House of Representatives

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) to give the force of law in Australia to the following tax agreements:

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The Agreement between the Government of Australia and the Government of the British Virgin Islands for the Allocation of Taxing Rights with Respect to Certain Income of Individuals (BVI Agreement), which was signed in London on 27 October 2008; and

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The Agreement between the Government of Australia and the Government of the Isle of Man 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 (IoM Agreement), which was signed in London on 29 January 2009.

These Agreements contain articles that are based on corresponding articles contained in Australia's bilateral tax treaties.

The BVI Agreement is the first agreement of its type signed between Australia and a low-tax jurisdiction and was signed in conjunction with the Agreement for the Exchange of Information Relating to Taxes between Australia and the British Virgin Islands (BVI), which was signed in London on 27 October 2008.

The IoM Agreement is the second agreement of this type and was signed in conjunction with the Agreement for the Exchange of Information with Respect to Taxes between Australia and the Isle of Man (IoM), which was signed in London on 29 January 2009.

Who is affected by this Bill ?

Individuals who are residents of Australia and/or the BVI or the IoM who derive income from pensions and retirement annuities (in the case of the IoM Agreement only) or the provision of government services, or receive payments in their capacity as visiting students or business apprentices.

Residents of Australia or the IoM that wish to contest a transfer pricing adjustment made by the Australian or IoM tax authorities.

How the legislation is structured

The Agreements Act 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 (FBTAA 1986) are incorporated into and read as one with the Agreements Act. The provisions of the Agreements Act (including the terms of the tax treaties) take precedence over provisions of the:

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ITAA 1936 (other than the general anti-avoidance rules under Part IVA);

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ITAA 1997; and

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FBTAA 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 is amended to insert the text of the BVI Agreement and the IoM Agreement as Schedules to that Act, which will give them the force of law.

When will these changes take place ?

From the date of Royal Assent.

When will these Agreements enter into force, and from what date will they have effect ?

The BVI Agreement

The BVI 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, enactment of the legislation giving the BVI Agreement the force of law along with tabling it in Parliament are prerequisites to the exchange of diplomatic notes.

Once it enters into force the BVI Agreement will apply as follows

Application in Australia

In respect of any income year beginning on or after 1 July in the calendar year next following the date on which the BVI Agreement enters into force.

Application in the BVI

In respect of any income year beginning on or after 1 January in the calendar year next following the date on which the BVI Agreement enters into force.

The IoM Agreement

The IoM 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, enactment of the legislation giving the IoM Agreement the force of law along with tabling it in Parliament are prerequisites to the exchange of diplomatic notes.

Once it enters into force the IoM Agreement will apply as follows

Application in Australia

In respect of any income year beginning on or after 1 July in the calendar year next following the date on which the IoM Agreement enters into force.

Application in the IoM

In respect of any income year beginning on or after 5 April in the calendar year next following the date on which the IoM Agreement enters into force.

The financial impact of this Bill

The impact of both the BVI Agreement and the IoM Agreement on the forward estimates has been estimated as negligible.

Compliance costs

No significant compliance costs are expected to result from the entry into force of the BVI Agreement and the IoM Agreement.

Summary of regulation impact statement

The BVI Agreement

Regulation impact on business

Impact: Minimal.

Main points:

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The BVI Agreement is likely to have an impact on Australian individuals providing services to an Australian government (including a state or local government) in the BVI; Australian students and business apprentices temporarily residing in the BVI for education or training purposes; the Australian Government and the Australian Taxation Office (ATO).

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The BVI Agreement will promote a closer bilateral relationship between Australia and the BVI by eliminating double taxation of certain income derived by individuals, specifically government employees, students and business apprentices.

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In conjunction with the Agreement for the Exchange of Information Relating to Taxes between Australia and the BVI, the BVI Agreement will provide for greater cooperation between tax authorities to prevent tax avoidance and evasion.

No material costs to taxpayers have been identified as likely to arise from the BVI Agreement but there is likely to be a small, unquantifiable administration cost.

The IoM Agreement

Regulation impact on business

Impact: Minimal.

Main points:

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The IoM Agreement is likely to have an impact on recipients of Australian source pensions or retirement annuities who reside in the IoM; individuals providing services to an Australian government (including a state or local government) in the IoM; Australian students and business apprentices temporarily residing in the IoM for education or training purposes; the Australian Government and the ATO.

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The IoM Agreement will also have an impact on Australian residents (including non-individuals) that wish to contest a transfer pricing taxation adjustment made by the IoM tax authority.

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The IoM Agreement will promote a closer bilateral relationship between Australia and the IoM by eliminating double taxation of certain income derived by individuals, specifically pension recipients, government employees, students and business apprentices.

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In conjunction with the Agreement for the Exchange of Information with Respect to Taxes between Australia and the IoM, the IoM Agreement will provide for greater cooperation between tax authorities to prevent tax avoidance and evasion.

No material costs to taxpayers have been identified as likely to arise from the IoM Agreement but there is likely to be a small, unquantifiable administration cost.