Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)Notes on Clauses
Clause 1: Short title, etc.
This clause formally provides for the short title of the amending Act and refers to the Income Tax (International Agreements) Act 1953 as the Principal Act.
Clause 2: Commencement
Under 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.
Clause 3: Interpretation
Section 3 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act. Paragraphs (a) and (b) of clause 3 will insert in section 3(1) definitions referring to the comprehensive agreements with Malaysia and Sweden (which by clause 9 of the Bill are being incorporated as Schedules 16 and 17 to the Principal Act).
Clause 4: Convention with Canada
Sub-clause (1) of this clause proposes the insertion of a new sub-section (2A) in section 6A of the Principal Act, which provided for the force of law to be given to the convention with Canada. Article 15(2)(a) of the Canadian convention provides for exemption from tax in the country visited of earnings from employment during a short-term visit by a resident of the other country, provided those earnings do not exceed $CAN3,000 or $AUS2,600, while Article 15(3) provides that those amounts may be varied by agreement between the Australian Treasurer and the Canadian Minister of National Revenue, in letters exchanged for that purpose. New sub-section (2A) provides for particulars of any variation so agreed to be published in the Gazette as soon as practicable thereafter. The purpose of this is to provide a readily available and authoritative source from which persons may ascertain the fact and particulars of any such variation.
Sub-clause (2) is a formal provision to establish that the amendment effected by sub-clause (1) does not apply retrospectively. No variations have been made so far.
Clause 5: Agreement with Singapore
This clause proposes an amendment to section 7 of the Principal Act, which provided for the force of law to be given to the Singapore agreement, similar to that proposed by clause 4 in relation to the Canadian convention. Article 18(4) of the Singapore agreement provides that a special tax credit under Article 18(3) of that agreement shall not apply after 30 June 1974 or any later date that maybe agreed by the two countries in notes exchanged for that purpose. Sub-clause (1) proposes the insertion of a new sub-section (2) providing for any later date so agreed to be published in the Gazette, while sub-clause (2) formally establishes that the amendment effected by sub-clause (1) does not apply retrospectively. Two extensions of the relevant date have been agreed, the latest, by an exchange of notes on 11 March 1981, to 30 June 1984.
Clause 6: Agreement with the Republic of the Philippines
The amendment proposed by this clause to section 11D of the Principal Act, which provides for the force of law to be given to the Philippine agreement, is to the same effect as that proposed by clause 4 in relation to the Canadian convention. Article 14(1) of the Philippine agreement provides, in effect, for exemption from tax in the country visited of income from independent personal services during a short-term visit by a resident of the other country if the income derived from residents of the country visited does not exceed $AUS10,000 or its equivalent in Philippine pesos, while Article 14(2) provides that those amounts may be varied by agreement between the Australian Treasurer and the Minister of Finance of the Philippines, in letters exchanged for that purpose.
Sub-clause (1) proposes the insertion of a new sub-section (3) providing for particulars of any variation so agreed to be published in the Gazette, while sub-clause (2) formally established that the amendment effected by sub-clause (1) does not apply retrospectively. No variations have been made so far.
Clause 7: Agreement with Malaysia and Agreement with Sweden
This clause proposes the insertion in the Principal Act of two sections - sections 11F and 11G - which, respectively, will give the force of law in Australia to the comprehensive double taxation agreement with Malaysia and that with Sweden. Each agreement will be given the force of law with effect from the dates indicated in each agreement itself (see explanations of Article 28 of each agreement).
By proposed section 11F(1), the Malaysian 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 July 1979;
- (b)
- in respect of other income, for any year of income commencing on or after 1 July 1979.
By proposed section 11G(1), the Swedish 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 immediately following that 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 immediately following that in which the agreement enters into force.
Sub-section (2) of each of the proposed sections 11F and 11G provides for the dates on which the agreements enter into force to be notified in the Gazette as soon as practicable thereafter. The purpose of this is to provide a readily available and authoritative source from which persons may ascertain the fact and date of entry into force of each of the agreements. Because of the terms of the two agreements relating to entry into force - each enters into force on the exchange of diplomatic notes advising that everything has been done to give the agreement the force of law in Australia and the other country - it is not possible to indicate in this Bill the dates of entry into force of the agreements.
Sub-section (3) of the proposed section 11F will have the same effect, in relation to the Malaysian agreement, as new section 7(2) proposed to be inserted by clause 5 in relation to the Singapore agreement. Article 23(7) of the Malaysian agreement provides that special tax credit provisions in that article shall not apply after 30 June 1984 or any later date that may be agreed by the two governments in letters exchanged for that purpose. Sub-section (3) provides for any later date so agreed to be published in the Gazette.
Sub-section (4) of proposed section 11F will ensure that the interest and royalty "source" rules negotiated with Malaysia, and contained in Articles 11(5) and 12(5) of the Malaysian agreement, will not when read with Article 22 have the unintended effect of subjecting to Australian tax interest or royalties paid by an Australian resident to a Malaysian 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.
Sub-clause (2) of clause 7 will empower the Commissioner to amend assessments for the purpose of giving effect to the agreement with Malaysia. It is necessary to give the Commissioner this power because, although the agreement will not enter into force until an exchange of diplomatic notes has been made, its provisions will have effect - pursuant to proposed section 11F(1) - in relation to income in respect of which assessments may have already been made.
Clause 8: 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 Malaysia and Sweden and in respect of which, under the agreements, the Malaysian or Swedish tax is subject to limit. 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 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 1936 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 8 will apply this policy to interest and royalties derived by Australian residents from Malaysia or Sweden after the commencement of the year of income to which the relevant agreement is to apply. Articles 23 and 24 respectively are the relevant credit articles in the Malaysian and Swiss agreements. However, as Sweden does not generally tax interest 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 interest derived by Australian residents is, and will remain, fully taxable.
Paragraph (a) of clause 8(1) will effect a formal drafting amending consequent upon the addition to section 12(1) of the Principal Act of two new paragraphs, (ak) and (am).
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 (ak) will ensure that interest and royalties derived from Malaysia by a resident of Australia, the Malaysian tax on which is expressly limited to 15 per cent of the gross amount of the relevant income, will not be exempt from Australian tax. Paragraph (ak) will apply to income derived on or after 1 July 1979.
New paragraph (am) will serve a similar purpose in relation to income from Sweden. It will have effect in relation to interest and royalties derived in income years commencing on or after 1 July in the calendar year immediately following that in which the agreement enters into force (i.e. the year after that in which notes are exchanged) where, under the agreement, Swedish tax is limited to 10 per cent of the gross amount of the relevant income. As noted earlier, Sweden does not, at present, generally impose tax on outgoing interest payments. However, should Swedish tax be imposed on such income in the future, the agreement would apply to limit the Swedish tax to 10 per cent and Australia would allow a credit against the Australian tax on the interest in respect of this amount of Swedish tax.
Sub-clause (2) of clause 8 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 or royalty income derived from Malaysia by Australian residents after the commencement of the 1979-80 income year, but on or before the date of signature and announcement of the agreement on 20 August 1980. When signature of this agreement was announced it was indicated that the credit method of relief was to be applied to this income. Because the limits imposed by the Malaysian agreement on the source country's tax on interest and royalties will generally not result in a reduction in Malaysian tax on such income derived by residents of Australia, the sub-clause will mean, in effect, that in most cases there will be no increase in the Australian tax payable in respect of interest or royalty income derived on or before 20 August 1980, resulting from the change from the exemption system to the credit system.
Sub-clause (3) of clause 8 has a similar purpose to that of clause 7(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 as regards interest and royalties from Malaysia.
Clause 9: Schedules 16 and 17
This clause will add the agreements with Malaysia and Sweden as Schedules 16 and 17 respectively to the Principal Act.
Clause 10: Formal amendments
This clause will effect the formal amendments to the Principal Act set out in Schedule 2 to the Bill.