Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon. Frank Crean, M.P.)
INCOME TAX (INTERNATIONAL AGREEMENTS) BILL 1974.
This clause formally provides for the short title and citation of the Amending Act and of the Principal Act as amended.
Section 5(1A) of the Acts Interpretation Act 1901-1973 provides that unless the contrary intention appears every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent. By this clause the Amending Act will come into operation on the day on which it receives the Royal Assent, thus enabling early implementation of the agreement.
Section 3 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act. Clause 3 will insert in section 3 a definition of the comprehensive agreement with the Federal Republic of Germany (which is being incorporated as a schedule to the Principal Act by clause 7 of the Bill). The agreement comprises a main agreement of 29 articles and a protocol of 11 paragraphs.
This clause will give the force of law in Australia to the agreement with the Federal Republic. This will be achieved by inserting a new section - section 11 - in the Principal Act.
Sub-section (1) of the new section will give the force of law in Australia to the agreement, with effect from the time (broadly, 1 July 1971) indicated in the agreement itself (see the explanation of article 28 of the agreement on page 13).
The agreement is to enter into force on the 30th day after the date of exchange of formal instruments of ratification (article 28). As it is not possible to indicate in this Bill when this will occur, sub-section (2) of section 11 provides for notification of the relevant date in the Gazette. This will provide a readily available and authoritative reference to the fact and date of entry into force of the agreement.
In Australia's other double taxation agreements, there are various provisions which provide that particular income which, under the agreement, Australia may tax in the hands of a resident of the other country, is to be deemed to have a source in Australia. These provisions have been carried into the Australian domestic taxation law in such a way that the agreed "source" rule clearly establishes that Australia is able to tax the non-resident concerned. No provision in such terms was included in the agreement with the Federal Republic of Germany, but protocol (3) to the agreement provides that Australia may legislate to give the income a source in Australia for purposes of Australia's domestic income tax law. Sub-section (3) of section 11 will give effect to this arrangement.
Sub-clause (2) of clause 4 of the Bill will empower the Commissioner of Taxation to amend assessments for the purpose of giving effect to sub-section (1) of new section 11. It is necessary to give the Commissioner this power because, although the agreement will not enter into force until thirty days after the instruments of ratification have been exchanged, its provisions will have effect - pursuant to sub-section (1) of new section 11 - in relation to income in respect of which assessments have already been made.
The purpose of this clause is to ensure that the credit system, rather than the exemption system, of relief of double taxation will apply to interest and royalties that are derived by residents of Australia from the Federal Republic of Germany and in respect of which tax in that country is limited by the agreement to 10 per cent. Section 12 of the Principal Act, which is to be amended by this clause, already achieves a corresponding result for interest and royalties derived by residents of Australia from the United Kingdom, Singapore, Japan and New Zealand, where the double taxation agreements with those countries limit the foreign tax on the income.
Paragraph (a) of sub-clause 5(1) will effect a formal drafting amendment consequent on the addition to sub-section 12(1) of the Principal Act of a new paragraph (ad).
Paragraph (b) of sub-clause 5(1) will insert a new paragraph (ad) in sub-section 12(1) of the Principal Act. This will mean that section 23(q) of the Income Tax Assessment Act - which provides a general exemption from Australian tax for foreign-source income (other than dividends) of residents of Australia that is taxed in the country of source - is not to apply to interest or royalties derived from the Federal Republic of Germany by a resident of Australia. This change will have effect for income derived after the commencement of the year of income to which the agreement is to first apply (1971-72) where, under the agreement, the tax of the Federal Republic is limited to 10 per cent of the gross amount of the interest or royalties. The interest and royalties will thus be assessable income for the general purposes of the Income Tax Assessment Act and the agreement (article 22) will require a credit for the limited tax to be allowed against the Australian tax on the income. Existing sections 14 and 15 of the Principal Act will govern the allowance of credit.
Sub-clause (2) of clause 5 is designed to avoid any retrospective increase in overall tax liability that might result from the application of the credit method of relief to relevant interest and royalty income derived by Australian residents after the commencement of the 1971- 72 income year, but on or before the date of announcement of signature of the agreement on 24 November 1972. That announcement indicated that the credit method of relief was to be applied to this income. The sub-clause provides, in effect, that any increase in the Australian tax payable in respect of the interest or royalties, resulting from the change from the exemption system to the credit system, is not to exceed the amount by which the tax of the Federal Republic of Germany on the income is reduced by reason of the agreement.
Sub-clause (3) of clause 5 has a similar purpose to that of sub-clause 4(2) 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-clause 5(1) and (2).
The amendments to section 15 of the Principal Act proposed by this clause arise from proposals, in the Income Tax Bill 1974 and the Income Tax Assessment Bill (No. 2) 1974, to impose a surcharge of tax on property income of individuals and to allow a rebate of tax to low-income taxpayers who maintain dependants.
Section 15 contains provisions for determining, for purposes of the Principal Act, the amount of Australian tax on particular income. The amount of Australian tax is relevant in cases where the assessable income of a taxpayer includes foreign income on which foreign tax has been paid. The credit allowable for the foreign tax cannot exceed the amount of Australian tax on the income (sub-section 14(4)). The amount of Australian tax is also relevant under section 16 of the Principal Act. If, for example, a non-resident individual receiving a royalty from Australia is entitled under a double taxation agreement to have the Australian tax on that income limited to, say, 10 per cent, section 16 allows a rebate of the amount by which the Australian tax on the royalty, determined under section 15, exceeds the limit specified in the agreement.
Sub-clause (1) of clause 6 will amend the definition in section 15 of "the average rate of Australian tax". Very broadly, the amount of Australian tax on particular income, for the purposes outlined above, is ascertained by applying the average rate of Australian tax to the amount of that income included in the taxable income.
In calculating the average rate of tax, rebates of tax allowable under the Act declaring the rates of tax, but not other rebates, are taken into account (paragraph (a) of the definition). The revised paragraph (a) of the definition being inserted by sub-clause 6(1) will also take into account the new rebate of tax to be allowed under section 160AA of the Assessment Act (clause 35 of the Income Tax Assessment Bill (No. 2) 1974) as a factor that reduces the overall amount of tax. The new rebate will give effect to the policy that a taxpayer is to be entitled to a tax-saving of at least 40 per cent of the amount of concessional deductions for the maintenance of dependants.
The revised paragraph (b) of the definition of "the average rate of Australian tax" will exclude from the calculation of the average rate any surcharge payable by the taxpayer in respect of property income. If the surcharge were taken into account in the calculation this would average-out the surcharge over the whole of the taxable income and this would be inappropriate where part only of the taxable income is from property. A more direct method of taking the surcharge into account is proposed by the next sub-clause.
Sub-clause (2) of clause 6 inserts two new sub-sections, sub-sections (3A) and (3B), in section 15 of the Principal Act. As just mentioned, they arise from the proposed tax surcharge on property income of individual taxpayers.
Sub-section (3A) will apply where a "relevant part" of a person's income (i.e., the part of the person's income in respect of which the amount of Australian tax is to be determined) includes property income (paragraph (a)) and a tax surcharge is payable by the person in respect of income from property (paragraph (b)).
In this situation Australian tax will be the amount that, in the absence of the surcharge, would have been the amount of Australian tax (paragraph (c)) plus an amount in respect of the surcharge determined in accordance with paragraph (d).
Paragraph (d) of the proposed sub-section 15(3A) is designed to produce the amount of surcharge that may fairly be regarded as relating to property income included in the "relevant part" of a taxpayer's income. If there is only one relevant part of a person's income that includes property income the amount under paragraph (d) will, by sub-paragraph (d)(i), be a proportionate part of the surcharge payable by the person. The proportion will be based on the ratio borne by the "net property component" of the relevant part (see proposed sub-section 15(3B)) to the amount of taxable income from property.)
Sub-paragraph (d)(ii) applies the same principle of apportionment to the more complicated cases in which more than one "relevant part" of a person's income includes property income.
Sub-section 15(3B) specifies how, for purposes of subsection 15(3A), "the net property component", i.e., the amount of property income comprised in a relevant part that is included in a person's taxable income, is to be determined. It will be the amount of property income reduced by the allowable deductions that relate exclusively (paragraph (a)), or may appropriately be related (paragraph (b)), to that income.
Sub-clause (3) will amend sub-section 15(4) of the Principal Act consequential on the insertion of sub-sections 15(3A) and (3B).
By sub-clause (4) the amendments to section 15 apply in relation to the 1974-75 income year and subsequent years.