Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Wayne Swan MP)
Chapter 4 - The Australia-Jersey Agreement
Outline of chapter
4.1 This Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) and inserts Schedule 50 into the Agreements Act 1953 which is the Agreement between the Government of Australia and the Government of Jersey for the Allocation of Taxing Rights with Respect to Certain Income of Individuals and to Establish a Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments (the Jersey Agreement). This chapter explains the rules that apply in the Jersey Agreement. All legislative references are to Schedule 50, unless otherwise stated.
Context of amendments
4.2 The Jersey Agreement was signed in London on 10 June 2009. There is no pre-existing agreement of this type between Australia and Jersey. The Jersey Agreement was signed in conjunction with the Agreement between the Government of Australia and the Government of Jersey for the Exchange of Information with Respect to Taxes (the Jersey Information Exchange Agreement), which will establish a legal basis for the exchange of tax information between the two countries. Jointly, the two agreements will promote greater economic and administrative cooperation between the two countries.
Summary of new law
Main features of this Agreement
4.3 The main features of the Jersey Agreement are as follows:
- Income from pensions and retirement annuities will generally be taxed only in the country of residence of the recipient, provided the income is subject to tax in that country.
- Income from government service will generally be taxed only in the country that pays the remuneration. However, the remuneration shall only be taxed in the other country where the services are rendered in that other country by a resident of that other country who is a national of that other country or did not become a resident of that other country for the purpose of rendering the services.
- Payments made from abroad to visiting students and business apprentices for the purposes of their maintenance, education or training will be exempt from tax in the country visited.
- A non-binding administrative mechanism will be established to assist taxpayers to seek resolution of transfer pricing disputes.
Comparison of key features of new law and current law
|New law||Current law|
|Australian source pensions and retirement annuities derived by residents of Jersey will be exempt from Australian tax, provided they are taxed in Jersey.||Australian source income of foreign residents is generally subject to Australian tax.|
|Certain income derived by residents of Jersey from government service in Australia will be exempt from Australian tax.||Australian source income of foreign residents is generally subject to Australian tax.|
|Certain payments received by visiting students and business apprentices from Jersey will be exempt from Australian tax.||Some payments received by foreign students and business apprentices may be taxable in Australia, depending on the circumstances.|
|The competent authorities of Australia and Jersey will endeavour to resolve taxpayers' transfer pricing disputes arising from transfer pricing adjustments that contravene the arm's length principle.||No equivalent.|
Detailed explanation of new law
4.4 This Bill gives effect to the Jersey Agreement, which is inserted as Schedule 50 to the Agreements Act 1953 and deals with the allocation of taxing rights with respect to certain income of individuals.
Article 1 - Persons Covered
4.5 This Article establishes the scope of the application of the Jersey Agreement by providing for it to apply to persons who are residents of one or both of the countries. [Article 1]
4.6 The application of the Jersey Agreement to persons who are dual residents (that is, residents of both countries) is dealt with in Article 4 ( Resident ).
Article 2 - Taxes Covered
4.7 This Article specifies the existing taxes of each country to which the Jersey Agreement applies. This is, in the case of Australia, the federal income tax. [Article 2, subparagraph 1(a)]
4.8 For Jersey, the Jersey Agreement applies to the income tax (referred to as Jersey tax). [Article 2, subparagraph 1(b)]
4.9 The application of the Jersey Agreement will be automatically extended to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, the existing taxes. The competent authorities for the two countries are required to notify each other in the event of a significant change to the taxation law of the respective countries, within a reasonable period of time after those changes. [Article 2, paragraph 2]
Article 3 - Definitions
Definition of Australia
4.10 The definition of Australia follows corresponding definitions in Australia's modern tax treaties. 'Australia' is defined to include certain external territories and areas of the continental shelf. [Article 3, subparagraph 1(a)]
Definition of Jersey
4.11 Jersey is defined to mean the Bailiwick of Jersey, including its territorial sea. [Article 3, subparagraph 1(b)]
Definition of competent authority
4.12 The competent authority is the person or institution specifically authorised to perform certain actions under the Jersey Agreement. For example, to notify each other of any significant changes to the tax law of their respective countries, to communicate for the purposes of Article 8 ( Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments ) and to exchange information in accordance with Article 9 ( Exchange of Information ).
4.13 In the case of Australia, the competent authority is the Commissioner of Taxation (Commissioner) or an authorised representative of the Commissioner. In the case of Jersey, the competent authority is the Treasury and Resources Minister or an authorised representative of the Minister. [Article 3, subparagraph 1(c)]
Definition of party
4.14 Party means Australia or Jersey, as the context requires. [Article 3, subparagraph 1(d)]
Definition of national
4.15 National means any individual possessing the nationality or citizenship of Australia or Jersey, as the context requires. [Article 3, subparagraph 1(e)]
Definition of person
4.16 Person includes an individual, a company and any other body of persons. [Article 3, subparagraph 1(f)]
Definition of tax
4.17 The term tax means either Australian tax or Jersey tax, depending on the context. [Article 3, subparagraph 1(g)]
Definition of transfer pricing adjustment
4.18 A transfer pricing adjustment is an adjustment made by the competent authorities of Australia or Jersey to the profits of an enterprise, based on the application of domestic transfer pricing laws. For Australia, such laws are contained in Division 13 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936). [Article 3, subparagraph 1(h)]
Terms not specifically defined
4.19 A term that is not specifically defined in the Jersey Agreement shall have (unless the context requires otherwise) the meaning that it has under the domestic taxation law of the country applying the Jersey Agreement at the time of its application. In that case, the term's domestic taxation law meaning will have precedence over the meaning it may have under that country's other domestic laws. [Article 3, paragraph 2]
4.20 The same term may have different meaning and a varied scope within different Acts relating to specific taxation measures. For example, goods and services tax definitions are sometimes broader than income tax definitions. The definition more specific to the type of tax should be applied in such cases. For example, where the matter subject to interpretation is an income tax matter, but definitions exist in either the ITAA 1936 or the Income Tax Assessment Act 1997 (ITAA 1997) and the A New Tax System (Goods and Services Tax) Act 1999 , the income tax definition would be the relevant definition to be applied.
Article 4 - Resident
4.21 This Article sets out the basis upon which the residence status of a person is to be determined for the purposes of the Jersey Agreement. Residence status is a criterion for determining each country's taxing rights and is a necessary condition for the provision of relief under the Jersey Agreement. In the case of Australia, a person's residence is determined according to Australia's taxation law [Article 4, subparagraph 1(a)] . In the case of Jersey, residence is determined according to Jersey's taxation law [Article 4, subparagraph 1(b)] .
Special residency rules
4.22 A person is not a resident of a country, for the purposes of the Jersey Agreement, if that person is liable to tax in that country in respect only of income from sources in that country. In the Australian context, this would mean, for example, that Norfolk Island residents, who are generally only subject to Australian tax on Australian source income, are not residents of Australia for the purposes of the Jersey Agreement. Accordingly, Jersey will not have to forego tax in accordance with the Jersey Agreement on income derived by Norfolk Island residents (which will not be subject to Australian tax). [Article 4, paragraph 2]
4.23 Tie-breaker rules are included for determining residency, for the purposes of the Jersey Agreement, if a taxpayer qualifies as a dual resident, that is, a resident of both countries in accordance with paragraph 1 of Article 4. These rules, in order of application, are:
- if the individual has a permanent home available in only one of the countries, the person is deemed to be a resident solely of that country for the purposes of the Jersey Agreement [Article 4, subparagraph 3(a)] ;
- if the individual has a permanent home available in both countries or in neither, then the person's residential status takes into account their personal or economic relations with Australia and Jersey, and the person is deemed for the purposes of the Jersey Agreement to be a resident only of the country with which they have the closer personal and economic relations [Article 4, subparagraph 3(a)] ;
- residency will be determined on the basis of an individual's nationality where the foregoing tests are not determinative [Article 4, subparagraph 3(b)] ;
- if the individual is a national (as defined in subparagraph 1(e) of Article 3 ( Definitions ) of the Jersey Agreement) of both countries, or of neither, the competent authorities will endeavour to resolve the question of treaty residence by mutual agreement [Article 4, subparagraph 3(c)] ; or
- where a person that is not an individual is a dual resident, the entity will be deemed, for the purposes of the Jersey Agreement, to be a resident of the country in which its place of effective management is located [Article 4, paragraph 4] .
4.24 In relation to Australia, a dual resident remains a resident for the purposes of Australian domestic law. Accordingly, that person remains liable to tax in Australia as a resident, insofar as the Jersey Agreement allows.
Article 5 - Pensions and Retirement Annuities
4.25 Pensions and retirement annuities are taxable only by the country of which the recipient is a resident, provided such income is subject to tax in that country. If such income is not subject to tax in that country, the income may be taxed by the country from which the relevant payments were made. [Article 5, paragraph 1]
Meaning of retirement annuity
4.26 In the case of Australia, retirement annuity means a superannuation annuity payment within the meaning of the taxation laws of Australia. That is, a superannuation annuity as defined by Regulation 995-1.01 of the Income Tax Assessment Regulations 1997 , which took effect from 1 July 2007. [Article 5, subparagraph 2(a)]
Article 6 - Government Service
4.27 Salary and wage type income, other than government service pensions or annuities, paid to an individual for services rendered to a government of one of the countries (including a political subdivision or local authority), is to be taxed only in that country [Article 6, subparagraph 1(a)] . However, such remuneration will be taxable only in the other country if the services are rendered in that other country and:
- the recipient is a resident of, and a national of, that other country; or
- the recipient is a resident of that other country and did not become a resident of that country solely for the purpose of rendering the services (for example, if the recipient is a permanent resident of that other country).
[Article 6, subparagraph 1(b)]
4.28 However, salaries, wages and other similar remuneration in respect of services rendered in connection with a trade or business carried on by any governmental authority referred to in paragraph 1 of Article 6 of the Jersey Agreement is excluded from the scope of the Article. Such remuneration will remain subject to the domestic taxation laws of the two countries. [Article 6, paragraph 2]
Article 7 - Students
Exemption from tax
4.29 Article 7 applies to students or business apprentices who are temporarily present in one of the countries solely for the purpose of their education or training if they are, or immediately before the visit were, resident in the other country. In these circumstances, payments from abroad received by the students or business apprentices solely for their maintenance, education or training will be exempt from tax in the country visited. This will apply even though the student or apprentice may qualify as a resident of the country visited during the period of their visit.
4.30 Where, however, a Jersey student visiting Australia solely for educational purposes undertakes employment in Australia, for example, part-time work with a local employer, the income earned by that student as a consequence of that employment may be subject to tax in Australia.
4.31 For business apprentices, this Article only applies where the apprentice's remuneration consists solely of subsistence payments, made from abroad, to cover training or maintenance. Remuneration for service, that is, salary equivalents, falls for consideration under domestic taxation law.
4.32 In the case of a Jersey business apprentice visiting Australia solely for training purposes, it may therefore be necessary to distinguish between remuneration for service and a payment for the apprentice's maintenance or training. The quantum of the payment will be relevant in such cases.
4.33 A payment for maintenance or training would not be expected to exceed the level of expenses likely to be incurred to ensure the apprentice's maintenance and training (that is, a subsistence payment). If the remuneration is similar to the amounts paid to persons who provide similar services who are not business apprentices (that is, salary equivalent), this would generally indicate that the payments constitute income from employment that would fall for consideration under domestic taxation law. Likewise, if that business apprentice undertakes any other employment in Australia, the income earned from that employment may be subject to tax in Australia.
4.34 In these situations, the payments received from abroad for the student or apprentice's maintenance, education or training will not, however, be taken into account in determining the tax payable on the employment income that is subject to tax in Australia. No Australian tax would be payable on the employment income if the student or apprentice qualifies as a resident of Australia during the visit and the taxable income of the student or apprentice does not exceed the tax-free threshold applicable to Australian residents for income tax purposes.
Article 8 - Mutual Agreement Procedure in Respect of Transfer Pricing Adjustments
4.35 Article 8 provides for consultation between the competent authorities of the two countries for the purpose of endeavouring to resolve disputes concerning transfer pricing adjustments purportedly made not in accordance with the arm's length principle. [Article 8, paragraph 2]
4.36 The term 'arm's length principle' refers to the requirement that businesses price their related party international dealings according to what truly independent parties acting independently would reasonably be expected to have done in the same situation. The Commissioner would apply the arm's length principle when reviewing business transactions in the context of Division 13 of Part III of the ITAA 1936.
4.37 A person wishing to use this mutual agreement procedure must present their case to the competent authority of their country of residence within three years of the first notification of the transfer pricing adjustment. This procedure operates independently of, and in addition to, domestic legal remedies available to taxpayers. [Article 8, paragraph 1]
Article 9 - Exchange of Information
4.38 Article 9 authorises and limits the exchange of information by the competent authorities to information that is foreseeably relevant to the administration of the Jersey Agreement.
4.39 The exchange of information is subject to the provisions of the Jersey Information Exchange Agreement, which was signed by the two countries on 10 June 2009. After that agreement enters into force and takes effect, it will provide for exchange of information that is foreseeably relevant to the administration of the taxation laws of the two countries. It also contains safeguards to protect taxpayers' rights. For example:
- confidentiality rules to ensure that information exchanged is only disclosed to authorised recipients; and
- limitations to ensure that the competent authorities do not exceed domestic laws and normal administrative procedures in the course of obtaining and supplying information.
Article 10 - Entry into Force
Date of entry into force
4.40 The Jersey Agreement will enter into force on the date of the last exchange of diplomatic notes notifying that the domestic procedures to give it the force of law have been completed. In Australia, tabling the Jersey Agreement and enactment of the legislation giving the Jersey Agreement the force of law are prerequisites to the exchange of diplomatic notes. Entry into force is also conditional upon the Jersey Information Exchange Agreement being in force at that time.
Date of application in Australia
4.41 Following entry into force, the Jersey Agreement will take effect in Australia in respect of any income year beginning on or after 1 July in the calendar year next following the date on which it enters into force. [Article 10, subparagraph ( a)]
4.42 Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the accounting period that has been substituted for the year of income beginning on 1 July in the calendar year next following the date on which this Agreement enters into force will be the relevant year of income for the purposes of the application of such Australian tax. [Article 10, subparagraph ( a)]
Date of application in Jersey
4.43 Following entry into force, the Jersey Agreement will take effect in Jersey in respect of any income year beginning on or after 1 January in the calendar year next following the date on which it enters into force. [Article 10, subparagraph ( b)]
Article 11 - Termination
4.44 The Jersey Agreement is to continue in effect indefinitely. However, either country may give written notice of termination of the Jersey Agreement through the appropriate channel. [Article 11, paragraph 1]
Cessation in Australia
4.45 In the event of either country terminating the Jersey Agreement, it would cease to be effective in Australia in the year of income beginning on or after 1 July in the calendar year next following that in which the notice of termination is given. [Article 11, subparagraph 2(a)]
Cessation for Jersey
4.46 The Jersey Agreement would correspondingly cease to be effective in Jersey for any year of income beginning on or after 1 January in the calendar year next following that in which the notice of termination is given. [Article 11, paragraph 2(b)]
Cessation in other circumstances
4.47 The Jersey Agreement will also terminate and cease to be effective if the Jersey Information Exchange Agreement is terminated. In that event, the Jersey Agreement would terminate on the first day of the month following the expiration of three months after receipt of notification of termination of that agreement. [Article 11, paragraph 3]