Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Agreement with the Republic of South Africa
Main features of the Double Tax Agreement
1.1 The agreement between Australia and South Africa accords substantially with Australia's recent comprehensive double taxation agreements (DTAs). A number of modifications to the provisions have been required to accommodate South Africa's domestic territorial taxation system.
1.2 The features of the DTA include:
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- Dual resident individuals (i.e. persons who are residents of both Australia and South Africa according to the domestic law of each country) are, in accordance with specified criteria, to be treated for the purposes of the DTA as being residents of only one country.
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- Income from real (immovable) property may be taxed in full by the country in which the property is situated. Income from real property for these purposes includes natural resource royalties.
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- Business profits are to be generally taxed only in the country of residence of the recipient unless they are derived by a resident of one country through a branch or other prescribed `permanent establishment' in the other country, in which case that other country may tax the profits.
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- Profits from international operations of ships and aircraft may be taxed only in the country of residence of the operator.
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- Profits of associated enterprises may be taxed on the basis of dealings at arm's length.
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- Dividends, interest and royalties may generally be taxed in both countries, but there are limits on the tax that the country in which the dividend, interest or royalty is sourced may charge on such income flowing to residents of the other country who are beneficially entitled to that income. These limits are 10% for interest and 10% of royalties. No tax is payable in the source country on dividends which have been fully taxed at the corporate level where the dividend recipient is a company that holds directly at least 10% of the capital of the company paying the dividend. A 15% limitation on source country tax applies to all other dividends.
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- Income, profits or gains from the alienation of real property may be taxed in full by the country in which the property is situated. Subject to that rule and other specific rules in relation to business assets and some shares, capital gains are to be taxed in accordance with the domestic law of each country.
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- Income from professional services and other similar activities provided by an individual will generally be taxed only in the country of residence of the recipient. However, remuneration derived by a resident of one country in respect of professional services rendered in the other country may, where that remuneration is derived through a fixed base of the person concerned in that country or if the person is present for more than 183 days in any 12 month period in that country, be taxed in that country.
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- Income from dependent personal services , that is, employee's remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during certain short visits to one country by a resident of the other country, the income will be exempt in the country visited.
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- Directors' fees and other similar payments may be taxed in the country of residence of the paying company.
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- Income derived by entertainers and sportspersons may generally be taxed by the country in which the activities are performed.
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- Pensions and annuities (excluding government service pensions) may be taxed only in the country of residence of the recipient provided that such pensions and annuities are included in the taxable income in that country. However, an annuity paid to a former resident of a country which was purchased by way of a lump sum payment from an insurer in that country may be taxed by both countries, with the country of residence of the recipient providing double tax relief.
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- Government service remuneration will generally be taxed only in the country that pays the remuneration. However, the remuneration may be taxed in the other country in certain circumstances where the services are rendered in that other country. Similarly, government service pensions will generally be taxed only in the paying country. However, if the pensioner is both a resident, and a citizen or national, of the other country and the services for which the pension is paid were rendered in that other country, the pension will be taxable only in that other country.
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- Income of visiting students will be exempt from tax in the country visited insofar as it consists of payments made from abroad for the purposes of their maintenance or education.
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- Other income (i.e. income not dealt with by other articles) may generally be taxed in both countries, with the country of residence of the recipient providing double tax relief.
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- Double taxation relief
for income which under the DTA may be taxed by both countries is required to be provided by the country in which the taxpayer is resident under the terms of the DTA as follows:
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- in Australia , by allowing a credit for South African tax against Australian tax payable on income derived by a resident of Australia from sources in South Africa. Australia is also required to give credit for underlying taxes on non-portfolio dividends paid to related Australian resident companies;
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- in South Africa , by deducting the Australian tax paid from the South African tax due on income derived by residents of South Africa from sources in Australia.
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- In the case of Australia, effect will be given to the double tax relief obligations arising under the DTA by application of the general foreign tax credit system provisions of Australia's domestic law, or relevant exemption provisions of that law where applicable.
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- Consultation and exchange of information between the 2 taxation authorities is authorised by the DTA.
Agreement with South Africa
1.3 This article establishes the scope of application of the DTA, by providing for it to apply to persons (defined to include companies) who are residents of one or both countries. It generally precludes extra-territorial application of the DTA.
1.4 The application of the DTA to persons who are dual residents (i.e. residents of both countries) is dealt with in Article 4.
1.5 This article specifies the existing taxes of each country to which the DTA applies. These are, in the case of Australia:
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- the Australian income tax; and
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- the resource rent tax in respect of offshore petroleum projects.
1.6 It is specifically stated that the article applies only to taxes imposed under the federal law of Australia. This is to ensure that the DTA does not bind Australian States and applies only to federal taxes.
1.7 For South Africa the DTA applies to:
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- the normal tax; and
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- the secondary tax on companies.
1.8 In the case of Australia, income tax (including that imposed on capital gains), and resource rent tax are covered by the DTA. Sales tax, goods and services tax, fringe benefits tax, wool tax and levies, customs duties, State tax and duties and estate tax and duties are not covered by the DTA.
1.9 The application of the DTA 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. A duty is imposed on Australia and South Africa to notify each other within a reasonable time of any significant changes to their respective laws to which the DTA applies.
Article 3 - General definitions
1.10 As with Australia's other modern taxation agreements, Australia , when used in a geographical sense, is defined to include certain external territories and areas of the continental shelf. By reason of this definition, Australia preserves its taxing rights, for example, over mineral exploration and mining activities carried on by nonresidents on the seabed and subsoil of the relevant continental shelf areas (under section 6AA of the Income Tax Assessment Act 1936 (ITAA 1936), certain sea installations and offshore areas are to be treated as part of Australia). The definition is also relevant to the taxation by Australia and South Africa of shipping profits in accordance with Article 8 of the DTA. [Sub-paragraph 1(a)]
1.11 The definition of company in the DTA accords with Australia's DTA practice. It reflects the fact that Australia's domestic tax law does not specifically use the expression body corporate for tax purposes.
1.12 The Australian tax law treats certain trusts (public unit trusts and public trading trusts) and corporate limited partnerships as companies for income tax purposes. These entities will be regarded as companies for the purposes of the DTA. [Sub-paragraph 1(e)]
Definition of international traffic
1.13 In this DTA this term is of relevance only for alienation of ships and aircraft (Article 8.3) and wages of crew (Article 15.3). [Sub-paragraph1(i)]
1.14 For the purposes of the DTA, the term tax does not include any amount of penalty or interest imposed under the respective domestic law of the 2 countries. This is important in determining a taxpayer's entitlement to a foreign tax credit under the double tax relief provisions of Article 23 of the DTA. [Sub-paragraph 1(k)]
1.15 In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation law of South Africa with respect to income that South Africa is entitled to tax under the DTA, would not be a creditable tax for the purposes of Article 23.1 of the DTA. This is in keeping with the meaning of foreign tax in the ITAA 1936 (subsection 6AB(2) Foreign Income and Foreign Tax). Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign tax credit entitlement under Article 23.1 (pursuant to Division 18 of PartIII of the ITAA 1936 Credits in Respect of Foreign Tax).
Terms not specifically defined
1.16 Where a term is not specifically defined within this DTA, that term (unless used in a context that requires otherwise) is to be taken to have the same interpretative meaning as it has under the domestic law of the country applying the DTA at the time of its application, with the meaning it has under the taxation law of the country having precedence over the meaning it may have under other domestic laws.
1.17 If a term is not defined in the DTA, but has an internationally understood meaning in double tax treaties and a meaning under the domestic law the context would normally require that the international meaning be applied. [Paragraph 2]
1.18 This article sets out the basis by which the residential status of a person is to be determined for the purposes of the DTA. Residential status is one of the criteria for determining each country's taxing rights and is a necessary condition for the provision of relief under the DTA. The concept of resident according to each country's taxation law provides the basic test.
1.19 A person is not a resident of Australia for the purposes of the DTA if that person is liable to tax in Australia in respect only of income from sources in Australia. The provision means that Norfolk Island residents, who are generally subject to Australian tax on Australian source income only, will not be residents of Australia for the purposes of the DTA. Accordingly, South Africa will not have to forgo tax in accordance with the DTA on income derived by residents of Norfolk Island from sources in South Africa (which will not be subject to Australian tax). [Paragraph 1]
1.20 The article also includes a set of tie-breaker rules for determining how residency is to be allocated to one or other of the countries for the purposes of the DTA if a taxpayer whether an individual, a company or other entity qualifies as a dual resident, i.e. as a resident under the domestic law of both countries.
1.21 The tie-breaker rules for individuals apply certain tests, in a descending hierarchy, for determining the residential status (for the purposes of the DTA) of an individual who is a resident of both countries under their respective domestic laws.
1.22 These rules, in order of application are:
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- if the individual has a permanent home in only one of the countries, the person is deemed to be a resident only of that country for the purposes of the DTA;
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- if the individual has a permanent home available in both countries or in neither, then their residential status takes into account the person's personal or economic relations (including the person's habitual abode) with Australia and South Africa, and the person is deemed to be a resident only of the country for the purposes of the DTA with which they have the closer personal and economic relations.
[Paragraph 2]
1.23 Dual residents remain, however, in relation to each country, a resident for the purposes of their domestic law and subject to its tax as such insofar as the DTA allows.
1.24 In circumstances where the dual resident is a company the DTA provides that, for the purposes of the DTA, the company will be deemed to be a resident for the purposes of the DTA only of the country in which its place of effective management is situated. [Paragraph 3]
Article 5 - Permanent establishment
1.25 Application of various provisions of the DTA (principally Article7 relating to business profits) is dependent upon whether a person who is a resident of one country has a `permanent establishment' in the other, and if so, whether income derived by the person in the other country is attributable or effectively connected with carrying on a business through that `permanent establishment'. The definition of the term `permanent establishment' which this article embodies, corresponds generally with definitions of the term in Australia's more recent DTAs.
Meaning of permanent establishment
1.26 The primary meaning of the term permanent establishment is expressed as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. A `permanent establishment' must comply with the following requirements:
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- there must be a place of business;
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- the place of business must be fixed (both in terms of physical location and in terms of time);
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- the business of the enterprise must be carried on through this fixed place.
[Paragraph 1]
1.27 Other paragraphs of the article elaborate on the meaning of the term by giving examples (by no means intended to be exhaustive) of what may constitute a `permanent establishment' for example:
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- an office;
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- a workshop; or
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- a mine.
As paragraph 2 is subordinate to paragraph 1, the examples listed will only constitute a `permanent establishment' if the primary definition in paragraph 1 is satisfied. [Paragraph 2]
Agricultural, pastoral or forestry activities
1.28 All of Australia's comprehensive DTAs include as a `permanent establishment' an agricultural, pastoral or forestry property . This reflects Australia's policy of retaining taxing rights over exploitation of Australian land for the purposes of primary production. This approach ensures that the arms length profits test provided for in Article 7 ( Business profits ) apply to the determination of profits derived from these activities. This position is also reflected in this DTA. [Sub-paragraph 2(g)]
Building sites or construction, installation or assembly projects
1.29 Also consistent with Australia's DTA practice, sub-paragraph 2(h) of the DTA includes building sites or construction, installation or assembly projects which exist for more than 12 months as examples of a `permanent establishment'. Building sites, construction, installation and assembly projects lasting less than 12 months, which nevertheless meet the requirements of other `permanent establishment' rules will be `permanent establishments'.
1.30 The term `building site or a construction, installation or assembly project' covers constructional activities such as excavating or dredging. The term `building site' can only mean such work as is directly connected with the erection of buildings and similar projects (earth work, masonry, painting, roofing, glazing and plumbing). Planning and supervision are certainly part of the building site if carried out by the construction contractor. However, planning and supervision of work does not represent a building site if carried out by another enterprise (see paragraph 1.35 regarding sub-paragraph 4(a) of Article 5).
Preparatory and auxiliary activities
1.31 Certain activities are deemed not to give rise to a permanent establishment, for example use of facilities or maintenance of a stock of goods solely for storage, display or irregular delivery, or preparatory or auxiliary activities.
1.32 Generally these activities are of a preparatory or auxiliary character and are unlikely to give rise to substantial profits. The necessary economic link between the activities of the enterprise and the country in which the activities are carried on does not exist in these circumstances.
1.33 Unlike the OECD Model Tax Convention on Capital and Income (the OECD Model), which provides that the listed activities are deemed not to constitute a `permanent establishment', the DTA incorporates the Australian DTA approach of stating that an enterprise will not be deemed to have a `permanent establishment' merely by reason of such activities. This is to prevent the situation where enterprises structure their business so that most their activities fall within the exceptions when viewed as a whole the activities ought to be regarded as a `permanent establishment'.
1.34 Another feature consistent with Australia's DTA practice is that sub-paragraph 4(f) of the OECD Model dealing with combinations of the activities in sub-paragraphs (a) to (e) is not included. Australia does not consider that an enterprise undertaking multiple functions of the kind indicated in sub-paragraphs (a) to (e) could reasonably be regarded as only engaged in preparatory or auxiliary activities. [Paragraph 3]
Deemed permanent establishments
1.35 Supervisory activities carried on for more than 12 months in connection with a building site or a construction, installation or assembly project are deemed to constitute a permanent establishment. Australia has a reservation on Article 5 of the OECD Model reflecting this position. The rationale for inclusion of this provision is the prevalence of the use in Australia of imported expertise in relation to supervision of such projects. [Sub-paragraph 4(a)]
1.36 Under sub-paragraph 4(b) an enterprise is deemed to have a `permanent establishment' in a State if substantial equipment is being used in that State by, for or under contract with the enterprise.
1.37 This position is reflected in Australia's reservation to the OECD Model and one effect is to further protect Australia's right to tax income from natural resources. Australia's experience is that the `permanent establishment' provision in the OECD Model may be inadequate to deal with high value activities involved in the development of natural resources, particularly in offshore regions.
1.38 Some examples of substantial equipment would include:
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- large industrial earth moving equipment or construction equipment used in road building, dam building or powerhouse construction etc.;
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- manufacturing or processing equipment used in a factory;
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- oil and drilling rigs, platforms and other structures used in the petroleum/mining industry; and
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- grain harvesters and other large agricultural machinery.
1.39 For the purposes of the application of Article 7.1 the enterprise is deemed to carry on business through the substantial equipment permanent establishment. [Sub-paragraph 4(b)]
1.40 The inclusion of sub-paragraph 4(c) is consistent with another of Australia's reservations to the OECD Model. It deals with so-called cost-toll situations, under which a mineral plant refines minerals at cost, so that the plant operations produce no Australian profits. Title to the refined product remains with the mining consortium and profits on sale are realised mainly outside of Australia.
1.41 Sub-paragraph 4(c) deems such a plant to be a `permanent establishment' because the manufacturing or processing activity (which gives the processed minerals their real value) is conducted in Australia, and therefore Australia should have taxing rights over business profits arising from the sale of the processed minerals to the extent that they are attributable to the processing activity carried on in Australia. This sub-paragraph prevents an enterprise which carries on very substantial manufacturing or processing activities in a country through an intermediary from claiming that it does not have a permanent establishment in that country.
1.42 The inclusion of this sub-paragraph is insisted upon by Australia in its DTAs and is consistent with Australia's policy of retaining taxing rights over exploitation of its mineral resources. [Sub-paragraph 4(c)]
1.43 Paragraph 5 reflects Australia's DTA practice in relation to a person who acts on behalf of an enterprise of another country of deeming that person to constitute a `permanent establishment' if that person has and habitually exercises an authority to conclude contracts on behalf of the enterprise. This will apply unless the agent's activities are limited to the purchase of goods or merchandise for the enterprise, or the agent is an `independent agent' to whom paragraph 6 applies.
1.44 Business carried on through an independent agent does not, of itself, constitute a `permanent establishment', provided that the independent agent is acting in the ordinary course of that agent's business as such an agent. [Paragraph 6]
1.45 Generally a subsidiary company will not be a `permanent establishment' of its parent company. A subsidiary, being a separate legal entity, would not usually be carrying on the business of the parent company but rather its own business activities. However a subsidiary company gives rise to a `permanent establishment' if the subsidiary permits the parent company to operate from its premises such that the tests in paragraph 1 are met, or acts as an agent such that a dependent agent `permanent establishment' is constituted. [Paragraph 7]
1.46 The principles set down in this article are also to be applied in determining whether a permanent establishment exists in a third country or whether a third country has a permanent establishment in Australia (or in South Africa) when applying the source rule contained in:
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- paragraph 5 of Article 11 ( Interest ); and
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- paragraph 5 of Article 12 ( Royalties ).
[Paragraph 8]
Article 6 - Income from real (immovable) property
Where income from real property is taxable
1.47 This article provides that the income of a resident of one country from real property situated in the other country may be taxed by the other country. Thus income from real property in Australia will be subject to Australian tax laws. [Paragraph 1]
1.48 Income from real property is effectively defined as extending, in the case of Australia , to:
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- the direct use, letting or use in any other form of real property, a lease of land and any other interest in or over land (including exploration and mining rights); and
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- royalties and other payments relating to the exploration for or exploitation of mines or quarries or other natural resources or rights in relation thereto.
1.49 In the case of South Africa , real property is generally defined as immovable property and includes:
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- property accessory to immovable property;
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- rights to which the general law in respect of landed property apply;
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- usufruct of immovable property; and
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- rights to variable or fixed payments as consideration for the exploitation of or the right to explore for or exploit, or in respect of exploitation of, mineral, oil or gas deposits, and other natural resources.
[Paragraphs 2 and 4]
1.50 Under Australian law the situation of an interest in land, such as a lease, is not necessarily where the underlying property is situated there may not necessarily be a situs. Paragraph 3 puts the situation of the interest or right beyond doubt. [Paragraph 3]
Real property of an enterprise and of persons performing independent personal services
1.51 The operation of this article extends to income derived from the use or exploitation of real property of an enterprise and income derived from real property that is used for the performance of independent personal services.
1.52 Accordingly, application of this article (when read with Articles7 and 14) to such income ensures that the country in which the real property is situated may impose tax on the income derived from that property by:
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- an enterprise of the other country; or
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- an independent professional person resident in that other country;
irrespective of whether or not that income is attributable to a `permanent establishment' of such an enterprise, or `fixed base' of such a person, situated in the firstmentioned country. [Paragraph 5]
1.53 This article is concerned with the taxation of business profits derived by an enterprise that is a resident of one country from sources in the other country.
1.54 The taxing of these profits depends on whether they are attributable to the carrying on of a business through a `permanent establishment' in the other country. If a resident of one country carries on business through a `permanent establishment' (as defined in Article5) in the other country, the country in which the `permanent establishment' is situated may tax the profits of the enterprise that are attributable to that permanent establishment.
1.55 If a taxpayer who is a resident of one country carries on business through an enterprise that does not have a `permanent establishment' in the other country, the general principle of the article is that the taxpayer will not be liable to tax in the other country on the business profits of that enterprise (but see the explanation at paragraphs 1.59 and 1.60 concerning paragraph 6 of the article). [Paragraph 1]
Determination of business profits
1.56 Profits of a `permanent establishment' are to be determined for the purposes of the article on the basis of arm's length dealing. The provisions in the DTA correspond to international practice and the comparable provisions in Australia's other DTAs. [Paragraphs 2 and 3]
1.57 No profits are to be attributed to a `permanent establishment' merely because it purchases goods or merchandise for the enterprise. Accordingly, profits of a permanent establishment derived from business activities carried on in its own right will not be increased by adding to them any profits attributable to the purchasing activities undertaken for the head office. It follows, of course, that any expenses incurred by the permanent establishment in respect of those purchasing activities will not be deductible in determining the taxable profits of the permanent establishment. [Paragraph 4]
1.58 This article allows for the application of the domestic law of the country in which the profits are sourced (e.g. Australia's Division 13 of the ITAA1936) where, due to inadequate information, the correct amount of profits attributable on the arm's length principle basis to a `permanent establishment' cannot be determined or can only be ascertained with extreme difficulty. [Paragraph 5]
Income or gains dealt with under other articles
1.59 Where income or gains are otherwise specifically dealt with under other articles of the Agreement the effect of those particular articles is not overridden by this article.
1.60 This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other articles of the DTA (e.g.shipping, dividends, interest, royalties and alienation of property) are to be treated in accordance with the terms of those articles and as outside the scope of this article (except where otherwise provided e.g. by Article 10.5 where the income is effectively connected to a permanent establishment). [Paragraph6]
1.61 Each country has the right to continue to apply any special provisions in its domestic law relating to the taxation of income from insurance. However, if the relevant law in force in either country at the date of signature of the DTA is varied (otherwise than in minor respects so as not to affect its general character), the countries must consult with each other with a view to agreeing to any amendment of this paragraph that may be appropriate. An effect of this paragraph is to preserve, in the case of Australia, the application of Division 15 of Part III of the ITAA 1936 (Insurance with Non-residents). [Paragraph 7]
1.62 The principles of this article will apply to business profits derived by a resident of one of the States (directly or through one or more interposed trust estates) as a beneficiary of a trust estate. Due to differences in the domestic law definitions, in the case of South Africa the DTA defines `trust estate' to mean a `trust'. [Paragraph 8]
Example 1.1
In accordance with this article, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust estate that is treated as a company for tax purposes) from the carrying on of a business through a permanent establishment in Australia, to which a resident of South Africa is beneficially entitled under the trust estate. Paragraph 8 ensures that such business profits will be subject to tax in Australia where, in accordance with the principles set out in Article 5, the trustee of the relevant trust estate has a permanent establishment in Australia in relation to that business.
Article 8 - Ships and aircraft
1.63 The main effect of this article is that the right to tax profits from the operation of ships or aircraft in international traffic, including profits derived from participation in a pool service or other profit sharing arrangement, is generally reserved to the country in which the operator is a resident for tax purposes. [Paragraph 1]
1.64 However, the article reflects Australian treaty policy to reserve to the other country the right to tax profits from internal traffic, profits from other coastal and continental shelf activities including non transport shipping and aircraft activities within its own waters.
1.65 Thus, the term transport is not used in the title of the article, as the article applies to survey ships, oil drilling ships etc. where transport is not necessarily involved. [Paragraph 2]
1.66 Paragraph 3 extends the application of the article to profits derived from the lease of ships or aircraft on a bareboat basis, or of containers and related equipment, where the lease of such ships or aircraft, or the containers and related equipment, is incidental to the international operation of the ships or aircraft. The article only extends to such profits, however, where the lessee operates the ships or aircraft in international traffic or the containers and related equipment are so used. [Paragraph 3]
1.67 By reason of the definition of `Contracting State' contained in Article 3 and the terms of paragraph 4 of this article, any shipments by sea or air from a place in Australia (including the continental shelf areas and external territories) for discharge at another place in or for return to that place in Australia, is to be treated as forming part of internal traffic. [Paragraph 4]
Example 1.2
Profits derived from a shipment of goods taken on board (during the course of an international voyage between a place in South Africa and Sydney) at Perth for delivery to Melbourne, would be profits from internal traffic. As such, 5% of the amount paid in respect of the internal traffic carriage would be deemed to be taxable income of the operator for Australian tax purposes pursuant to Division 12 of Part III of the ITAA1936.
Article 9 - Associated enterprises
1.68 This article deals with associated enterprises (parent and subsidiary companies and companies under common control). It authorises the re-allocation of profits between related enterprises in Australia and South Africa on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between independent enterprises dealing wholly at arm's length with one another.
1.69 The article would not generally authorise the rewriting of accounts of associated enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place on normal, open market commercial terms. [Paragraph 1]
1.70 Each country retains the right to apply its domestic law relating to the determination of the tax liability of a person (e.g. Australia's Division 13 of the ITAA 1936) to its own enterprises, provided that such provisions are applied, so far as it is practicable to do so, consistently with the principles of the article. [Paragraph 2]
1.71 Australia's domestic law provisions relating to international profit shifting arrangements were revised in 1981 in order to deal more comprehensively with arrangements under which profits are shifted out of Australia, whether by transfer pricing or other means. The broad scheme of the revised provisions is to impose arm's length standards in relation to international dealings, but where the Commissioner of Taxation (the Commissioner) cannot ascertain the arm's length consideration, it is deemed to be such amount as the Commissioner determines. Paragraph 2 is designed to preserve the application of those domestic law provisions.
1.72 Where a re-allocation of profits is made (either under this article or, by virtue of paragraph 2, under domestic law) so that the profits of an enterprise of one country are adjusted upwards, a form of double taxation would arise if the profits so re-allocated continued to be subject to tax in the hands of an associated enterprise in the other country. To avoid this result, the other country is required to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation.
1.73 It would generally be necessary for the affected enterprise to apply to the competent authority of the country not initiating the re-allocation of profits for an appropriate compensatory adjustment to reflect the re-allocation of profits made by the other treaty partner country. If necessary, the competent authorities of Australia and South Africa will consult with each other to determine the appropriate adjustment. [Paragraph 3]
1.74 This article broadly allows both countries to tax dividends flowing between them but in general limits the rate of tax that the country of source may impose on dividends payable by companies that are residents of that country under its domestic law to beneficial owners resident in the other country. [Paragraph 1]
1.75 Under this article, Australia will reduce its rate of withholding tax on unfranked dividends paid by Australian resident companies to residents of South Africa to 15% of the gross amount of the dividends. But for this provision, the normal domestic law rate of 30% would have applied.
1.76 The DTA provides that Australia will not tax franked dividends flowing to South African parent companies (with a voting power interest of at least 10% in the subsidiary). Reciprocally, South Africa will not tax dividends fully taxed at the corporate level.
1.77 In other cases the DTA provides that South Africa will generally limit its tax to 15% of the dividend.
1.78 The proviso allows some flexibility if there is a change to either country's general approach to dividend withholding taxes, such as a change to domestic law arrangements for franked dividends flowing overseas. In such a case the 2 countries are obliged to consult on the matter. [Paragraphs 2 and 3]
1.79 The limitation on the tax of the country in which the dividend is sourced does not apply to dividends derived by a resident of the other country who has a `permanent establishment' or `fixed base' in the country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that `permanent establishment' or `fixed base'.
1.80 Where the dividends are so effectively connected, they are to be treated as `business profits' or `income from independent personal services' and therefore subject to the source country's tax (in accordance with the provisions of Article 7 or Article 14, as the case may be). In practice, however, under changes made to Australia's domestic law with the introduction from 1 July 1987 of a full imputation system of company taxation, such dividends to the extent that they are franked dividends will remain exempt from Australian tax, while unfranked dividends will be subject to withholding tax at the rate of 15% instead of being taxed by assessment. [Paragraph 5]
1.81 The extra-territorial application by either country of taxing rights over dividend income is precluded by providing, broadly, that one country (the first country) will not tax dividends paid by a company resident solely in the other country, unless:
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- the person deriving the dividends is a resident of the first country; or
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- the holding giving rise to the dividends is effectively connected with a `permanent establishment' or `fixed base' in the first country; or
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- the first country does not impose a branch profits tax in excess of the rate of company income tax (in the case of Australia) or normal company tax (in the case of South Africa) and the dividends are paid out of profits attributable to one or more permanent establishments which the company has in that first country. Where only this third exception applies, any tax so imposed is limited to a maximum of 5% of the gross amount of dividends. This third exception is designed to effectively mirror the 5% limitation imposed by Article 10.7 on a country's branch profits tax (see paragraphs 1.84 and 1.85).
1.82 Currently, the third exception only applies to Australia (as South Africa imposes a branch profits tax at a rate exceeding the normal company tax rate) and in practice, it will operate to limit the rate of tax imposed under paragraph 44(1)(b) of the ITAA 1936.
1.83 However, the exemption is specified as not applying where the dividend paying company is a dual resident. This proviso ensures that Australia retains the right to tax dividends paid to a person resident outside of both countries by a company which is a resident of Australia under its domestic law notwithstanding that the company is deemed to be a resident of South Africa for the purposes of the agreement pursuant to the dual resident tie-breaker test for companies contained in Article 4. [Paragraph 6]
1.84 Paragraph 7 recognises each country's right to impose a branch profits tax on the profits of permanent establishments in their country but limits the rate of tax to a rate not exceeding more than 5 percentage points of each country's company tax rate.
1.85 As Australia does not currently impose a branch profits tax, the paragraph is presently only applicable to South Africa. There will be no immediate effect for South Africa whilst its normal company tax rate remains at 35% and its branch profits tax rate is 40%. The paragraph operates to ensure that the branch profits tax will continue to only exceed the company tax rate by a maximum of 5%. [Paragraph 7]
1.86 This article provides for interest income to be taxed by both countries but requires the country of source to generally limit its tax to 10% of the gross amount of the interest where a resident of the other country is the beneficial owner of the interest. [Paragraphs 1 and 2]
1. The limitation of the source country tax rate to 10% accords with the general rate of interest withholding tax applicable under Australia's domestic law.
1.88 The term interest is defined for the purposes of the article in a way that, in relation to Australia, encompasses items of income such as discounts on securities and payments under certain hire purchase agreements which are treated for Australian tax purposes as interest or amounts in the nature of interest. [Paragraph 3]
Interest effectively treated as business profits
1.89 Interest derived by a resident of one country which is effectively connected to a `permanent establishment' or `fixed base' of that person in the other country, will form part of the business profits of that `permanent establishment' or `fixed base' and be subject to the provisions of Article 7 (Business profits) or Article 14 (Independent personal services). Accordingly, the 10% tax rate limitation does not apply to such interest in the country in which the interest is sourced. [Paragraph 4]
1.90 Interest source rules are set out in the article. Those rules operate to allow Australia to tax interest to which a resident of South Africa is beneficially entitled where the interest is paid by a resident of Australia. Australia may also tax interest paid by a resident of South Africa to which another South African resident is beneficially entitled if it is an expense incurred by the payer of the interest in carrying on a business in Australia through a `permanent establishment'. However, consistent with Australia's interest withholding tax provisions, an Australian source is not deemed in respect of interest that is an expense incurred by an Australian resident in carrying on a business through a `permanent establishment' outside Australia. [Paragraph 5]
1.91 This article also contains a general safeguard against payments of excessive interest in cases where there is a special relationship between the persons associated with a loan transaction by restricting the 10% tax rate limitation in the country in which the interest is sourced to the amount of the interest which it might be expected would have been agreed upon if the parties to the loan agreement were dealing with one another at arm's length. Any excess part of the interest remains taxable according to the domestic law of each country but subject to the other articles of this DTA. [Paragraph 6]
1.92 The article in general allows both countries to tax royalty flows but limits the tax of the country of source to 10% of the gross amount of royalties paid or credited to residents of the other country beneficially entitled to the royalties. [Paragraphs 1 and 2]
1.93 The 10% rate limitation is not to apply to natural resource royalties, which, in accordance with Article 6, are to remain taxable in the country of source without limitation of the tax that may be imposed.
1.94 In the absence of a DTA, Australia's taxes royalties paid to nonresidents at 30% of the gross royalty.
1.95 The definition of royalties in the DTA reflects the definition in Australia's domestic income tax law. The definition encompasses payments for the use of, or the right to use industrial, commercial or scientific equipment. It also includes payments for the supply of scientific, technical, industrial or commercial know-how but not payments for services rendered. Payments made for the right to copy or adapt computer software in a manner which would, without the permission of the copyright owner, constitute an infringement of copyright, also constitute royalty payments. [Paragraph 3]
Payments for the supply of know-how versus payments for services rendered
1.96 It is considered that a German Supreme Court decision (Bundesfinanzhof (No. IR 44/67) of 16 December 1970) provides a definitive test to distinguish between a know-how contract and a contract for services. A know-how contract, it was held, involved the supply by a person of his or her know-how to the paying entity (e.g. teaching a personal expertise), whereas in a contract for services, although it may involve the use of know-how, that know-how is applied by the person in the performance of his or her services.
1.97 Payments for design, engineering or construction of plant or building, feasibility studies, component design and engineering services may generally be regarded as being in respect of a contract for services, unless there is some provision in the contract for imparting techniques and skills to the buyer .
1.98 In cases where both know-how and services are supplied under the same contract, if the contract does not separately provide for payments in respect of know-how and services, an apportionment of the 2 elements of the contract may be possible.
1.99 Payments for services rendered are to be treated under Article 7 ( Business profits ) or Article 15 ( Independent personal services ).
1.100 Consistently with Australian tax treaty practice, sub-paragraph (h) expressly treats as a royalty, amounts paid or credited in respect of forbearance to grant to third persons, rights to use property covered by the royalty article. This is designed to prevent arrangements along the lines of those contained in
Aktiebolaget Volvo v. Federal Commissioner of Taxation
(1978)
8 ATR 747
;
78 ATC 4316
, where instead of amounts being payable for the exclusive right to use the property they were made for the undertaking that the right to use the property will not be granted to anyone else, not being subject to tax as a royalty payment under the terms of Article 12.
[Sub-paragraph 3(h)]
Other royalties effectively treated as business profits
1.101 As in the case of interest income, it is specified that the 10% tax rate limitation is not to apply to royalties effectively connected with a `permanent establishment' or `fixed base' in the country in which the income is sourced such income being subject to full taxation under either Article7 or Article14 as the case may be. [Paragraph 4]
1.102 The royalties source rule provided for in the DTA effectively corresponds in the case of Australia with the deemed source rule contained in section6C (Source of royalty income derived by a nonresident) of the ITAA1936 for royalties paid to nonresidents of Australia. It broadly mirrors the source rule for interest income contained in paragraph 5 of Article 11 (Interest). [Paragraph 5]
1.103 If royalties flow between the payer and the person beneficially entitled to the royalties as the result of a special relationship between them, the 10% source country tax rate limitation will apply only to the extent that the royalties are not excessive. Any excess part of the royalty remains taxable according to the domestic law of each country but subject to the other articles of this DTA.
1.104 A special relationship is generally taken to exist where royalties are paid to an individual by an associate or legal person who is directly or indirectly controlled by an individual or associated legal person or to a subordinate, or a group having a common interest with them. It covers those relationships that exist by way of blood or marriage and in general any community of interest. [Paragraph 6]
Article 13 - Alienation of property
1.105 This article allocates between the respective countries taxing rights in relation to income, profits or gains arising from the alienation of real (immovable) property (as defined in Article 6) and other items of property.
1.106 Income, profits or gains from the alienation of real property may be taxed by the country in which the property is situated. [Paragraph 1]
1.107 Paragraph 2 deals with income, profits or gains arising from the alienation of property (other than real property covered by paragraph 1) forming part of the business assets of a permanent establishment of an enterprise or pertaining to a fixed base used for performing independent personal services. It also applies where the permanent establishment itself (alone or with the whole enterprise) or the fixed base is alienated. Such income or gains may be taxed in the country in which the permanent establishment or fixed base is situated. This corresponds to the rules for business profits and for income from independent personal services contained in Articles 7 and 14 respectively. [Paragraph 2]
1.108 Income, profits or gains from the disposal of ships or aircraft operated in international traffic, or associated property (other than real property covered by paragraph 1) are taxable only in the country of resident of the operator of the ships or aircraft. This rule corresponds to the operation of Article 8 in relation to profits from the operation of ships or aircraft in international traffic.
Shares and other interests in land-rich entities
1.109 Paragraph 4 extends the coverage of this article to situations involving the alienation of shares or other interests in companies, and other entities, whose assets consist principally of real property (as defined in Article6) which is situated in the other country (again, in the terms of Article 6). Such income or gains may thus be taxed by the country in which the real property is situated. This paragraph complements paragraph 1 of this article and is designed to cover arrangements involving the effective alienation of incorporated real property, or like arrangements.
1.110 This is to be the case whether the real property is held directly or indirectly through a chain of interposed entities. While not limited to chains of companies, or even chains of entities only some of which are companies, the example of chains of companies is used to make clear that the corporate veil should be lifted in examining direct or indirect ownership.
1.111 This provision responds to the tax planning opportunities exposed by the decision of the Full Federal Court in the
Commissioner of Taxation v. Lamesa Holdings BV
(1997)
77 FCR 597
. It is designed to protect Australian taxing rights over income, profits or gains on the alienation or effective alienation of Australian real property (as defined) despite the presence of interposed bodies corporate or other entities. The South African DTA is the first new DTA to include such revised provisions.
[Paragraph 4]
1.112 The article contains a sweep-up provision in relation to capital gains which enables each country to tax, according to its domestic law, any gains of a capital nature derived by its own residents or by a resident of the other country from the alienation of any property not specified in the preceding paragraphs of the article. It thus preserves the application of Australia's domestic law relating to the taxation of capital gains in relation to the alienation of such property. [Paragraph 5]
1.113 The term real property is to be defined for the purposes of this article as it is under Article 6. Where the property is situated is determined in accordance with paragraph3 of Article 6. [Paragraphs 6 and 7]
1.114 As indicated earlier, income, profits or gains from the alienation of property that fall within the scope of this article are not affected by the `business profits' provisions of Article 7. In the event that the operation of this article should result in an item of income or gain being subjected to tax in both countries, the country in which the person deriving the income or gain is a resident (as determined in accordance with Article 4) would be obliged by Article 22 ( Source of income ) and Article 23 ( Methods of elimination of double taxation ) to provide double tax relief for the tax imposed by the other country.
Article 14 - Independent personal services
1.115 Under this article income derived by an individual in respect of professional services or other independent activities will be subject to tax in the country in which the services or activities are performed if either:
- •
- the recipient has a fixed base regularly available in that other country for the purposes of performing his or her activities; or
- •
- the individual is present in that country for a period or periods exceeding in the aggregate 183 days in any 12month period commencing or ending in a year of income or year of assessment of the visited country.
1.116 If either of these conditions is met, the country in which the services or activities are performed will be able to tax so much of the income as is attributable to the activities performed during such period or periods or that are exercised from that fixed base. [Paragraph 1]
1.117 If the above tests are not met, the income will be taxed only in the country of residence of the recipient.
1.118 Remuneration derived as an employee and income derived by public entertainers are the subjects of other articles of the DTA and are not covered by this article.
Article 15 - Dependent personal services
1.119 This article generally provides the basis upon which the remuneration of visiting employees is to be taxed. The provisions of this article do not apply, however, in respect of income that is dealt with separately in:
- •
- Article 16 ( Directors' fees );
- •
- Article 18 ( Pensions and annuities ); and
- •
- Article 19 ( Government service );
of the DTA.
1.120 Generally, salaries, wages and similar remuneration derived by a resident of one country from an employment exercised in the other country will be liable to tax in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where visits of only a short-term nature are involved. [Paragraph 1]
1.121 The conditions for this exemption are that:
- •
- the visit or visits do not exceed, in the aggregate, 183 days in any 12 month period commencing or ending in the year of income or year of assessment concerned of the visited country;
- •
- the remuneration is paid by, or on behalf of, an employer who is not a resident of the country being visited; and
- •
- the remuneration is not deductible in determining taxable profits of a `permanent establishment' or a `fixed base' which the employer has in the country being visited.
1.122 Where all of these conditions are met, the remuneration so derived will be liable to tax only in the country of residence of the recipient. [Paragraph 2]
1.123 Where a short-term visit exemption is not applicable, remuneration derived by a resident of Australia from employment in South Africa may be taxable in South Africa. However, the article does not allocate sole taxing rights to South Africa in that situation.
1.124 Accordingly, Australia would also be entitled to tax that remuneration in accordance with the general rule of the Income Tax Assessment Act 1997 that a resident of Australia remains subject to tax on worldwide income. In common, however, with other situations where the DTA allows both countries to tax a category of income, Australia would be required in this situation (pursuant to Article 23), as the country in which the income recipient is resident for tax purposes, to relieve the double taxation that would otherwise occur.
1.125 Although that article provides for the double tax relief to be provided by Australia to be in the form of the grant of a credit against the Australian tax for the South African tax paid, the exemption with progression method of providing double tax relief in relation to employment income derived in the situation described would normally be applicable in practice pursuant to the foreign service income provisions of section 23AG of the ITAA1936. This method takes into account the foreign earnings when calculating the Australian tax on other assessable income the person has derived.
Employment on a ship or aircraft
1.126 Income from an employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country of residence of the operator. [Paragraph 3]
1.127 Under this article, remuneration derived by a resident of one country in the capacity of a director of a company which is a resident of the other country may be taxed in the latter country.
Article 17 - Entertainers and sportspersons
1.128 By this article, income derived by visiting entertainers and sportspersons from their personal activities as such may generally be taxed in the country in which the activities are exercised, irrespective of the duration of the visit. The words `income derived by entertainers...from their personal activities as such...' extend the application of this article to income generated from promotional and associated kinds of activities engaged in by the entertainer or sportsperson while present in the visited country. [Paragraph 1]
1.129 There is a safeguard provision included in this article which is designed to ensure that income in respect of personal activities exercised by an entertainer or sportsperson, whether received:
- •
- by the entertainer or sportsperson; or
- •
- by another person, for example, a separate enterprise which formally provides the entertainer's or sportsperson's services;
is taxed in the country in which the entertainer or sportsperson performs, whether or not that other person has a `permanent establishment' or `fixed base' in that country. [Paragraph 2]
Article 18 - Pensions and annuities
1.130 Pensions and annuities (excluding government service pensions dealt with under Article 19.2) are to be taxed only in the country of residence of the recipient provided that such pensions and annuities are included in taxable income in that country. [Paragraph 1]
1.131 Australia has a reservation to the OECD Model which states that Australia will propose in negotiations that all pensions be taxable only in the country of residence of the recipient. However, as pursuant to its territorial system of taxation, South Africa only taxes South African sourced pensions under its domestic law. Australia's usual approach would have resulted in Australian pensions paid to South African residents not being taxed in either country.
1.132 The wording of this article therefore ensures that the country of residence generally has sole taxing rights over such pensions, but also ensures that where the country of residence does not include such pensions and annuities in taxable income (as is the case for Australian pensions paid to South African residents), the DTA does not prevent the source (paying) country from taxing such pensions and annuities. Australia can therefore continue to exercise its source country taxing rights over Australian pensions paid to South African residents until such time as South Africa changes its domestic law to generally include foreign pension payments in taxable income.
Annuities purchased by way of a lump sum payment
1.133 An annuity paid to a former resident of either country which was purchased by way of a lump sum payment from an insurer in that country may be taxed by both countries, with the country of residence of the recipient providing double tax relief. This accords with South African domestic law and is designed to avoid the situation where South African residents can, by purchasing an annuity, effectively avoid South African limitations on the export of South African capital and escape the South African tax net on the resulting income. Under the DTA, Australia is also able to tax relevant purchased annuities paid to former Australian residents who have migrated to South Africa.
1.134 It is intended that the operation of this article extends to pension and annuity payments made to dependants, for example a widow or children, of the person in respect of whom the pension or annuity entitlement accrued where, upon that person's death, such entitlement has passed to that person's dependants.
Article 19 - Government service
1.135 Salary and wage type income, other than a pension or annuity, paid to an individual for services rendered to a government (including a State or local authority) of one the countries, is to be taxed only in that country. However, such remuneration is to be taxable only in the other country if:
- •
- the services are rendered in that other country;
- •
- the recipient is a resident of that other country for the purposes of that country's tax; and
- •
- either the recipient is a citizen or national of that other country or did not become a resident of that other country solely for the purpose of rendering the services.
[Paragraph 1]
1.137 Pensions paid by, or out of funds created by, one of the countries (or a political subdivision or local authority of that country) for services rendered to that country will be taxable only in that country. [Sub-paragraph2(a)]
1. However, if the recipient is a resident of and a citizen or national of the other country, the pension will be taxable in that other country provided the services in respect of which that pension is paid were rendered in that country. Thus an Australian government service pension paid to a South African resident who is also a South African national will only be taxable in South Africa, if the services which gave rise to that pension were rendered in South Africa. [Sub-paragraph 2(b)]
1.138 Remuneration or pensions for services rendered in connection with a trade or business carried on by a government or authority referred to in paragraphs 1 or 2 is excluded from the scope of this article. This remuneration will remain subject to the provisions of Article 15 ( Dependent personal services ), Article 16 ( Directors' fees ), Article 17 ( Entertainers and sportspersons ) and Article 18 ( Pensions and annuities ) as the case may be. [Paragraph 3]
1.139 This article applies to students temporarily present in one of the countries solely for the purpose of their education if the students are, or immediately before the visit were, resident in the other country. In these circumstances, the students will be exempt from tax in the country visited for payments received from abroad for their maintenance or education (even though they may qualify as a resident of the country visited during the period of their visit).
1.140 The exemption from tax provided by the visited country is treated as extending to maintenance payments received by the student that are made for maintenance of dependent family members who have accompanied the student to the visited country.
1.141 Where however, a student from South Africa who is visiting Australia solely for educational purposes undertakes:
- •
- some part time work with a local employer; or
- •
- during a semester break undertakes work with a local employer;
the income earned by that student as a consequence of that employment may, as provided for in Article 15, be subject to tax in Australia. In this situation the payments received from abroad for the student's maintenance or education will not however be taken into account in determining the tax payable on the employment income that is subject to tax in Australia.
1.142 This article provides rules for the allocation between the 2 countries of taxing rights to items of income not dealt with in the preceding articles of the DTA. The scope of the article is not confined to such items of income arising in one of the countries it extends also to income from sources in a third country.
1.143 Broadly, such income derived by a resident of one country is to be taxed only in his or her country of residence unless it is derived from sources in the other country, in which case the income may also be taxed in the other country. Where this occurs, the country of residence of the recipient of the income would be obliged by Article 23 ( Methods of elimination of double taxation ) to provide double taxation relief. [Paragraphs 1 and 3]
1. This article does not apply to income (other than income from real property as defined in Article 6(2)) where the right or property in respect of which the income is paid is effectively connected with a permanent establishment or `fixed base' which a resident of one country has in the other country. In such a case, Article 7 ( Business profits ) or Article 14 ( Independent personal services ), as the case may be, will apply. [Paragraph 2]
1.145 This article effectively contains sweep-up provisions in relation to items of income not dealt with in other articles of the DTA and paragraph 5 of Article 13 effectively sweeps-up capital gains not dealt with in the other paragraphs of that article.
1.146 This article effectively deems income, profits or gains derived by a resident of one country which, under the DTA, may be taxed in the other country to have a source in the latter country for the purposes of the DTA and the domestic income tax law of the respective countries. It therefore avoids any difficulties arising under domestic law source rules in respect of, for example, the exercise by Australia of the taxing rights allocated to Australia by the DTA over income derived by residents of South Africa. [Paragraph 1]
1.147 The article is also designed to ensure that where an item of income, profits or gains is taxable in both countries, double taxation relief will be given by the income recipient's country of residence (pursuant to Article 23) for tax levied by the other country as prescribed under the DTA. In this way, income derived by a resident of Australia, which is taxable by South Africa under the DTA, will be treated as being foreign income for the purposes of the ITAA 1936, including the foreign tax credit provisions of that Act. [Paragraph 2]
Article 23 - Methods of elimination of double taxation
1.148 Double taxation does not arise in respect of income flowing between the 2 countries where the terms of the DTA provide either:
- •
- for the income to be taxed only in one country; or
- •
- where the domestic taxation law of one of the countries frees the income from its tax.
1.149 It is necessary, however, to prescribe a method for relieving double taxation for other classes of income which, under the DTA, remain subject to tax in both countries. In accordance with international practice, Australia's DTAs provide for double tax relief to be provided by the country of residence of the taxpayer by way of a credit basis of relief against its tax for the tax of the country of source of the income. This article also reflects that approach.
1.150 Australia's general foreign tax credit system, together with the terms of this article and of the DTA generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income arising from sources in South Africa. As in the case of Australia's other DTAs, the source of income rules specified by Article 22 for the purposes of the DTA will also apply for those purposes.
1.151 Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraphs 1 and 2 of this article by application of the general foreign tax credit provisions (Division 18 of Part III) of the ITAA 1936. This will include the allowance of underlying tax credit relief in respect of dividends paid by South African resident companies that are related to Australian resident companies, including for unlimited tiers of related companies, in accordance with the relevant provisions of the ITAA 1936.
1.152 Notwithstanding the credit basis of relief provided for by paragraphs 1 and 2 of this article, the exemption with progression method of relief will be applicable, as appropriate, in relation to salary and wages and like remuneration derived by a resident of Australia during a continuous period of `foreign service' (as defined in subsection 23AG(7) of the ITAA1936) in South Africa. Other foreign source income exemptions in Australia's domestic law will also continue to be applicable in respect of relevant South African source income. [Paragraphs 1 and 2]
1.153 South Africa is required to allow its residents a deduction for Australian tax paid where they have derived income, profits or gains which are taxed in Australia and which are also subject to tax in South Africa. The deduction is of an amount equal to the Australian tax paid and is made against the South African tax payable on the income, subject to that deduction not exceeding an amount which bears to the total South African tax payable the same ratio as the income concerned bears to the total income. [Paragraph 3]
Article 24 - Mutual agreement procedure
1.154 One of the purposes of this article is to provide for consultation between the `competent authorities' of the 2 countries with a view to reaching a satisfactory solution where a person is able to demonstrate actual or potential imposition of taxation contrary to the provisions of the DTA.
1.155 A person wishing to use this procedure must present a case to the competent authority of the country of which the person is a resident within 3 years of the first notification of the action which the taxpayer considers gives rise to taxation not in accordance with the DTA. [Paragraph 1]
1.156 If, on consideration by the competent authorities, a solution is reached, it may be implemented irrespective of any time limits imposed by domestic tax law of the relevant country. [Paragraph 2]
1.157 The article also authorises consultation between the competent authorities of the 2 countries for the purpose of resolving any difficulties regarding the interpretation or application of the DTA and to give effect to it. [Paragraphs 3 and 4]
General Agreement on Trade in Services resolution process
1.158 Paragraph 3 of Article XXII of the World Trade Organization (WTO) General Agreement on Trade in Services (GATS) provides that a disputed measure that falls within the scope of an `international agreement relating to the avoidance of double taxation' may not be resolved under the dispute resolution mechanisms provided by Articles XXII and XXIII of the GATS.
1.159 If there is a dispute as to whether a measure actually falls within the scope of a tax agreement, however, either country may take the matter to the WTO's Council on Trade in Services for referral to binding arbitration.
1.160 Where the tax agreement in question was entered into prior to the entry into force of the GATS (1 January 1995), it requires the consent of both countries before the matter can be brought to the Council on Trade in Services. This restriction does not apply to subsequent agreements.
1.161 Article 24.5 of the DTA will require the consent of both Australia and South Africa before a disputed matter may be brought before the Council on Trade in Services, even though it will enter into force after 1January 1995. This is seen as the most effective way of dealing with such disputes, and avoids difficult issues as to when a disputed issue falls for resolution under the dispute resolution mechanism of the DTA or the GATS.
1.162 The provision is based in all essential respects on an OECD Model Commentary recommendation, and is common in recent international practice. [Paragraph 5]
Article 25 - Exchange of information
1.163 This article authorises and limits the exchange of information by the 2 competent authorities to information necessary for the carrying out of the DTA or for the administration of domestic laws concerning the taxes to which the DTA applies. [Paragraph 1]
1.164 The limitation placed on the kind of information authorised to be exchanged means that information access requests relating to taxes not within the coverage provided by Article2 ( Taxes covered ), for example sales tax, are not within the scope of the article.
1.165 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted consistently with Australia's other DTAs. Any information received by a country shall be treated as secret in the same manner as information obtained under the domestic law of that country. [Paragraph 1]
1. An exchange of information that would disclose any trade, business, industrial, commercial or professional secret or trade process or which would be contrary to public policy is not permitted by the article. [Paragraph 2]
Article 26 - Members of diplomatic missions and consular posts
1.167 The purpose of this article is to ensure that the provisions of the DTA do not result in members of diplomatic and consular posts receiving less favourable treatment than that to which they are entitled in accordance with international conventions. Such persons are entitled, for example, to certain fiscal privileges under the Diplomatic (Privileges and Immunities) Act 1967 and the Consular (Privileges and Immunities) Act 1972 which reflect Australia's international diplomatic and consular obligations.
1.168 This article provides for the entry into force of the DTA. This will be on the last date on which diplomatic notes are exchanged through the diplomatic channel notifying that the last of the domestic processes to give the DTA the force of law in the respective countries has been completed. In Australia, enactment of the legislation giving the force of law in Australia to the DTA along with tabling the treaty in Parliament are prerequisites to the exchange of diplomatic notes.
1.169 Once it enters into force, the DTA will have effect in Australia for purposes of withholding taxes in respect of income derived on or after 1January in the calendar year next following that in which the DTA enters into force.
1.170 In respect of other Australian tax, the DTA will first have effect in Australia in relation to income, profits or gains of the Australian year of income beginning on or after 1 July in the calendar year next following that in which it enters into force.
1.171 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 of the calendar year next following that in which the DTA enters into force will be the relevant year of income for the purposes of the application of `other Australian tax'.
Date of effect in South Africa
1.172 In South Africa, the DTA will first have effect, in relation to South African taxes withheld at source, on or after 1January in the calendar year next following the date on which the DTA enters into force. For other South African tax, the DTA will first have effect in South Africa in respect of years of assessment beginning on or after 1January next following the date on which the DTA enters into force.
1.173 By this article the DTA is to continue in effect indefinitely. However, either country may give through the diplomatic channel written notice of termination of the DTA on or before 30 June in any calendar year beginning after the expiration of 5 years from the date of its entry into force.
1.174 In that event, the DTA would cease to be effective in Australia for purposes of withholding tax in respect of income derived on or after 1 January next following that in which the notice of termination is given.
1.175 For other Australian tax, it would cease to be effective in relation to income, profits or gains of any year of income beginning on or after 1July in the calendar year next following that in which the notice of termination is given.
1.176 It would correspondingly cease to be effective in South Africa in respect of taxes withheld at source, for amounts paid or credited after the end of the calendar year in which the notice of termination is given; and in relation to other South African tax, the termination would first apply for any year of assessment beginning after the end of the calendar year in which the notice of termination is given.
1.177 The Protocol deals with 2 matters.
1.178 The first matter is in relation to the absence from this DTA, consistent with Australia's current tax treaty policy, of a Non-discrimination Article. The Protocol provides that if Australia should negotiate a Non-discrimination Article in a subsequent Agreement which is given effect to under the International Tax Agreements Act 1953 , then the parties to this DTA will enter into negotiations with a view to providing in this DTA comparable treatment as is provided for in the subsequent Agreement.
1.179 The second matter concerns the rate at which South Africa imposes its secondary tax on companies. The Protocol provides that if South Africa should limit the rate at which the secondary tax on companies is imposed in a subsequent Agreement with a third country, then the parties to this DTA will enter into negotiations with a view to providing in this DTA comparable treatment as is provided for in that subsequent Agreement.