Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)Chapter 3: International tax agreements
Context of amendments
3.1 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 or create rights in domestic law. Section 5 of the Agreements Act gives the provisions of Australia's bilateral tax treaties the force of law according to their tenor.
3.2 These tax treaties, as noted in their title, are generally made 'for the avoidance of double taxation with respect to taxes on income and the prevention of fiscal evasion' or similar. Eight of these tax treaties contain a Non-Discrimination Article providing that the Article extends to 'taxes of every kind and description'. This has caused some uncertainty to arise in respect of the interaction with taxes that are not covered taxes under the treaty, such as foreign investment fees and some state and territory property taxes.
3.3 The eight tax treaties containing such provision are:
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- Finnish agreement;
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- German agreement;
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- Indian agreement / Indian protocol (No. 1);
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- Japanese convention;
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- New Zealand convention;
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- Norwegian convention;
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- South African agreement / South African protocol (No. 2); and
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- Swiss convention.
3.4 Sections 4 and 4AA of the Agreements Act provide that it shall be read as one Act with the Assessment Act and FBT Act respectively. Subsections 4(2) and 4AA(2) further provide for the resolution of inconsistencies between these Acts and the Agreements Act. The subsections provide that to the extent of any inconsistency between these Acts and the Agreements Act, other than the general anti-avoidance and corporate collective investment vehicles provisions, the Agreements Act prevails.
3.5 There is no express provision in the Agreements Act clarifying how inconsistencies between the Agreements Act and other Acts, which are not specified in sections 4 and 4AA, should be resolved.
Comparison of key features of new law and current law
Table 3.1 Comparison of new law and current law
| New law | Current law |
| Subsection 5(3) clarifies that the operation of a provision in the Agreements Act is subject to anything inconsistent in a law of the Commonwealth, a state or a territory that imposes a tax other than an Australian tax, unless expressly provided otherwise in that law. | No comparison. |
Detailed explanation of new law
3.6 The Foreign Investment Bill resolves any inconsistencies arising between the Agreements Act, which gives the provisions of Australia's bilateral tax treaties the force of law, and laws imposing taxes (other than Australian tax). 'Australian tax' takes its meaning as defined in section 3 of the Agreements Act, which broadly incorporates income tax (including Medicare Levy) and fringe benefits tax.
3.7 The operation of a provision of a bilateral tax treaty that is given the force of law under subsection 5(1) of the Agreements Act is subject to anything inconsistent with a provision of a law imposing tax (other than Australian tax) unless that law expressly provides otherwise. This amendment provides an express ordering rule to ensure the law imposing non-Australian tax prevails in the event of any inconsistency with the provisions of Australia's bilateral tax treaties. This clarifies the Government's policy position that Australian Commonwealth, state and territory taxes, other than income taxes and fringe benefits taxes, prevail in the case of any inconsistency with the Agreements Act. [Schedule 1 to the Foreign Investment Bill, item 1, subsection 5(3) of the Agreements Act]
3.8 This express ordering rule only applies in relation to taxes other than 'Australian tax', as defined. These taxes, in relation to which the amendment applies, include Commonwealth, state and territory laws such as foreign investment fees and state and territory property taxes. This amendment clarifies that where a provision of a tax treaty, that is given the force of law under the Agreements Act, is inconsistent with a Commonwealth, state or territory law that imposes tax (other than Australian tax), that provision of the tax treaty will not operate to the extent of that inconsistency, therefore ensuring that the Commonwealth, state or territory tax continues to apply as intended. [Schedule #, items 1 and 2, subsection 5(3) of the Agreements Act and the application provision respectively]
Retrospective application
3.9 The amendment applies in relation to relevant taxes that are payable on or after 1 January 2018 and for all relevant tax periods that end on or after 1 January 2018 however those tax periods are described. The retrospective nature of this amendment provides certainty for affected taxpayers by preserving the status quo that these taxes have been validly imposed and collected. The retrospective period broadly aligns with the six-year statute of limitation periods generally provided under state and territory legislation. This ensures certainty for affected taxpayers throughout these statutory periods. [Schedule 1 to the Foreign Investment Bill, item 2, application provision]
3.10 This amendment applies in respect of taxes imposed for tax periods that end on or after 1 January 2018. For taxes that are paid in respect of a tax period, the circumstances that give rise to the tax being imposed may occur during this tax period. Where these circumstances arise prior to 1 January 2018, the amendment applies in relation to that tax provided the tax period for which it is payable ends on or after 1 January 2018.
3.11 It is necessary that the amendment apply retrospectively to ensure that there has been no unintended expansion of the Agreements Act which may undermine other Australian taxation regimes and the intended policy position.
3.12 Retrospective application is appropriate to reassure taxpayers who have been applying the law as intended have a sufficient level of certainty both for previous years and into the future. This provides certainty for taxpayers that these other Commonwealth, state and territory taxes are not affected by the tax treaty provisions.
Commencement, application, and transitional provisions
3.13 The Foreign Investment Bill commences the day of Royal Assent. [Section 2 of the Foreign Investment Bill]
3.14 The amendments apply to taxes (other than an Australian tax) payable on or after 1 January 2018 and taxes (other than an Australian tax) payable in relation to tax periods (however described) that end on or after 1 January 2018. The retrospective nature of this amendment ensures adequate certainty for affected taxpayers and maintains the status quo by clarifying that the relevant taxes continue to apply as intended and legislated by the Australian Parliament. [Schedule 1 to the Foreign Investment Bill, item 2]