Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon Wayne Swan MP)
General outline and financial impact
What will this Bill do?
This Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to give the force of law in Australia to the Convention between Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and its associated Protocol and Exchange of Notes, (together referred to as 'this Convention') that were signed in Tokyo on 31 January 2008.
This Convention is Australia's second comprehensive tax treaty with Japan. It will modernise the tax relationship between the two countries and will serve to facilitate trade and investment between Australia and Japan. This Convention will replace the Agreement between the Commonwealth of Australia and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and its associated Protocol that were signed in Canberra on 20 March 1969 (together referred to as 'the existing Agreement').
Who will be affected by this Bill?
Persons who are residents of Australia and/or Japan and who derive income, profits or gains from Australia or Japan will be affected by this Bill.
How is the legislation structured?
The Agreements Act 1953 gives the force of law in Australia to Australia's tax treaties which appear as Schedules to that Act. The provisions of the Income Tax Assessment Act 1936 (ITAA 1936), the Income Tax Assessment Act 1997 (ITAA 1997) and the Fringe Benefits Tax Assessment Act 1986 are incorporated into and read as one with the Agreements Act 1953. The provisions of the Agreements Act 1953 (including the terms of the tax treaties) take precedence over provisions of the:
- ITAA 1936 (other than the general anti-avoidance rules under Part IVA);
- ITAA 1997; and
- Fringe Benefits Tax Assessment Act 1986 (other than section 67 which is an anti-avoidance rule).
In what way does this Bill change the International Tax Agreements Act 1953?
The Agreements Act 1953 is amended to insert the text of this Convention as a Schedule to that Act. Australia's tax treaties appear as Schedules to the above Act, which gives them the force of law in Australia.
When will this Convention enter into force, and from what date will the Convention have effect?
This Convention will become law from the date of Royal Assent. Further, the Convention will enter into force 30 days after the date of the last notification by diplomatic notes that the domestic processes to give this Convention the force of law in the respective countries have been completed. In Australia, enactment of this Bill giving the force of law to this Convention is the prerequisite to such notification.
Once it enters into force this Convention will apply as follows
Application in Australia
For withholding taxes, on income derived:
- on or after 1 January in the calendar year next following the date on which this Convention enters into force.
For other Australian taxes, on income, profits or gains:
- any year of income beginning on or after 1 July in the calendar year next following the date on which this Convention enters into force.
Application in Japan
For taxes withheld at source, on amounts taxable:
- on or after 1 January in the calendar year next following the year in which this Convention enters into force.
With respect to all other taxes:
- any taxable year beginning on or after 1 January in the calendar year next following the year in which this Convention enters into force.
The financial impact of this Bill
Treasury has estimated the impact of the first round effects on forward estimates as $345 million. The estimated distribution of the first round costs is shown in the table below:
No significant compliance costs will result from the entry into force of this Convention.
Summary of regulation impact statement
Regulation impact on business
Impact : High.
Main points :
- This Convention is expected to have an impact on Australian residents doing business with Japan and includes Australian investors, banks, suppliers of technology, consultants, exporters, Australian employees working in Japan, and Australian residents receiving pensions from Japan. This Convention will also impact on the Australian Government and the Australian Taxation Office.
- While source country tax on interest will generally continue to be limited to 10 per cent, there will be no withholding tax charged on interest derived by a financial institution that is resident in the other country, or on interest derived by a government body or central bank of the other country, or by the Australian Export Finance and Insurance Corporation, Australia's Future Fund, the Japan Bank for International Cooperation or the Nippon Export and Insurance. No tax is payable on dividends in the source country where the dividend recipient is a company that holds directly at least 80 per cent of the voting power of the company paying the dividend, subject to certain conditions. A 5 per cent rate limit applies to other dividends where the dividend recipient is a company that holds directly at least 10 per cent of the voting power of the company paying the dividend. A 10 per cent limitation applies to other dividends. The general limit for royalties will be reduced from 10 per cent to 5 per cent. The limit for source country tax on distributions from Australian real estate investment trusts, and pre-Japanese dividend deduction companies with a majority of assets consisting of real property is set at 15 per cent.
- This Convention will assist the bilateral relationship by updating an important treaty in the network of commercial treaties between the countries and provides for greater cooperation between tax authorities to prevent fiscal evasion and tax avoidance.