroleum mining companies and eligible petroleum companies

Clause 9 of the Bill proposes a number of amendments to section 160ACB of the Principal Act that are designed to cause the safeguarding provisions of that section to apply to rebates allowable under the proposed extended provisions of section 160ACA, as amended by clause 8 of the Bill, in the same way as they now apply to rebates allowable under the existing provisions of section 160ACA.

Section 160ACB of the Principal Act is designed to withdraw rebates otherwise allowable to a person under section 160ACA for capital subscribed directly or indirectly to a petroleum mining company, should the shares concerned be sold or otherwise disposed of to a petroleum mining company or a petroleum mining investment company (a "prescribed company") before the moneys subscribed have been expended on mining or prospecting outgoings. The safeguarding provision operates to limit rebates to shareholders by reference to the net amount of money supplied by them for use on mining or prospecting outgoings.

The clause also proposes a technical amendment to section 160ACB to make it clear that the rebate entitlements of shareholders in an interposed company are to be reduced where the company sells its shares in a petroleum mining company or an eligible petroleum company to a prescribed company before the capital subscribed by the interposed company out of its shareholders' contributions has been expended on mining or prospecting outgoings or on petroleum outgoings by those operating companies. Essentially, the amendment is designed to apply the same principle to the recapture, indirectly, of rebatable capital subscriptions from the sale of shares by an interposed company as now applies to the direct recapture of rebatable capital subscriptions from the sale of shares by direct shareholders. This amendment will apply to sales of this kind that occur after the date on which the Bill is introduced.

Paragraph (a) of clause 9(1) will omit sub-section (1) of section 160ACB an substitute a new sub-section (1). The new sub-section (1) will define certain expressions that are used in the section. All but a "prescribed company" are expressions that are also used in section 160ACA and those expressions - "eligible operations", "eligible payments", "eligible petroleum operations", "mining or prospecting outgoings", "petroleum outgoings" and "prescribed payments" will have the same meaning as they are to have in section 160ACA.

The new definition of "prescribed company" will extend the present meaning of that expression to include a company that carries on, or that proposes to carry on, on-shore petroleum operations, a company engaged in a business of investing in shares in that kind of company (referred to in these notes as an interposed company) and a company carrying on both of those activities. The present meaning of that expression is in similar terms but embraces off-shore petroleum operations only.

Paragraphs (b) and (c) of clause 9(1) will effect consequential amendments to sub-section (3) of section 160ACB to restrict the operation of that sub-section to declarations lodged under sub-section (3) or (7) of section 160ACA (i.e., under the present off-shore scheme) and to the rebates available under, respectively, sub-section (5) or (15) of section 160ACA as a result of those declarations.

Paragraph (d) of clause 9(1) proposes the insertion of two new sub-sections - sub-sections (3A) and (3B) - in section 160ACB.

Section 160ACB(3A) is designed to perform the same function in relation to rebate entitlements arising by virtue of declarations lodged for the purpose of the extended scheme as sub-section 160ACB(3) performs in relation to the existing scheme.

Thus, where a person sells shares in an eligible petroleum company or an interposed company, as the case may be, to a prescribed company before the declared moneys paid on those shares have been expended on petroleum outgoings, sub-section (3A) will require whole or partial disallowance of rebates otherwise allowable under sub-section (5A) or (15A) of section 160ACA. The extent of the disallowance will be governed by the proportion of declared moneys that has been expended on petroleum outgoings before the sale of the shares. For this purpose sub-section 160ACB(6), as proposed to be amended, will treat an interposed company as having expended declared moneys on petroleum outgoings if its associated eligible petroleum company has expended on such outgoings the moneys passed on as eligible payments.

Sub-section 160ACB(3B) is to perform a similar function to sub-sections (3) and (3A) in a case where an interposed company, pursuant to the existing scheme makes prescribed payments (as defined) on shares in an associated petroleum mining company and sells those shares to a prescribed company before the declared moneys have been expended on mining or prospecting outgoings.

In these circumstances sub-section (3B) will, for the purposes of determining the amount of any rebate allowable under section 160ACA(15), operate to reduce the rebate entitlements of shareholders in the interposed company by, in effect, reducing the amount of the prescribed payments by the amount of the consideration received for the sale of the shares.

Because, in the circumstances to which sub-section (3B) will apply, the seller of the shares is not the same person as the person entitled to the rebate, the formula devised to give effect to the reduction in rebate entitlements is based on aggregating the consideration received for each share sold by the interposed company during the period in which the petroleum mining company is required to expend the declared moneys on mining or prospecting outgoings.

Unless all of the relevant shares are sold simultaneously, sub-section (3B) will not generally apply until this period has expired so that the aggregate consideration for all sales may be determined. In this respect, the operation of sub-section (3B) will differ from that of sub-sections (3) and (3A) which may be applied at the time of each sale of shares.

As mentioned later in these notes, proposed section 160ACB(6B) will perform a similar function to that of sub-section (3B) where an interposed company, pursuant to the extended scheme, makes eligible payments to an associated eligible petroleum company and sells the relevant shares to a prescribed company before the moneys included in the eligible payments have been expended on petroleum outgoings.

By virtue of sub-clause (2) of clause 9, sub-sections (3B) and (6B) of section 160ACB will only apply to sales of shares by an interposed company after the date on which the Bill was introduced.

Paragraph (e) of clause 9(1) will insert references to new sub-sections 160ACB(3A) and (3B) in sub-section 160ACB(5), which is a complementary safeguarding provision designed to counter arrangements under which shares in a company may be sold or otherwise disposed of for a consideration that does not fairly reflect the real value of the shares.

Paragraph (f) of clause 9 proposes the omission of sub-section (6) and the insertion of three new sub-sections - sub-sections (6), (6A) and (6B) - in section 160ACB.

Sub-section (6) is to be expressed in substantially similar terms to the existing sub-section that it is to replace. New sub-section (6) is a machinery provision that will enable certain amounts expended on mining or prospecting outgoings by a petroleum mining company or on petroleum outgoings by an eligible petroleum company to be regarded as having been expended by an associated interposed company in determining whether, for the purposes of sub-section (3) or (3A), all moneys included in declarations lodged by the interposed company for years of income up to and including the year of sale had been expended on such outgoings before a person had sold shares in that interposed company.

Sub-section (6A) will perform, for the purposes of sub-section (3B), the same function as sub-section (6) does for sub-sections (3) and (3A). The necessity for this provision arises from the possibility that the operating company referred to in sub-section (3B) could itself, at some time, have been an interposed company that lodged a declaration under sub-section 160ACA(7).

Any moneys that have been specified in such a declaration and passed on as prescribed payments will, by virtue of this provision, be treated as having been expended by that company on mining or prospecting outgoings to the extent that the recipient of the prescribed payments has so expended the money.

By virtue of sub-section (6B), sub-sections (3B) and (6A) will apply in relation to the extended rebate scheme by applying those sub-sections as though the references therein to terms and sub-sections used in relation to the existing rebate scheme were in fact references to corresponding terms and sub-sections used in relation to the extended rebate scheme.

Thus sub-sections (3B) and (6A) will also operate to authorise a reduction or withdrawal of rebates allowable under sub-section 160ACA(15A) in respect of moneys specified in declarations lodged by an interposed company under sub-section 160ACA(7A) and expended in the making of eligible payments to an eligible petroleum company where the shares so acquired in that company were sold by the interposed company to a prescribed company before the eligible payments had been expended on petroleum outgoings.

As already mentioned, sub-clause (2) of clause 9 will cause the provisions of sub-sections (3B) and (6B) to apply only to sales of shares by an interposed company after the date on which the Bill was introduced.

Clause 10: Company not entitled to investment allowance in certain circumstances

This clause proposes to amend section 160ACC of the Principal Act to reflect the changes proposed to be made by clause 8 of the Bill to extend the scope of section 160ACA of that Act.

As presently enacted, where a company has lodged a declaration under section 160ACA, section 160ACC operates to preclude a deduction for the investment allowance in respect of any expenditure on plant for use in exploring for petroleum in off-shore areas of Australia and acquired in the year of receipt of the declared moneys or in the next succeeding two years of income.

Paragraph (a) of clause 10(1) proposes to insert a reference to sub-sections (3), (7) or (13) of section 160ACA in the existing provisions of section 160ACC. This will confine the application of those provisions to expenditure on exploration plant incurred in the period specified where a company lodges a declaration under those sub-sections for the purposes of the off-shore rebate scheme.

The existing provisions will become sub-section (1) of section 160ACC. Paragraph (b) of clause 10(1) proposes the insertion of a new sub-section (2) to section 160ACC which, in relation to declarations lodged for the purposes of the proposed extended rebate scheme in respect of capital subscribed after 21 August 1979, will operate in the same way as sub-section (1) to deny the investment allowance on exploration plant acquired in the year in respect of which a declaration is lodged or in the next two succeeding years of income.

Sub-clause (2) of clause 10 will limit the application of proposed new sub-section (2) of section 160ACB to expenditure on exploration plant incurred after 21 August 1979.

INCOME TAX (INTERNATIONAL AGREEMENTS) AMENDMENT BILL 1980

This is the second of the two Bills explained in this memorandum. The principal features of the Bill have already been mentioned and the following notes relate to each clause of the Bill.

Clause 1: Short title, etc.

By this clause the amending Act is to be cited as the Income Tax (International Agreements) Amendment Act 1980 and the Income Tax (International Agreements) Act 1953, as previously amended, as the "Principal Act".

Clause 2: Commencement

By section 5(1A) of the Acts Interpretation Act 1901, unless the contrary intention appears, every Act is to 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 and the protocol.

Clause 3: Interpretation

Section 3(1) of the Principal Act contains a number of definitions for the more convenient interpretation of the Act.

Paragraphs (a) and (b) of clause 3 will insert in section 3(1) definitions referring to the comprehensive agreements with the Philippines and Switzerland (which are being incorporated as Schedules 14 and 15 to the Principal Act by clause 8 of the Bill).

Paragraph (c) will amend section 3(1) by omitting the existing definition of "the United Kingdom agreement" and substituting two new definitions, of "the United Kingdom agreement" and "the United Kingdom protocol". As already noted, the United Kingdom protocol is a protocol to amend the United Kingdom agreement and accordingly the term "the United Kingdom agreement" is being redefined to mean the agreement (a copy of which is set out in Schedule 1 to the Principal Act) as amended by the United Kingdom protocol. A copy of the United Kingdom protocol is set out in Schedule 1A to be inserted in the Principal Act by clause 8 of the Bill.

Clause 4: Protocol with the Government of the United Kingdom

This clause proposes the insertion in the Principal Act of a new section - section 5A - which will give the force of law in Australia to the protocol with the United Kingdom.

In accordance with Article III of the United Kingdom protocol, the protocol will enter into force when all steps necessary to give it the force of law in Australia and the United Kingdom have been completed. Proposed section 5A(1) will give the protocol the force of law in Australia, with effect as from the date on which it enters into force.

Section 5A(2) calls for a notification in the Gazette of the date on which the protocol entered into force. This is to provide a readily available and authoritative source from which persons may ascertain the fact and date of entry into force of the protocol.

Sub-section (3) of proposed section 5A arises out of paragraph (2) of the new Article 8 being inserted in the United Kingdom agreement by the protocol. That paragraph is to the effect that an Australian resident individual who receives a dividend from a United Kingdom resident company is to be entitled to a tax credit in the United Kingdom in respect of the dividend, on the same basis as a United Kingdom resident individual. The paragraph also requires that any such tax credit to which an Australian resident individual may be entitled is to be treated as assessable income in Australia. Sub-section (3) will implement this broad rule.

By paragraph (a) of the proposed sub-section, the tax credit is to be included in the assessable income of the taxpayer of the year of income in which the dividend to which the tax credit relates is paid. By paragraph (b) that tax credit is to be added to the dividend. This treatment, which parallels the way in which the dividend and tax credit are treated as one for purposes of United Kingdom tax, is necessary to ensure that credit for the United Kingdom tax may properly be allowed against the Australian tax on the same income as that on which the United Kingdom tax is based.

Clause 5: Agreement with the Republic of the Philippines and Agreement with the Swiss Federal Council

This clause proposes the insertion in the Principal Act of two sections - sections 11D and 11E - which, respectively, will give the force of law in Australia to the comprehensive double taxation agreement with the Philippines and that with Switzerland. Each agreement will be given the force of law with effect from the dates indicated in each agreement itself (see explanations of Article 29 of the Philippine agreement and Article 27 of the Swiss agreement).

By proposed section 11D(1), the Philippine agreement will, when the agreement enters into force, have effect, as regards Australian tax -

(a)

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

(b)

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

By proposed section 11E(1), the Swiss agreement will, when the agreement enters into force, have effect, as regards Australian tax -

(a)

in respect of dividends or interest subject to withholding tax that are derived on or after 1 January 1979;

(b)

in respect of other income, for any year of income beginning on or after 1 July 1979.

Sub-section (2) of each of new sections 11D and 11E provides for notification in the Gazette of the dates of entry into force of the agreements. These provisions have a similar purpose to proposed section 5A(2) - to give an authoritative source from which the date of entry into force of the agreements can be obtained. Because of the terms of the two agreements relating to entry into force - the Philippine agreement enters into force on the exchange of instruments of ratification and the Swiss agreement on the exchange of diplomatic notes advising that everything has been done to give the agreement the force of law in Australia and in Switzerland - it is not possible in this Bill to indicate the dates of entry into force of the agreements.

Sub-clause (2) of clause 5 will empower the Commissioner to amend assessments for the purpose of giving effect to the agreement with the Philippines. It is necessary to give the Commissioner this power because, although the agreement will not enter into force until instruments of ratification have been exchanged, its provisions may have effect - pursuant to proposed section 11D(1) - in relation to income in respect of which assessments may have already been made by the time entry of force of the agreement takes place. Sub-clause (4) has a similar purpose in relation to the Swiss agreement.

Proposed sub-clause (3) of clause 5 is to be inserted to ensure that the interest and royalty "source" rules negotiated with Switzerland, and contained in Articles 11(5) and 12(5) of the Swiss agreement, will not when read with Article 25 have the unintended effect of subjecting to Australian tax interest or royalties paid by an Australian resident to a Swiss resident where the interest or royalties are an outgoing wholly incurred in carrying on a business in a third country. Such interest or royalties would not be subject to tax under the provisions of the Australian income tax law (sections 128B and 6C of the Income Tax Assessment Act) or, in corresponding circumstances, under any of Australia's other double taxation agreements.

Clause 6: Provisions relating to certain income derived from sources in certain countries

The primary purpose of this clause is to apply the credit method of relief of double taxation to interest and royalties that are derived by residents of Australia from the Philippines and Switzerland and in respect of which, under the respective agreements, the Philippine or Swiss tax is limited. Section 12 of the Principal Act, which is being amended by this clause, already achieves a corresponding result for interest and royalties derived by residents of Australia from countries with which Australia has concluded comprehensive double taxation agreements which limit the foreign tax on such income.

Section 23(q) of the Income Tax Assessment Act confers relief from double taxation in the form of an exemption from Australian tax for foreign source income (other than dividends) of Australian residents that is taxed (not exempt from tax) in the country of source. Section 12 of the Principal Act gives effect to a policy that this exemption method of relief 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 exempting provision is, by section 12, made inapplicable, interest and royalties that are taxed in the other country 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 6 will apply this policy to interest and royalties derived by Australian residents from the Philippines or Switzerland after the commencement of the year of income to which the relevant agreement is to apply. Articles 24 and 22 respectively are the relevant credit Articles in the Philippine and Swiss agreements. However, as Switzerland currently does not tax royalties derived by residents of other countries, the "not exempt from tax condition" of section 23(q) of the Assessment Act is not met, and such royalties derived by Australian residents are, and will remain, fully taxable.

Paragraph (a) of clause 6(1) will effect a formal drafting amendment consequent upon the addition to section 12(1) of the Principal Act of two new paragraphs, (ah) and (ai).

Paragraph (b) will insert the two new paragraphs in section 12(1) of the Principal Act. This section formally 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 (ah) will ensure that interest and royalties derived from the Philippines by a resident of Australia, the Philippine tax on which is limited to 15 or 10 per cent, as applicable, in the case of interest, and 15 to 25 per cent, as applicable, in the case of royalties, will not be exempt from Australian tax. Paragraph (ah) will apply to income derived in income years commencing on or after 1 July in the calendar year in which the agreement enters into force (i.e., the year in which instruments of ratification are exchanged).

New paragraph (ai) will serve a similar purpose in relation to income from Switzerland. It will have effect in relation to interest and royalties derived on or after 1 July 1979 where, under the agreement, Swiss tax is limited to 10 per cent of the gross amount of the relevant income. As noted earlier, Switzerland does not, at present, impose tax on outgoing royalty payments. However, should Swiss tax be imposed on such income in the future, the agreement would apply to limit the Swiss tax to 10 per cent and Australia would allow a credit against the Australian tax on the royalties in respect of this amount of Swiss tax.

Sub-clause (2) of clause 6 is designed to avoid any retrospective increase in overall tax liability that might result from the application of the credit method of double taxation relief to interest income derived from Switzerland by Australian residents after the commencement of the 1979-80 income year, but on or before the date of announcement of signature of the agreement on 28 February 1980. When signature of this agreement was announced, it was indicated that the credit method of relief was to be applied to this income. The sub-clause will mean, in effect, that any increase in the Australian tax payable in respect of such interest, resulting from the change from the exemption system to the credit system, is not to exceed the amount by which Swiss tax on the income is reduced by reason of the agreement.

Sub-clause (3) of clause 6 has a similar purpose to that of clauses 5(2) and 5(4) of the Bill. It will empower the Commissioner to amend assessments that have already issued, to apply the credit method of double taxation relief in accordance with sub-clauses (1) and (2) as regards interest from Switzerland.

Clause 7: Deductions for United Kingdom tax not to be taken into account in calculating amount of dividend, interest or royalty

Paragraph (a) of clause 7 will amend section 13 of the Principal Act to insert a new sub-section (1A), which will express sub-section (1) of that section as being not applicable in relation to dividends to which Article 8 of the United Kingdom agreement as amended by the protocol applies, that is, dividends derived on or after 6 April 1977. Sub-section 13(1) of the Principal Act clarified, for purposes of the Australian law, the amount of a United Kingdom dividend that would be assessable income in the hands of an Australian shareholder. The provision was necessary when the United Kingdom agreement was given the force of law in 1968, because of the way in which the United Kingdom law in relation to taxation of dividends operated at that time.

However, changes made in the United Kingdom law in relation to taxation of companies and shareholders have made section 13(1) unnecessary, and its operation is to be terminated in relation to dividends derived on or after 6 April 1977.

Paragraph (b) will effect a formal drafting amendment consequent on the insertion of section 13(1A), to ensure that section 13(2) will continue to refer to sub-section 13(1).

Clause 8: Schedules 1A, 14 and 15

This clause will insert the United Kingdom protocol as Schedule 1A to the Principal Act, following the United Kingdom agreement (paragraph (a)), and add the agreements with the Philippines and Switzerland as Schedules 14 and 15 respectively to the Principal Act (paragraph (b)).

Clause 9: Transitional provisions with respect to the protocol with the Government of the United Kingdom

Against the background of the amendments proposed by clauses 3(c) and (4) the purpose of this clause is to make it clear that the amendments to the United Kingdom agreement effected by the United Kingdom protocol will not operate prior to the dates provided for in the protocol.

Clause 9(1) specifies that the amendments to which the transitional provisions of this clause are to apply are those effected by clause 3(c), which inserted an amended definition of "the United Kingdom agreement" and a definition of "the United Kingdom protocol", and those effected by clause 4 which provides for the force of law to be given to the United Kingdom protocol.

As a consequence of these amendments, it will be the original United Kingdom agreement as amended by the United Kingdom protocol that is, by section 5 of the Principal Act, given the force of law in Australia. By section 5, the agreement is (so far as relevant) expressed to have effect from 1 July 1967, but as the amendments to the agreement being made by the protocol are to operate only from the dates set out in the protocol it is appropriate to make it clear that those amendments apply from those dates, and not from 1 July 1967.

Accordingly, by clause 9(2) the amendments to give the force of law to the United Kingdom protocol are to be effective only in relation to the income to which the United Kingdom protocol applies, and only from the dates from which the provisions of the protocol are to have effect. In the case of remuneration to which Article I of the protocol applies, the date will be the commencement of the 1980-81 income year (paragraph (a)) and for dividends to which Article II of the protocol applies, the date will, subject to clause 9(3), be 6 April 1977 (paragraph (b)).

Clause 9(3) is designed to avoid any retrospective increase in Australian tax liability that might result from the application of the provisions of new article 8 of the agreement to dividends from United Kingdom companies, derived by Australian residents on or after 6 April 1977 but on or before the date of announcement of signature of the United Kingdom protocol on 29 January 1980.

Clause 9(4) will empower the Commissioner of Taxation to amend assessments that have already issued, to give effect to the amendments arising out of the United Kingdom protocol effected by clauses 3(c) and (4), taking into account, where applicable, the provisions of sub-clause (3) of this clause.

The provisions of the protocol to the United Kingdom agreement and of the agreements with the Philippines and Switzerland are explained in the notes that follow.

PROTOCOL TO THE UNITED KINGDOM AGREEMENT

Australia's existing double taxation agreement with the United Kingdom was signed in 1967 and given the force of law in Australia in 1968. Since that time, the United Kingdom has amended its income tax law in two areas relevant to the operation of the provisions of the 1967 agreement. Those areas relate to its basis of taxation of some categories of employment income and its basis of taxing companies and dividends paid to their shareholders. The protocol amends the 1967 agreement to take account of those changes in the United Kingdom tax law.

Article I - Paragraph (3)(A) added to Article 2 of the United Kingdom Agreement

This change is designed to ensure that certain employment income is not tax-free in both Australia and the United Kingdom.

When the double taxation agreement with the United Kingdom was signed in 1967, the United Kingdom had what is called a "remittance" basis of taxation of overseas earnings of residents of the United Kingdom, which system, broadly, had the result that only that part of the overseas earnings of a person resident in the United Kingdom that was remitted to or received in the United Kingdom was subject to United Kingdom tax. So that unremitted earnings of United Kingdom residents from sources in Australia would not be free from tax in both countries, Article 2(3) of the agreement required that any relief from Australian tax under the agreement was not to extend to amounts that were not subject to United Kingdom tax because they were not remitted there.

Under new United Kingdom provisions concerning remuneration from employment, unremitted amounts are formally subject to tax in the United Kingdom but a deduction, of up to 100 per cent of relevant remuneration, is allowed. To the extent that such a deduction is allowed, the income is, of course, effectively tax-free, but because of the formal subjection of the income to tax, Article 2(3) is inapplicable.

New paragraph (3)(A) of Article 2, which is inserted into the existing agreement by the protocol, is designed to ensure that the changes in the United Kingdom regarding taxation of employment income will not have the effect that the relevant employment income derived by United Kingdom residents working in Australia will be wholly or partly free of tax in both countries. The paragraph accordingly identifies circumstances in which the United Kingdom may allow the deduction referred to. It then requires that any relief from Australian tax that would otherwise be applicable (for example under Article 12 in relation to employment income derived during a short-term visit to Australia, or under Article 16 in relation to remuneration of a visiting teacher or professor) is not to be granted in relation to so much of the income of a United Kingdom resident as, by reason of the deduction, is effectively freed from tax in the United Kingdom.

New paragraph (3)(A) of Article 2 also has application to a person whose domicile is in Australia and who is an Australian resident working in the United Kingdom for an employer not resident in the United Kingdom, e.g., for the United Kingdom branch of an Australian company. Under earlier United Kingdom law, income that the person derived for such work was, if it was not remitted to the United Kingdom, not taxed in that country. It followed that it was not eligible for the exemption from Australian tax conferred by section 23(q) of the Assessment Act on income that is not exempt from tax in the country of source.

When the United Kingdom altered its "remittance" basis of taxation, it replaced this rule by one under which such a person was formally taxable in the United Kingdom on the whole of his or her remuneration but was entitled to a deduction equal to 50 per cent of it. Again, although the person was effectively taxed in the United Kingdom on only half the remuneration, the whole of it had to be treated as exempt from Australian tax by section 23(q).

To meet this situation, paragraph (3)(A) will, by sub-paragraph (b), have the further effect that the amount of remuneration freed from United Kingdom tax by the special deduction will not qualify for exemption from Australian tax under section 23(q).

Article II - New Article 8

The principal effect of this new "dividend" article is to entitle Australian resident individual shareholders to the United Kingdom dividend tax credit to which United Kingdom resident shareholders are entitled.

In 1973, the United Kingdom changed its system of taxing companies and their shareholders from a system similar to that which operates in Australia to an "imputation" system, a feature of which is that a United Kingdom company has to pay an amount of "advance corporation tax" (ACT) when it pays a dividend, for which credit is allowed against the amount of corporation tax assessed to the company at the end of the relevant year. Individual shareholders who are United Kingdom residents are in turn allowed credit against their personal tax for an amount equal to the ACT paid by the company when their dividends were distributed, and are subject to United Kingdom tax on the sum of their dividends and this credit.

Under a provision in the United Kingdom law (section 27 of the Income and Corporation Taxes Act 1970) an Australian shareholder, who is not a United Kingdom resident, but who is a British subject, can apply to have the benefit of the credit. An Australian resident individual shareholder who is not a British subject does not have this right to a tax credit, which in any event arises under United Kingdom domestic law and is not a right under the existing United Kingdom agreement. As well, the Australian tax rules relating to dividends received from United Kingdom companies were not framed in the context of an "imputation" system and a Taxation Board of Review has decided both that the tax credit does not constitute assessable income of the shareholder concerned and that the shareholder is not entitled to any credit for United Kingdom tax.

Against this background, a new Article 8 has been negotiated. The new article retains the basic feature of the original article, that any tax levied by one of the countries on dividends flowing to the other is ordinarily to be limited to 15 per cent of the dividends.

Paragraph (1) of the new Article 8 relates to dividends derived by Australian resident shareholders from United Kingdom companies and differs from the provisions it replaces in two practical respects.

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Firstly, under sub-paragraph (b) if an Australian resident is entitled under paragraph (2) to a tax credit in respect of a dividend paid by a United Kingdom company - that is, an Australian resident individual - the United Kingdom may tax the sum of the dividend and the credit (as it does in the case of its own residents) at a rate not exceeding 15 per cent (the rate to which the United Kingdom tax on dividends is limited under the 1967 agreement). As explained in the notes on clause 4 of the Bill, an Australian individual shareholder will correspondingly be assessed to Australian tax on the sum of the dividend and the credit as if that sum were one dividend, with credit being allowed for the limited United Kingdom tax on the aggregated amount.

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Secondly, by sub-paragraph (c), dividends derived by Australian residents from United Kingdom companies in respect of which a credit is not payable - that is dividends derived by Australian resident companies - are to retain the exemption from United Kingdom tax on dividends that applies under existing United Kingdom law. Australian companies receiving United Kingdom dividends will include such dividends in assessable income but that income will be effectively freed from Australian tax by the rebate of tax on intercorporate dividends available under section 46 of the Assessment Act.

Under paragraph (2) of new Article 8, all Australian resident individual shareholders, whether British subjects or not, who are the beneficial owners of dividends received from United Kingdom companies, are to be entitled to tax credits in respect of those dividends in the same way as United Kingdom resident shareholders. The credit is, at present, equal to 42.86 per cent of the amount of a dividend. Since the credit to which the Australian shareholders concerned are to be entitled will thus be greater than the United Kingdom tax payable by them - to be limited by paragraph (1)(b) to 15 per cent of the sum of the dividend and the credit - paragraph (2) also requires that they are to be entitled to the payment of any such excess. At present, this excess would be 21.43 per cent of the dividend.

Also by paragraph (2), the amount of the credit to which Australian resident individual shareholders are to be entitled under the paragraph is to be treated for the purposes of Australian tax as assessable income from sources in the United Kingdom - see notes on clause 4 of the Bill and on paragraph (1)(b) of this article. By reason of the existing Article 19 of the agreement, credit is to be allowed against this Australian tax for the 15 per cent United Kingdom tax on the sum of the dividend and the United Kingdom tax credit.

The following example illustrates how the protocol, along with associated provisions in United Kingdom and Australian law, will operate. It assumes that an Australian resident individual has derived $15,000 Australian-source income and a $1,000 dividend from a United Kingdom company.

The remaining provisions of the new article are the same, in practical effect, as the corresponding provisions of the deleted article.

It is noteworthy that there is no provision in the new article corresponding with paragraph (4) of the deleted article, which applied where dividends were paid by companies which were resident in one country but derived 90 per cent or more of their income from a business carried on in the other country. Where the paragraph applied, the country in which the company was resident exempted from its tax dividends derived by persons resident in the other country. This exemption was dependent on certain conditions being satisfied, one being that the country in which the business was carried on did not impose a branch profits tax. As such a tax is now payable in Australia, the United Kingdom - the country whose tax had in practice been affected by paragraph (4) - would no longer have been obliged to exempt dividends under this paragraph.

Article III - Entry into Force

This article makes provision for the protocol to form an integral part of the United Kingdom agreement and for its entry into force. It will enter into force on the date when the last of all such things have been done in Australia and the United Kingdom as are necessary to give it the force of law in both countries. As mentioned earlier in this memorandum, the protocol will be given the force of law in Australia by new section 5A to be inserted in the Income Tax (International Agreements) Act 1953. By clause 4 of the Bill a notification will be inserted in the Gazette of the day on which the protocol entered into force.

Once it enters into force, the protocol will have effect in Australia in respect of income to which Article I applies, as from 1 July 1980. As regards dividends to which Article II (the new Article 8) applies, the protocol will have effect in both Australia and the United Kingdom from 6 April 1977.

AGREEMENT WITH THE PHILIPPINES

Subject to some differences that reflect the position of the Philippines as a developing country, the agreement with that country proceeds much along the lines of other comprehensive double taxation agreements to which Australia is a party. Like them, it limits the tax that the country of source may charge on some types of income, and reserves to the country of residence the sole right to tax other types. It also contains provisions to the effect that where both countries may levy tax on income the country of residence, if it taxes, is to give credit against its tax for the tax of the country of source.

Article 1 - Personal Scope

Paragraph (1) of this article makes the agreement applicable to persons (which term includes companies) who are residents of either Australia or the Philippines. Because under its laws the Philippines may tax the foreign-source income of Philippine citizens who are not residents of the Philippines, paragraph (2) of the article means that nothing in the Agreement is to prevent the Philippines taxing such people in accordance with its law. The rate of tax imposed by the Philippines on such income varies from 1 to 3 per cent.

The term "resident of one of the Contracting States" and the situation of persons who are residents of both countries (i.e., dual residents) are dealt with in Article 4.

Article 2 - Taxes Covered

This article specifies the existing income taxes of each country to which the agreement is to apply. By it, the agreement will also apply to any identical or substantially similar taxes which may subsequently be imposed by either Australia or the Philippines in addition to, or in place of, the existing taxes.

Article 3 - General Definitions

This article defines a number of the terms used in the agreement. Definitions of some other terms are contained in the articles to which they relate and terms not defined in the agreement are to have the meaning which they have under the taxation law of the country applying the agreement.

Article 4 - Residence

This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. Residence according to each country's taxation law provides the basic test. The article provides rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded as a resident under both countries' domestic laws. (Residential status is one of the criteria for determining taxing rights, and the provision of relief, under the agreement.)

Article 5 - Permanent Establishment

The application of various provisions of the agreement (principally Article 7) is dependent upon whether a person resident in one country has a "permanent establishment" in the other, or whether income that such a person derives in the other country is effectively connected with a "permanent establishment" belonging to the person that is located there. The article defines the term "permanent establishment" for the purposes of the agreement. Its primary meaning in paragraph (1) is that of a fixed place of business in which the business of an enterprise is wholly or partly carried on. The other paragraphs elaborate on and refine the general definition by giving examples - a branch, an office, a mine, etc. - of what constitutes a "permanent establishment" and detailing tests to be used in determining the existence of a "permanent establishment".

Article 6 - Income from Real Property

Under this article income from real property, including royalties and similar payments in respect of the exploitation of mines, quarries or other natural resources may be taxed in the country in which the property is situated. The scope of the term "income from real property" is extended by paragraph (3) of the article to include income from a lease of land and income from any other direct interest in or over land, the lease or other interest in effect being deemed to be situated in the country in which the land to which they relate is situated.

Income to which this article applies is specifically excluded from the scope of Article 7 (by paragraph (6) of that article) and is therefore taxable in the country of source regardless of whether or not the recipient has a "permanent establishment" in that country.

Article 7 - Business Profits

This article sets out the general basis of taxation of business profits derived by a resident of one country from sources in the other. Broadly, for a country to be able to tax the profits of an enterprise resident in the other country, that enterprise must carry on business in the first country through a "permanent establishment" situated therein, and there is (in paragraph (1)(b)) an anti-avoidance provision designed to supplement this principle.

Article 7 has practical effect comparable with corresponding articles in Australia's other double taxation agreements. As under those agreements, the article provides an arm's length basis for ascertaining the amount of profits fairly attributable to a "permanent establishment".

Paragraph (5) of this article allows the application of provisions of the source country's domestic law where there is insufficient information available to determine the profits of a "permanent establishment" on the basis of arm's length dealing, while paragraph (7) preserves the application of the special provisions in each country's law relating to income from general insurance.

As the overall agreement with the Philippines leaves each country free to apply its domestic law rules in the taxation of international airline profits of an airline of the other country, the next article (Article 8) does not extend to such profits and they are, by paragraph (6) of Article 7 (read with relevant definitions in Article 3) excluded from the scope of Article 7. See also Article 28.

Article 8 - Shipping

This article imposes a limit on the tax which a country may impose on profits derived from sources therein by a resident of the other country from the operation of ships in international traffic, including profits received through participation in a pool service, in a joint transport operating organisation or in an international operating agency. The source country's tax is not to exceed 1.5 per cent of the gross revenues derived from sources in that country. However, if the Philippines were to impose a lower rate of tax on such shipping profits derived by a resident of a third country, that lower rate will also apply for the purposes of this article.

Article 9 - Associated Enterprises

This is a conventional provision which authorises the re-allocation, on an arm's length basis, of profits between associated enterprises where the commercial or financial arrangements between them differ from those that might be expected to exist between independent enterprises.

If a re-allocation of profits were effected in one of the countries and the profits of an enterprise of that country were adjusted upwards, a form of double taxation would arise if the profits so re-allocated remained subject to tax in the hands of an associated enterprise in the other country. Paragraph (3) requires the other country concerned to make an appropriate adjustment in these circumstances with a view to relieving any such double taxation.

Article 10 - Dividends

The broad scheme of this article is to impose a limit on the tax imposed by the country of source on dividends payable by companies resident in that country to shareholders resident in the other country.

In the case of dividends paid by Philippine companies to shareholders resident in Australia, the Philippines tax - normally 35 per cent - will be limited to:

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where the shareholder is a company entitled to the rebate of tax on intercorporate dividends under section 46 of the Income Tax Assessment Act (i.e., all Australian resident companies) - 15 per cent of the gross dividends;

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in any other case - 25 per cent of the gross dividends.

In the case of dividends paid by Australian companies to Philippine resident shareholders, the Australian tax - normally 30 per cent - will be limited to:

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where the shareholder is a company owning more than 50 per cent of the voting stock (shares) of the Australian dividend-paying company - 15 per cent of the gross dividends;

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in any other case - 25 per cent of the gross dividends.

Paragraph (4) of Article 10 ensures that the country of source will remain free to impose its normal rate of tax where the holding giving rise to the dividends is effectively connected with a "permanent establishment" or fixed base that the recipient has in that country.

Paragraph (5) is a provision which ensures, broadly, that one country will not tax dividends paid by a company resident in the other country unless the person deriving the dividends is a resident of the first country or the holding giving rise to the dividends is effectively connected with a "permanent establishment" or "fixed base" in that country.

Paragraphs (6) and (7) preserve the right of each country to impose the "branch profits" taxes provided for under their domestic laws.

Article 11 - Interest

This article requires the country of source generally to limit its tax on interest derived by residents of the other country to 15 per cent of the gross amount of the interest. This rate limitation will not affect the Australian withholding tax rate of 10 per cent which will continue to be imposed in respect of interest payments to Philippine residents. While the general rate provided for in the article is 15 per cent, paragraph (8) provides for a 10 per cent limit to apply to Philippine tax in respect of interest on public issues of bonds, debentures or similar obligations paid by a Philippine company to an Australian resident.

By paragraph (4), the 15 per cent limitation does not apply where the person deriving the interest has in the country of source a "permanent establishment" or a "fixed base" with which the indebtedness giving rise to the interest is effectively connected.

The article contains a general safeguard (paragraph (6)) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the 15 per cent tax limitation in such cases to an amount of interest which might be expected to have been agreed upon by persons dealing at arm's length.

Paragraph (7) requires each country to exempt interest derived by the Government of, or any other body exercising governmental functions in, the other country, or by a bank performing central banking functions in the other country.

Article 12 - Royalties

In Australia, gross royalties (other than film and video tape royalties) paid to non-residents, as reduced by allowable expenses, are, in the absence of an agreement, taxed by assessment at ordinary rates of tax. In the Philippines, the basic rate of withholding tax on royalties paid to non-residents is 35 per cent of gross royalties, with reductions below that rate in only limited circumstances.

This article requires the country of source generally to limit the tax which it may impose on royalties paid to a resident of the other country to 25 per cent of the gross royalties, but a 15 per cent rate will apply in the case of royalties paid to Australian residents by Philippine enterprises engaged in "preferred areas" of activities and registered with the Philippine Board of Investment. The Philippines reduces its tax on these latter royalties as an "incentive" measure and, by Article 24, Australia is to give matching "tax-sparing" relief.

The tax limitation set out in Article 12 will not affect the Australian tax on film and video tape royalties paid to residents of the Philippines which will continue to be imposed at the rate of 10 per cent of the gross royalties generally applicable. Nor will it apply to natural resource royalties which, in accordance with Article 6, are to remain taxable by the source country without limitation on the rate of tax which may be imposed.

There are other cases in which the limitation on the tax of the country of source is not to apply in respect of royalties. One is where the asset giving rise to the royalties is effectively connected with a permanent establishment or "fixed base" which the recipient has in the country of source. The other is where the royalties are paid by a person not independent of the payee. In the latter case the limitation will not apply to any amount of royalty that is in excess of what might be expected to have been agreed upon by independent persons acting at arm's length.

Article 13 - Alienation of Property

Under this article, income from the alienation of real property may be taxed in the country in which that property is situated. Real property is defined for the purposes of the article as including a lease of land or other direct interest in or over land and rights to exploit, or to explore for, natural resources. Shares or comparable interests in a company the assets of which consist wholly or principally of direct interests in or over land in one of the countries, or of rights to exploit or explore for natural resources in one of the countries, are also for these purposes deemed to be real property.

By paragraph (3), income from the alienation of capital assets of an enterprise will be taxable only in the country of residence of the enterprise. However, where those assets form part of the business assets of a permanent establishment or fixed base in the other country, the income may be taxed in that other country.

Article 14 - Independent Personal Services

At present, an individual resident in Australia or in the Philippines may be taxed in the other country on remuneration derived from the performance in that other country of professional services or other similar independent activities. Under this article, such remuneration will continue to be subject to tax in the country in which the services are performed if:

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the recipient has a fixed base regularly available in that country for the purpose of performing his or her activities;

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the period spent by the recipient in that country for that purpose equals or exceeds 183 days in the year of income; or

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the gross income of the recipient from those activities derived in that country from residents thereof exceeds $A10,000, or its Philippine equivalent in the year of income. (Provision is made in paragraph (2) for the specified amount of income to be varied by agreement between the Treasurer and his Philippine counterpart.)

If the tests mentioned are not met the remuneration will be taxed only in the country of residence. Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and will not be covered by this article.

Article 15 - Dependent Personal Services

This article sets out the basis for taxing remuneration derived by visiting employees. A resident of one country will generally be taxed in the other country on salaries, wages, etc., from an employment where the services are rendered during a visit to the other country but, subject to specified conditions, there is a conventional exemption from this rule for short-term visitors which, where it applies, provides an exemption from the tax of the country being visited.

The article also permits income from an employment exercised aboard a ship or aircraft operated in international traffic to be taxed in the country of residence of the operator.

Article 16 - Directors' Fees

This article relates to remuneration received by a resident of one country from a company resident in the other country, in the capacity of a director of that company. To avoid difficulties in such cases in ascertaining in which country a director's services are performed, and the remuneration is to be taxed, the article provides that the remuneration may be taxed in the country of residence of the company. However, where the remuneration is derived by a director in respect of the discharge of day-to-day functions of a managerial or technical nature, the provisions of Article 15 are to be applied.

Article 17 - Entertainers

In this case, income derived by visiting entertainers (including athletes) from their personal activities as such may be taxed by the country in which the activities are exercised, no matter how short is the visit to that country.

The article also contains a safeguard against attempts by entertainers to circumvent its general purpose by, e.g., having fees paid to a separate enterprise which formally provides the entertainer's services. In such a case, the profits of the enterprise from the provision of the services may be taxed in the country in which the activities of the performer are exercised, whether or not that enterprise has a "permanent establishment" in that country.

Paragraph (3) calls on the country visited to exempt from its tax the income of entertainers whose visits are substantially supported or sponsored by the other country.

Article 18 - Pensions and Annuities

Pensions and annuities are, subject to one exception, to be taxed only by the country of residence of the recipient. The exception, under which pensions paid out of unregistered Philippine pension plans may be taxed in the Philippines, is relevant to features of Philippine law.

Article 19 - Government Service

By this article, remuneration in respect of services rendered to a government (including a State or local government) of one of the countries will be taxed only by that country, unless the remuneration is paid in respect of services rendered in the other country and the recipient is, in broad terms, a citizen of, or ordinarily resident in, that country, in which case it will be taxed only by the other country. These provisions do not apply, however, where the services are rendered in connection with a trade or business carried on by a government.

Article 20 - Professors and Teachers

This article applies in respect of professors or teachers resident in one country who visit the other country for a period of not more than two years for the purpose of teaching or advanced study or research at an educational institution. In these circumstances, the remuneration of the professor or teacher for the teaching, study or research work, including remittances received from sources outside the country visited to enable the professor or teacher to carry out the work are to be exempt from tax in the country visited and will remain taxable in the home country. The exemption provided by the article does not apply to remuneration which is received for conducting research if the research is undertaken primarily for the private benefit of a specific person or persons.

Article 21 - Students and Trainees

This article applies to students and trainees resident in one of the countries who are temporarily present in the other country solely for the purposes of their education or training. A student or trainee meeting these tests will be exempt from the tax of the country visited in respect of payments made to him or her from abroad for the purposes of his or her maintenance or education.

Article 22 - Income of Dual Resident

This article relates to individuals and companies that are residents both of Australia and the Philippines under the domestic income tax laws of the two countries.

For the purposes of the agreement, the residential status of such a person is established by application of the rules set out in Article 4, and Article 22 reserves to the country to which the person's residence is allotted the sole right to tax income from sources in that country or from a third country.

Article 23 - Source of Income

This article specifies the source of various classes of income for the purposes of ensuring that each country is empowered to exercise the taxing rights assigned to it by the agreement over residents of the other country and that the country of residence will, as the agreement intends, give double taxation relief in respect of tax levied pursuant to those rights. This provision obviates any question of income not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country.

Article 24 - Methods of Elimination of Double Taxation

Double taxation does not arise in respect of income flowing between the two countries where the terms of the agreement provide for the income to be taxed only in one country or the other, or where the domestic taxation law of one of the countries frees the income from its tax. It is necessary, however, to prescribe a method for relieving double taxation in respect of other classes subject to tax in both countries. Australia's other double taxation agreements provide for a credit basis for the relief of double taxation to be applied by Australia and, usually, the other country. In these cases the country of residence is required to give credit against its tax for tax of the country of source. This approach has been adopted in this agreement.

When the Income Tax Assessment Act and the Income Tax (International Agreements) Act (as amended by the present Bill) are read together, the measures that will operate to relieve double taxation of income derived from the Philippines by Australian residents are as follows. Australia will allow credit for the Philippine tax on dividends derived by individuals from the Philippines and on interest and royalties derived by individuals and companies in respect of which the tax of the Philippines is limited by Articles 11 and 12 respectively. (See the notes above concerning clause 6 of the Bill.) Section 46 of the Income Tax Assessment Act will continue to free from Australian tax dividends that are derived from the Philippines by Australian resident companies. However, should Australia cease to allow Australian resident companies the rebate under section 46 in respect of dividends received from the Philippines, Article 24 would require Australia to allow, in addition to credit for the Philippine tax on the dividends themselves, credit for the Philippine tax on the company profits out of which the dividends are paid, but only if the Australian company owns at least 10 per cent of the paid-up share capital of the Philippine company. Other income of Australian residents that is taxed in the Philippines will continue to qualify for exemption from Australian tax under section 23(q) of the Assessment Act. In these latter cases, as there will be no Australian tax payable, there will be no question of allowance of credits.

Under paragraph (3) of this article, Australia is to grant a "tax-sparing" credit in cases where an Australian resident receives royalties from a Philippine enterprise in respect of which the Philippines limits its tax to 15 per cent as provided for in Article 12(2)(a). The Philippines is prepared, as an incentive measure, to reduce its tax on royalties paid by enterprises engaged in preferred areas of activities, and as approved by the Philippine Board of Investment, from the general agreement rate of 25 per cent to 15 per cent but only on the basis that Australia gives the relief called for by paragraph (3).

Under the "tax-sparing" arrangement provided for in this paragraph, the royalty payable to an Australian resident will, in effect, be "grossed-up", for purposes of Australian tax, by an amount equal to 5 per cent of the gross amount of the royalty, with credit being allowed for the Philippine tax actually paid plus the 5 per cent "tax-sparing" credit. Australia's agreement with Singapore contains an arrangement of this general kind.

For its part, the Philippines will allow a credit to Philippine residents in respect of taxes paid in Australia. In the case of a Philippine company receiving dividends from an Australian company in which the Philippine company owns more than 50 per cent of the voting stock, the Philippines will also allow, as a credit against its tax on dividends, the tax paid by the Australian company on the profits out of which the dividends are paid.

Article 25 - Mutual Agreement Procedure

One of the purposes of this article is to provide for the taxation authorities of the two countries to consult with a view to reaching a satisfactory solution where a taxpayer is able to demonstrate actual or potential subjection to taxation contrary to the provisions of the agreement. A taxpayer wishing to use this procedure must present a case, in writing, within a two year time limit.

The other main object of the article is to authorise consultation between the taxation authorities of the two countries for the purpose of implementing the agreement and assuring its consistent application.

Article 26 - Exchange of Information

This article authorises the exchange between the two taxation authorities of information necessary for the carrying out of the agreement or of domestic laws concerning the taxes to which the agreement applies. The restrictions which it contains in relation to the purposes for which this information may be used and the persons to whom it may be disclosed are along the lines of Australia's other double taxation agreements.

This article does not permit the exchange of information that would disclose any trade, business, industrial, commercial or professional secret or trade process or which would be contrary to public policy.

Article 27 - Diplomatic and Consular Officials

The purpose of this article is to ensure that members of diplomatic and consular posts will, under the provisions of the agreement, receive no less favourable treatment than that to which they are entitled in accordance with international law. In Australia, fiscal privileges are conferred on such persons by the Diplomatic (Privileges and Immunities) Act and the Consular (Privileges and Immunities) Act.

Article 28 - Miscellaneous

Australia's other comprehensive double taxation agreements include provisions to the effect that the country of source is to exempt income from the operation of aircraft (and, with one exception, of ships also) in international traffic, leaving the income to be taxed on a residence basis only. Although the Philippines could not agree to the inclusion of such a rule in this agreement, this article makes provision for the eventuality that the Philippines in a future agreement agrees to exempt a resident of a third country from its tax on gross billings from international aircraft operations or from its tax on gross receipts from international operations of ships or aircraft. In that event a corresponding exemption would be granted by the Philippines to residents of Australia and Australia would extend a similar exemption to Philippine residents.

Article 29 - Entry into force

This article provides for the agreement to be ratified and for it to enter into force on the date on which the instruments of ratification are exchanged.

Once it enters into force the agreement will, in general, have effect for purposes of withholding tax (in the Philippines, tax withheld at source) in both countries as from 1 January in the calendar year in which the agreement enters into force. It will have effect in Australia, in respect of tax other than withholding tax, as from 1 July in the calendar year in which the agreement enters into force, although where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year beginning on 1 July in the year in which the agreement first has effect, will be the date from which the agreement will take effect. In the Philippines, the agreement will have effect in respect of tax, other than tax withheld at source, for taxable years beginning on or after 1 January in the calendar year in which the agreement enters into force.

Article 30 - Termination

This article declares that the agreement is to continue in effect indefinitely but that either country may give written notice of termination on or before 30 June in any calendar year after the fifth year following the exchange of instruments of ratification. In that event, the agreement would cease to be effective in both countries, for withholding tax purposes, from 1 January in the calendar year next following that in which notice of termination is given. It would cease to be effective for tax other than withholding tax from the beginning of the year of income commencing on or after 1 July in that next calendar year in Australia and from the beginning of any taxable year commencing on or after 1 January in that next calendar year in the Philippines.

AGREEMENT WITH SWITZERLAND

The agreement with Switzerland - which consists of a main agreement and a supplementary protocol - is broadly along the lines of other comprehensive double taxation agreements recently concluded by Australia. The country of source is generally allocated the right to tax income arising there (sometimes at limited rates) while in particular situations the country of residence of the recipient of income is given the sole right to tax. The relief from double taxation of classes of income taxable in both countries is assured by provisions in the agreement which require the country of residence of the recipient to give a credit against its own tax for the tax imposed in the country of origin, or comparable relief.

Article 1 - Personal Scope

The agreement will apply to persons (which term includes companies) who are residents of Australia or Switzerland.

Article 2 - Taxes Covered

This article specifies the existing income taxes to which the agreement applies. These are the Australian income tax and the Swiss federal, cantonal and communal taxes on income. The article will automatically extend the application of the agreement to any identical or substantially similar taxes which may subsequently be imposed by either country in addition to, or in place of, the existing taxes.

Article 3 - General Definitions

This article defines a number of the terms used in the agreement. Definitions of some other terms are contained in the articles to which they relate and terms not defined in the agreement are to have the meaning which they have under the taxation law of the country applying the agreement.

As with Australia's other modern double taxation agreements, "Australia" is defined as including external territories and areas of the continental shelf. By virtue of this definition, Australia retains taxing rights in relation to mineral exploration and mining activities on its continental shelf.

Article 4 - Residence

This article sets out the basis on which the residential status of a person is to be determined for the purposes of the agreement. Residential status is one of the criteria for determining taxing rights, and the provision of relief, under the agreement. The concepts of when a person is a "resident" under Australian tax law, or "subject to unlimited tax liability" under Swiss tax law (i.e., taxable on world-wide income), are taken as the basis. The article also includes rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded by the respective laws as resident in each.

Article 5 - Permanent Establishment

Application of various provisions of the agreement (principally Article 7) is dependent upon whether a resident of one country has a "permanent establishment" in the other, and if so, whether income the person derives in the other country is attributable to the "permanent establishment". The definition of the term "permanent establishment" which this article embodies corresponds closely with definitions of the term in Australia's other double taxation agreements.

The primary meaning of the defined term is stated in paragraph (1) as being a fixed place of business through which the business of the enterprise is wholly or partly carried on. Other paragraphs of the article are concerned with giving examples of what constitutes a "permanent establishment" - such as an office, a factory or a mine - and defining the circumstances in which a resident of one country shall, or shall not, be deemed to have a "permanent establishment" in the other country.

Article 6 - Income from Real Property

By this article income from real property, including royalties and other payments in respect of the operation of mines or quarries or the exploitation of other natural resources may be taxed in the country in which the property is situated. Income from a lease of land and income from any other direct interest in or over land are, in accordance with paragraph (4), to be regarded as income from real property situated where the land to which the lease or other interest is related is situated.

Income to which this article applies is excluded from the scope of Article 7 (by paragraph (5) of that article) and is therefore taxable in the country of source regardless of whether or not the recipient has a "permanent establishment" in that country.

Article 7 - Business Profits

This article is concerned with the taxation of business profits derived by a resident of one country from sources in the other country.

The taxing of these profits depends on whether they are attributable to a "permanent establishment" of the taxpayer in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer. If, however, a resident of one country carries on business through a "permanent establishment" (as defined in Article 5) in the other country, the country in which the "permanent establishment" is situated may tax profits attributable to the establishment.

Paragraph (2) of the article provides for profits of the "permanent establishment" to be determined on the basis of arm's length dealing.

Paragraphs 2 and 3 of the protocol to the agreement contain provisions that are relevant to this article. In particular, paragraph 3 of the protocol provides for the application of provisions of the source country's domestic law where there is insufficient information available to determine the profits of a "permanent establishment" on the basis of arm's length dealing and sub-paragraph 2(c) preserves the application of the special provisions in each country's law relating to the taxation of income from general insurance.

Article 8 - Shipping and Air Transport

Under this article the right to tax profits from the operation of ships or aircraft in international traffic, including profits received through participation in a pool service, in a joint transport operating organisation or in an international operating agency, is reserved to the country of residence of the operator.

Any profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. In such cases, the tax in respect of carriage in internal operations is ordinarily not to exceed 5 per cent of the net amount paid or payable for the carriage. By reason of the definition of "Australia" in Article 3 and the terms of paragraph (4) of Article 8, any shipments by air or sea from a place in Australia to another place in Australia, its continental shelf or external territories are to be treated as forming part of internal traffic.

Article 9 - Associated Enterprises

This article authorises the re-allocation of profits between inter-connected enterprises in Australia and Switzerland on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing at arm's length with one another.

Article 10 - Dividends

This article in general limits to 15 per cent of the gross amount of dividends the tax that the country of source may impose on dividends payable to shareholders resident in the other country. Under this article, Australia will reduce its rate of withholding tax on dividends paid to residents of Switzerland from 30 per cent to 15 per cent, while Switzerland will reduce its withholding tax on dividends paid to Australian residents from 35 per cent to 15 per cent.

Paragraph (4) declares that the 15 per cent limitation on the source country's tax will not apply to dividends derived by a resident of the other country who has a "permanent establishment" or "fixed base" in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that "permanent establishment" or "fixed base". In those cases the dividends will be taxed in accordance with the relevant articles, Article 7 or Article 14.

Article 11 - Interest

By paragraph (2) of this article the tax which the country of source may impose on interest payable to a resident of the other country is generally limited to 10 per cent of the gross amount of the interest. As the rate of the Australian withholding tax on interest paid to non-residents is 10 per cent, the agreement will not change the amount of Australian tax on interest flowing to residents of Switzerland. However, as the rate of Swiss tax on interest paid in respect of bonds and bank deposits is 35 per cent it will effect a reduction in the amount of Swiss tax on such interest payable to Australian residents.

Interest derived by a resident of one country which is effectively connected with a "permanent establishment" or "fixed base" of that person in the other country will form part of the business profits of that establishment or "fixed base" and be subject to the provisions of Article 7 or Article 14. Accordingly, paragraph (4) of Article 11 requires that the 10 per cent limitation is not to apply to such interest.

Because the interest "source" rules set out in paragraph (5) differ from those under Australian law and under Australia's other double taxation agreements, in that interest paid by an Australian resident that is an expense of a permanent establishment (branch) in a third country is treated by paragraph (5) as having a source in Australia, it has been necessary to propose an ameliatory amendment of the Income Tax (International Agreements) Act. This is to be found in clause 5(3) of the Bill.

Article 12 - Royalties

The purpose of this article is to place a limit of 10 per cent of the amount of the gross royalties on the tax Australia and Switzerland may charge on royalties derived by a resident of the other country. The 10 per cent limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed. In the absence of the 10 per cent limitation Australia generally taxes such royalties paid to non-residents (other than film and video tape royalties which are taxed at the rate of 10 per cent of the gross royalties), as reduced by allowable expenses, at ordinary rates of tax. Royalties paid from Switzerland are not taxed there, and the article, which does no more than provide a limit, will not alter this.

It is of note that the definition of "royalties" contained in this article (and in Article 12 of the Philippine agreement) incorporates measures to the same general effect as the amendments proposed by clause 3 of the Income Tax Assessment Amendment Bill 1980.

As in the case of dividends and interest, it is specified in paragraph (4) that the 10 per cent limitation of tax in the country of origin is not to apply to royalties effectively connected with a "permanent establishment" or "fixed base" in that country. The point noted above in relation to the interest source rule is also applicable in relation to the royalty "source" rules contained in paragraph (5) of this article.

By paragraph (6), if royalties flow between persons not at arm's length, the 10 per cent limitation will apply only to the extent that the royalties are not excessive, judged by arm's length standards.

Article 13 - Alienation of Property

This article applies to income from the alienation of real property, including income from the alienation of a direct interest in or over land or of a right to exploit, or to explore for a natural resource, and income from the alienation of shares or comparable interests in a company the assets of which consist wholly or principally of such property. This income may be taxed in the country in which the land is situated.

Under paragraph (3), income derived from the alienation of capital assets of an enterprise will be taxable only in the country of residence of the enterprise. However, where those assets form part of the business assets of a "permanent establishment" in the other country the income may be taxed in that other country.

Article 14 - Independent Personal Services

At present, an individual resident in Australia or in Switzerland may be taxed in the other country on remuneration derived from the performance in that other country of professional services or other similar independent activities. By this article, such remuneration will continue to be subject to tax in the country in which the services are performed if the recipient has a fixed base regularly available in that country for the purposes of performing his or her activities, and the remuneration is attributable to activities exercised from that base. If the tests mentioned are not met the remuneration will be taxed only in the country of residence. Remuneration derived as an employee and income derived by public entertainers are the subject of other articles of the agreement and will not be covered by this article.

Article 15 - Dependent Personal Services

This article sets out the basis for taxing remuneration derived by visiting employees. A resident of one country will generally be taxed in the other country on salaries, wages, etc., from an employment where the services are rendered during a visit to the other country but, subject to specified conditions, there is a conventional exemption from this rule for short-term visitors which, where it applies, provides an exemption from the tax of the country being visited.

Paragraph (3) will mean that income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country of residence of the operator.

Article 16 - Directors' Fees

This article relates to remuneration received by a resident of one country in the capacity of a director of a company which is a resident of the other country. The remuneration is to be taxed in the country of residence of the company.

Article 17 - Entertainers

By this article, income derived by visiting entertainers (including athletes) from their personal activities as such will continue to be taxed in the country in which the activities are exercised, no matter how short their visit to that country.

The article also contains a safeguard against attempts by entertainers to circumvent its general purpose by, e.g., having fees paid to a separate enterprise which the performer controls, and which formally provides his or her services. In such a case, the profits of the enterprise from the provision of the services of the entertainer may be taxed in the country in which the entertainer performs, whether or not that enterprise has a "permanent establishment" in that country, but only if the entertainer or persons related to the entertainer participate directly or indirectly in the profits of the enterprise.

Article 18 - Pensions and Annuities

Under this article pensions and annuities are to be taxed only by the country of residence of the recipient.

Paragraph (3) of the article specifies, however, that the country of residence is to exempt from its tax certain specified pensions while they remain exempt from tax under the source country's domestic law. The pensions covered by this exemption are Australian repatriation war pensions and pensions paid under Swiss Military Insurance legislation.

Article 19 - Government Service

This article provides for a reciprocal exemption from tax by each country in respect of remuneration of government employees of the other country. The article is subject to the provisos that the exemption conferred by the article will not apply where the services are rendered in connection with a trade or business carried on by the government, or where, in broad terms, the employee is a citizen of, or ordinarily resides in, the country where he performs his governmental duties for the other country.

Article 20 - Students

This article applies to students resident in one of the countries who are temporarily present in the other country solely for the purpose of their education. In these circumstances, a student will be exempt from the tax of the country visited in respect of payments made from abroad for the purposes of his or her maintenance or education.

Article 21 - Income of Dual Residents

This article relates to individuals and companies that are residents both of Australia and of Switzerland under the general income tax laws of the two countries.

For the purposes of the agreement such a person is to be treated by application of the rules set out in Article 4 as a resident of one only of the countries and Article 21 reserves to the country to which the person's residence is so allotted the sole right to tax income from sources in that country or from a third country.

Article 22 - Methods of Elimination of Double Taxation

This article provides for the formal relief of double taxation where income that is derived by a resident of one country from sources in the other country would otherwise be taxed in both countries.

Some income flowing between the two countries may be taxed only in one country or the other, in which case there is no need to give further relief. Other income may be taxed in the country of source and if the country of residence would, but for this article, also tax, the article requires the country of residence to relieve the ensuing double taxation.

Paragraph (1) of the article requires Australia to allow against its own tax a credit for Swiss tax on income derived by a resident of Australia from sources in Switzerland. Australia will allow credit for the Swiss tax on dividends derived by individuals from Switzerland and on interest (and royalties if Swiss tax is imposed) derived by individuals and companies from Switzerland in respect of which the tax of that country is limited by the agreement to 10 per cent. Section 46 of the Income Tax Assessment Act will continue to free from Australian tax dividends derived from Switzerland by Australian resident companies, while other income of Australian residents that is taxed in Switzerland will continue to qualify for exemption from Australian tax under section 23(q) of that Act. In these latter cases, since there will be no Australian tax payable, there is no call for allowance of credits.

By paragraph (2) of the article, Switzerland will, except in the case of dividends, interest and royalties which are dealt with in paragraph (3), exempt from its tax income of Swiss residents derived from sources in Australia which may be taxed by Australia in accordance with the agreement. However, Switzerland will take income so exempted into account for the purposes of calculating the rate of tax payable on the resident's other income. By paragraph (3), the relief to be afforded by Switzerland to Swiss residents in respect of dividends, interest and royalties from sources in Australia will be either by the allowance of a credit for the Australian tax paid thereon, a lump sum reduction in Swiss tax, or a partial exemption from Swiss tax, the method to be used to be determined in accordance with relevant provisions of Swiss domestic law.

The provision made by paragraph (4) concerning inter-company dividends received by Swiss resident companies is relevant to features of Swiss law. Its purpose is to ensure that dividends received from an Australian company are treated on the same basis in the hands of Swiss companies, as dividends received from Swiss companies.

Article 23 - Mutual Agreement Procedure

One of the purposes of this article is to provide for the taxation authorities of the two countries to consult with a view to reaching a satisfactory solution where a taxpayer is able to demonstrate actual or potential subjection to taxation, contrary to the provisions of the agreement.

The other main object of the article is to authorise consultation between the taxation authorities of the two countries for the purpose of resolving any difficulties regarding the application of the agreement and to give effect to it.

Article 24 - Exchange of Information

This article authorises exchange of information between the taxing authorities of each country, where this is necessary for the carrying out of the agreement.

The article does not permit the exchange of information that would disclose any trade, business, industrial or professional secret or trade process.

Article 25 - Source of Income

Article 25 specifies the source of various classes of income to ensure that each country is empowered to exercise the taxing rights assigned to it by the agreement over residents of the other country and that, as the agreement intends, the country of residence will give double taxation relief in respect of tax levied pursuant to those rights. The article eliminates any question of income not having, by domestic law rules, a source in the country that is, by the agreement, entitled to tax that income in the hands of a resident of the other country.

Article 26 - Diplomatic and Consular Officials

This article ensures that members of diplomatic and consular posts will, under the provisions of the agreement, receive no less favourable treatment than that to which they are entitled in accordance with international law, subject to a safeguard aimed at ensuring that the officials concerned cannot, by the combined effort of the provisions of the agreement and of the fiscal privileges accorded to diplomatic and consular officials, escape taxation in both countries. In Australia, fiscal privileges are conferred on such persons by the Diplomatic (Privileges and Immunities) Act and the Consular (Privileges and Immunities) Act.

The article also includes a safeguard to ensure that the benefits of the agreement shall not apply to international organisations, to organs or officials thereof, or to diplomatic or consular staff of a third country who, although present in one of the countries, are not treated as residents by either country.

Article 27 - Entry into Force

This article provides for the entry into force of the agreement. This will be on the date on which notes are exchanged through the diplomatic channel notifying that the last of all such things has been done in Australia and Switzerland as is necessary to give the agreement the force of law in both countries.

Once it enters into force, the agreement will have effect in Australia, for purposes of withholding tax, as from 1 January 1979. In respect of tax other than withholding tax, it will have effect in Australia as from 1 July 1979, although where a taxpayer has adopted an accounting period ending on a date other than 30 June, the beginning of the accounting period that has been substituted for the year commencing on 1 July 1979 will be the date from which the agreement takes effect. In Switzerland, the agreement will have effect for any taxable year beginning on or after 1 January 1979.

Article 28 - Termination

This article declares that the agreement is to continue in effect indefinitely but either country may give notice of termination on or before 30 June in any calendar year. In that event, the agreement would cease to be effective in Australia, for withholding tax purposes, as from 1 January in the calendar year following the year in which notice of termination is given. In respect of tax other than withholding tax, it would cease to be effective in Australia from the beginning of the income year commencing in that next calendar year. In Switzerland, the agreement would cease to be effective for taxable years beginning on or after 1 January in that next calendar year.

Protocol to the Agreement with Switzerland

The protocol contains a number of provisions varying or extending parts of the main body of the agreement. The protocol itself provides that its provisions are to form an integral part of the agreement.

Paragraph 1 of the protocol will mean that, for the purpose of calculating the tax base upon which the "branch profits tax" is imposed in Australia, the provisions of Australia's domestic law as at the date of signature of the agreement are to be applied. However, if those provisions are subsequently amended to the advantage of non-resident companies, those amended provisions are to be applied.

Paragraph 2 of the protocol contains three provisions which bear on Article 7 of the agreement - the article which deals with the taxation of business profits of a permanent establishment.

Sub-paragraph (a) provides that where it has been customary to calculate profits of a permanent establishment on the basis of an apportionment of the total profits of the enterprise (this method is commonly used in Switzerland), the arm's length rules in Article 7 are not to preclude the continued application of that apportionment basis, if the result accords with arm's length principles.

Under sub-paragraph (b), the profits to be attributed to a permanent establishment are to be determined in a consistent manner from year to year.

By sub-paragraph (c), Article 7 is not to apply to the profits of an enterprise from carrying on a business of general insurance, each country being left to apply the provisions of its domestic taxation law to such a business.

Paragraph 3 of the protocol covers the situation where there is insufficient information available to enable application of the arm's length basis of determining profits for purposes of Articles 7 and 9 of the agreement.

In effect, the paragraph will authorise the Commissioner of Taxation, in an appropriate case, to apply the provisions of section 136 of the Income Tax Assessment Act. That section provides, under defined conditions, for assessment on the basis of such portion of the total receipts of a business as the Commissioner determines.

Paragraph 4 of the protocol requires that if, at some future time, Australia enters into an agreement with a country which, at the date of signature of the protocol is a member of the O.E.C.D., and in which Australia agrees to limit its tax on dividends, interest and royalties to rates which are less than those prescribed for that income in the Swiss agreement, Australia is to enter into negotiations with Switzerland for the purpose of reviewing those rates in the Swiss agreement.