Explanatory MemorandumCirculated By the Authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP
Outline of chapter
1.1 Schedule 1 to this Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953) to modify and streamline its structure and remove the majority of the existing Schedules to the Act, which contain the texts of Australia's bilateral tax treaties. This Bill is not intended to alter the entry into force or application of Australia's tax treaties.
Context of amendments
1.2 The Vienna Convention on the Law of Treaties defines a treaty as '... an international agreement concluded between States in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation.' The word 'treaty' is, however, a generic term covering all instruments governed by international law and giving rise to international rights and obligations. Treaties may also be called agreements, conventions, exchanges of notes and letters constituting agreements, and protocols.
1.3 Much of the Agreements Act 1953 consists of Schedules to the Act that are copies of various tax treaties and similar agreements concluded by Australia. To a large extent these Schedules reflect treaties based on international standards, for example the Organisation for Economic Co-operation and Development's (OECD) Model Tax Convention on Income and on Capital . As a consequence of the expansion of Australia's tax treaty network, the Agreements Act 1953 has grown to be one of the largest Acts on the Commonwealth's statute books.
Summary of new law
1.4 The Agreements Act 1953 will be shortened by omitting almost all of the Schedules to the Act and instead incorporating treaties by reference to other accessible resources, principally the Australian Treaty Series online database of treaties. This will substantially reduce the size of the Agreements Act 1953.
Comparison of key features of new law and current law
|New law||Current law|
|The majority of the existing Schedules to the Agreements Act 1953, which contain the texts of Australia's tax treaties, have been removed.||The texts of Australia's tax treaties are reproduced in full and included as Schedules to the Agreements Act 1953.|
|Treaties are defined in alphabetical order, by jurisdiction.||Treaties are defined in a combination of numeric and alphabetical order.|
|A number of treaties are given the force of law on a consolidated basis.||Each treaty is given the force of law by a separate provision.|
Detailed explanation of new law
What does the Agreements Act 1953 do?
1.5 The general proposition under Australian law is that treaties which Australia has joined, apart from those terminating a state of war, are not directly and automatically incorporated into Australian law. Signature and ratification do not, of themselves, make treaties operate domestically. In the absence of legislation, tax treaties cannot impose obligations on individuals or create rights in domestic law. To be given effect, tax treaties must be given the force of law by the Federal Parliament.
1.6 The Agreements Act 1953 gives the force of law in Australia to Australia's tax treaties, which currently appear as Schedules to that Act.
1.7 The Income Tax Assessment Act 1936 , the Income Tax Assessment Act 1997 and the Fringe Benefits Tax Assessment Act 1986 are incorporated into and read as one with the Agreements Act 1953. By subsection 4(2) of the Agreements Act 1953, the provisions of the Agreements Act 1953 (including the terms of tax treaties) take precedence over inconsistent provisions of the:
- Income Tax Assessment Act 1936 (other than the general anti-avoidance rules under Part IVA);
- Income Tax Assessment Act 1997 ; and
- Fringe Benefits Tax Assessment Act 1986 (other than section 67 which is an anti-avoidance rule).
1.8 Historically, the texts of Australia's tax treaties have been included as Schedules to the Agreements Act 1953 (currently there are 50 such Schedules). This practice, however, is not strictly necessary to give those treaties the force of law in Australia. The effect of including the treaty texts as Schedules to the Agreements Act 1953 is essentially only presentational. By way of comparison, the texts of Australia's tax information exchange agreements are not included as Schedules to the Agreements Act 1953 but are given effect by section 23 of the Agreements Act 1953. Likewise, the texts of treaties in respect of earlier periods are not included as separate Schedules but continue to have the force of law for relevant income.
In what way does this Bill change the Agreements Act 1953?
1.9 This Bill will modify and streamline the structure of the Agreements Act 1953 and remove the majority of the existing Schedules to the Act which contain the texts of Australia's tax treaties.
1.10 The title of the Agreements Act 1953 will be amended to replace the phrase 'Conventions and Agreements' with the phrase 'Treaties and other Agreements'. This more closely reflects the common usage of the term 'treaty' to describe the agreements covered by the Agreements Act 1953. [Schedule 1, item 1, title]
What is an agreement?
1.11 An 'agreement' is a current tax treaty or other agreement, or an agreement for an earlier period, covering Australia and another jurisdiction. [Schedule 1, item 2 subsection 3(1)]
1.12 For greater ease of reference, these agreements, which include protocols and notes, will be categorised as 'current agreements' and 'agreements for earlier periods' and presented in the new law in alphabetical order, by country name. By comparison, the current law lists the agreements in a less convenient combination of numeric and alphabetical order. [Schedule 1, item 5, sections 3AAA and 3AAB]
1.13 An agreement includes a treaty, agreement, convention, protocol or exchange of notes dealing with the allocation of taxing rights. The words 'agreement' and 'convention' are considered to be synonymous in the context of this Bill. Typically an agreement would include:
- a comprehensive tax treaty for the elimination of double taxation and/or the prevention of fiscal evasion; for example, the Mexican agreement (signed on 9 September 2002);
- a protocol signed in conjunction with a comprehensive tax treaty, for example, the Protocol to the Japanese convention (signed on 31 January 2008);
- a protocol that subsequently amends a comprehensive tax treaty, for example, the United States protocol (No. 1) (signed on 27 September 2001);
- an agreement for the allocation of taxing rights over certain income of individuals and to establish a mutual agreement procedure in respect of transfer pricing adjustments, for example, the Isle of Man agreement (signed on 29 January 2009); and
- an exchange of notes conducted in conjunction with a comprehensive tax treaty, for example, the 2003 Notes exchanged in conjunction with the signature of the United Kingdom convention (signed on 21 August 2003).
1.14 Under current practice, each treaty is defined in section 3 of the Agreements Act 1953 by the title of the treaty and a reference to the particular Schedule where the text of the treaty is reproduced, for example:
- the Austrian agreement means the Agreement between Australia and the Republic of Austria for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, being the agreement a copy of which in the English language is set out in Schedule 27.
1.15 A new section is included in the Agreements Act 1953 (section 11R in the case of the Austrian agreement) which sets out when and to what extent the treaty is given the force of law.
1.16 Where a treaty is superseded by a new treaty, the previous treaty continues to be defined in section 3, and a provision is included which gives it the force of law only in respect of income to which it remains effective. As mentioned, the superseded treaty is not reproduced in a Schedule to the Agreements Act 1953.
1.17 Amendments contained in this Bill will give Australia's tax treaties the force of law through streamlined arrangements. This Bill is not intended to change the effect of the Agreements Act 1953 or the extent to which Australia's tax treaties are given the force of law in Australia.
- An 'agreement' is a current tax treaty or other agreement, or an agreement for an earlier period, covering Australia and another jurisdiction. Current agreements and earlier agreements are specifically listed in new sections 5 and 5A respectively [Schedule 1, item 2, subsection 3(1)].
- All treaties are defined - in alphabetical order by country name - by reference to their full title and the place and date of signature. There are separate provisions defining current agreements and agreements for earlier periods. By comparison, the current law lists the agreements in a less convenient combination of numeric and alphabetical order [Schedule 1, item 5, sections 3AAA and 3AAB] .
- There is no reference to a schedule in each definition and all Schedules containing a treaty text have been repealed, with the exception of the Taipei agreement, which has been retained as Schedule 1 due to the specific nature of that agreement. The parties to the Taipei agreement are the Australian Commerce and Industry Office and the Taipei Economic and Cultural Office [Schedule 1, item 5, section 3AAA under the 'Taipei agreement' and Schedule 1, item 68].
- Each definition contains a note directing the reader to the treaty text by reference to the relevant Australian Treaty Series number. Any treaty entering into force for Australia is printed in the Australian Treaty Series. The series is held in major public and university libraries and is also published on the Internet, for example, the Australasian Legal Information Institute (AustLII). Copies of Australian treaties are also available online via the Department of Foreign Affairs and Trade's Australian Treaties Database. Copies of Australia's tax treaties are also available via the Treasury's public website.
- A new provision will give the force of law to most current tax treaties, which are listed in a table. It is expected that most new treaties will be incorporated into this table and their provisions given the force of law 'according to their tenor' [Schedule 1, item 8, subsection 5(1)].
- 'Force of law' rules for earlier treaties are consolidated in a separate table [Schedule 1, item 8, section 5A] .
- Not all of Australia's existing tax treaties are included in the tables contained in new sections 5 and 5A. Arguably, some of the existing 'force of law' provisions contained in the Agreements Act 1953 qualify, to some extent, the force of law given to a treaty. To remove any potential doubt in such cases, those existing force of law provisions have been retained. This applies to certain treaties concluded with the following countries:
|Austria (section 11R)||Korea (Republic of) (section 11L)|
|Canada (section 6A)||Malaysia (section 11F)|
|China (section 11Q)||Malta (section 11N)|
|Denmark (section 11H)||the Philippines (section 11D)|
|Germany (section 11)||Singapore (section 7)|
|Ireland (section 11K)||Sweden (section 11G)|
|Italy (section 10A)||Switzerland (section 11E)|
Application and transitional provisions
1.18 Transitional rules will apply to ensure the prospective application of the amendments contained in this Bill. That is, notwithstanding the operation of new section 5 to give the provisions of a treaty the force of law, those provisions will continue to have effect for the purposes of the Agreements Act 1953 as it was prior to these amendments. [Schedule 1, item 71, subsections (1) and (2)]
1.19 In addition, transitional rules will ensure that the legal operation of a treaty provision that was in force prior to the application of these amendments, and which is not covered by new section 5 or 5A, will continue to have the force of law following these amendments. This will apply regardless of any change in the description of an agreement resulting from these amendments. [Schedule 1, item 72, subsections (1) and (2)]