House of Representatives

Explanatory Notes

(Circulated by the Treasurer, the Rt. Hon. Sir Arthur Fadden.)

INTRODUCTORY NOTE

The primary purpose of this Bill is to give the force of law in Australia to an agreement entered into by Australia and Canada for the avoidance of double taxation on incomes flowing between the two countries. A secondary purpose is to amend section 16 of the Income Tax (International Agreements) Act 1953 in order to delete references to interest on certain Commonwealth loans which have been redeemed since that Act came into effect.

The agreement with Canada was signed on 1st October, 1957, and was preceded by agreements with the United Kingdom in 1946 and the United States of America in 1953. The two earlier agreements, which are still operative, received Parliamentary sanction and the agreement with Canada requires the force of law to be given to it by both countries before it becomes effective. The Canadian legislation for this purpose has already been enacted, having been assented to on 31st January, 1958.

The agreement is printed in full as a Schedule to the Bill and it is proposed to incorporate it as The Third Schedule to the Income Tax (International Agreements) Act.

Notes on the clauses of the Bill are given below and these are followed by explanations of the various articles of the agreement with Canada.

NOTES ON THE BILL.

Clause 1: Short Title and Citation.

This clause formally provides for the short title of the Amending Act and the Principal Act as amended.

Clause 2: Commencement.

Section 5(1A.) of the Acts Interpretation Act 1901-1957 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.

By this clause, it is proposed that the Income Tax (International Agreements) Act 1958 shall come into operation on the day on which it receives the Royal Assent. This course is being adopted in order to avoid any possibility of undue delay in giving effect to the agreement with Canada.

In this connection, the agreement provides that it shall become effective as regards Australian tax from the commencement of the year of income in which the final action necessary to give it the force of law in both countries is completed. As already mentioned, the Canadian legislation for this purpose was assented to on 31st January, 1958. In order that the agreement may commence to operate for the current income year, it will be necessary for the Australian legislation to be enacted before 1st July, 1958.

Clause 3: Definitions.

Section 3 of the Principal Act contains definitions of a number of expressions used throughout the Act.

As in the case of the United Kingdom and United States agreements, the term "the Canadian agreement" is being defined so as to simplify references in the Act to that agreement. The term will mean the agreement relating to taxes on income signed on behalf of Australia and Canada on 1st October, 1957.

Clause 4: Agreement with Canada.

Subject to this Bill being assented to before 1st July, 1958, clause 4 will give the force of law to the Canadian agreement as regards Australian tax from the beginning of the current income year 1957-1958. As regards Canadian tax, the agreement will have effect as from 1st January, 1958.

These commencing dates follow from the terms of Article XVI of the agreement, which provides that the agreement shall become effective from the commencement of the year of income in which the final action necessary to give it the force of law in both countries is completed.

The agreement will continue to have the force of law until it ceases to be effective in accordance with a notice of termination given by either country under Article XVI.

Clause 5: Ascertainment of Australian Tax on Dividend.

Section 16 of the Principal Act, which is proposed to be amended by this clause, provides the basis for ascertaining the amount of Australian tax payable on dividends subject to the double taxation agreements and to section 45 of the Assessment Act. The provisions have application in determining the credits allowable for foreign tax on dividends received by Australian residents from ex-Australian sources and also in determining the rebates of Australian tax on dividends received from Australian companies by shareholders resident in the countries with which double taxation agreements have been concluded.

The statutory basis which has been provided for this purpose is designed primarily to allocate against dividends, in determining the tax actually borne or to be borne by the dividends, a proportion of the deductions allowable to the taxpayer which are not directly attributable to any particular class of income, e.g., concessional deductions. Since, however, the High Court has ruled that these deductions may not be allocated against interest from Commonwealth loans in applying the concessions granted in relation to such interest, it is necessary to exclude from the calculation income derived from this source.

In this connection, the existing basis of calculation has regard to two classes of Commonwealth loan interest - that subject to 1930-1931 rates of tax and that subject to the rebate of 2/- in the Pd provided by section 160AB of the Assessment Act. As the loans subject to 1930-1931 rates of tax formerly held by members of the public have now been wholly redeemed, this element of the calculation is no longer required and the amendments proposed by sub-clause (1.) of clause 5 are accordingly designed to delete from section 16 the references to interest from this class of loan.

Sub-clause (2.) will ensure that the former provisions will continue to have effect in relation to any unissued assessments for the income year 1956-1957 and prior years.

The amendments will assist towards simplifying the section, without, however, in any way adversely affecting the present entitlements of taxpayers under the section.

Clause 6: The Third Schedule.

Clause 6 of the Bill inserts as a Third Schedule to the Principal Act a copy of the agreement between Australia and Canada.

NOTES ON THE AGREEMENT.

Introductory Note.

The Schedule to the Bill sets out the terms of the agreement between Australia and Canada. The agreement is designed to avoid the incidence of double taxation on income which a resident of Australia derives from Canadian sources, or which a resident of Canada derives from sources in Australia. The agreement contains machinery provisions, including an article which will authorize the exchange between the taxation authorities of the two countries of information required for the operation of the agreement or the prevention of fiscal evasion.

The laws of Australia and Canada already contain provisions which afford considerable relief from the effects of double taxation on incomes. Nevertheless, the incidence of tax imposed by both countries on some classes of income flowing between the two countries has had a detrimental effect upon Canadian investment in Australia.

A comparable position in relation to capital from the United Kingdom and the United States of America was overcome by taxation agreements with those countries. Negotiations with Canada for a similar agreement were initiated in 1953 and the agreement was signed last year after a close examination of the practical results likely to follow the coming into effect of the agreement.

It is a widely accepted practice for countries to impose tax on all income having its source in their territories. If, however, the recipient of the income resides in another country, that country may also impose its tax. The unduly severe burden which results may be adequately eased by one country agreeing to grant exemption in relation to some classes of income, while the other country relieves the position in respect of the remaining classes of income.

The first method entails an exemption by the country in which the income arises, thus leaving the other country, in which the taxpayer resides, to obtain its normal amount of tax. Briefly stated, the classes of income to which this method will apply under the agreement with Canada are -

Business profits, if the recipient has no permanent establishment in the country of origin of the income (Article III).

Shipping and air transport profits (Article V).

Remuneration for personal services performed for an employer in the country in which the recipient resides during visits to the other country not exceeding 183 days in the income year (Article VIII).

Royalties in respect of literary, dramatic, musical or artistic works, but excluding royalties in respect of motion picture films (Article IX).

Pensions and purchased annuities (Article XI).

Remuneration earned during a period not exceeding two years by a professor or teacher who is a resident of one of the countries for teaching in the other country (Article XII).

The second method will apply to the bulk of the income covered by the agreement with Canada. The income involved will be taxed in the country in which it has its origin. If the other country imposes tax on the same income, it will allow against its tax a credit for the tax paid in the country of origin. For example, industrial or commercial profits which a Canadian enterprise derives through a branch in Australia will be subject to Australian tax at the same rates as would have applied if the agreement had not been reached, but Canada will allow against its tax on those profits a credit for the Australian tax. The allowance of credits is provided for in Article XIII.

International double taxation agreements frequently include a special provision in relation to dividends paid by a company resident in one of the countries to a shareholder residing in the other country. The profits earned by the company bear the full tax of the country in which it is resident, but a limitation is placed upon the rate of tax which that country may levy on dividends paid to shareholders resident in the other country.

In the agreement with Canada a maximum rate of 15% is permitted on dividends paid by Australian companies to Canadian shareholders. An Australian subsidiary of a Canadian company will accordingly pay on its profits the same rates of tax as are paid by other Australian companies, while dividends paid to the parent company in Canada will be taxed by Australia at a rate of 15%. The position is discussed in detail in the comments on Article VII.

The following are explanatory notes on each article of the agreement.

Article I.

This Article specifies the Australian and Canadian taxes which are the subject of the agreement.

In the case of Australia, the agreement covers the income tax and social services contribution, which is the only tax at present imposed on incomes in this country. This tax includes the additional tax on the undistributed income of private companies.

The Canadian taxes covered by the agreement are the income taxes payable by individuals and companies, including surtaxes and social security charges.

Paragraph (2) will extend the agreement to any future tax imposed either by Australia or by Canada if that tax is substantially similar in character to the taxes at present subject to the agreement.

The agreement does not apply to any tax imposed by the provincial governments of Canada, or to any tax imposed in Australia by an authority other than the Commonwealth.

Article II.

Paragraph (1) of this Article defines a number of expressions used in the agreement. The definitions calling for comment are -

"Australia": For the purposes of the income tax law, Papua is regarded as a part of Australia, but the Territories of New Guinea, Norfolk Island and Cocos (Keeling) Islands do not fall within the definition of "Australia". However, tax may be payable in some circumstances on income derived in those Territories and in isolated cases both Australian and Canadian tax may be levied, e.g., where the taxpayer is resident in both Australia and Canada. In order that double taxation may be relieved in these cases, "Australia" has been defined in the agreement as including those Territories as well as Papua.

"Australian resident" and "Canadian resident": For income tax purposes, an individual or a company may at the one time be resident in more than one place. In the drafting of the agreement it was accordingly necessary to recognise that a taxpayer may be a dual resident of Australia and Canada.

Some provisions of the agreement could not appropriately be applied to residents of both countries. For example, the exemption from Australian tax of remuneration earned in Australia by a Canadian businessman during a visit to Australia of up to 6 months could not be justified if he were also a resident of Australia. It was accordingly necessary to employ in various provisions of the agreement terms which covered a taxpayer resident in one of the countries, but not also resident in the other country.

The terms "Australian resident" and "Canadian resident" have been used and defined. An Australian resident means a resident of Australia who is not also resident in Canada. Correspondingly, a taxpayer who is a resident of Australia is unable to qualify as a Canadian resident.

The effects of the two definitions are carried through to the definitions of "Australian enterprise", "Canadian enterprise", "enterprise of one of the Contracting States" and "enterprise of the other Contracting State". To fall within any of these terms, the enterprise must be carried on by a taxpayer not resident in both Australia and Canada.

The definitions will not limit the relief of double taxation by means of the tax credits authorised by Article XIII.

"industrial or commercial profits": This expression will correspond broadly with the conception of "business profits" and will not include investment income such as dividends, interest, rents or royalties. Shipping and air transport profits have also been placed outside the definition as they are the subject of special provisions in Article V.

"permanent establishment": The application of important provisions of the agreement depends in part upon whether a taxpayer who resides in one country carries on trade or business through a permanent establishment in the other country.

It is desirable that "permanent establishment" have a wide coverage and with this aim in mind it is provided that the expression include not only branches, offices, workshops and factories, but also mines, oilwells, agricultural and pastoral properties, managements, certain agencies and any other fixed place of business.

In some cases an enterprise of one country may not set up a branch or other fixed place of business, but may carry out contracts involving the use or installation of plant or equipment, for example, the use of plant on, say, earth-moving projects or the installation of equipment in a factory. Activities of this nature will constitute a permanent establishment and when conducted in Australia it will be practicable to impose Australian tax on the profits arising through the permanent establishment.

The definition sets out circumstances which are not, in themselves, to be regarded as constituting a permanent establishment. These are -

1.

The carrying on of business activities through certain agents and brokers who are remunerated merely by a customary rate of commission.

2.

The maintenance of a place of business used solely to effect purchases.

3.

The existence of a subsidiary company.

4.

The conduct of business through an agent not habitually negotiating and concluding contracts for his principals or through an agent who does not regularly carry a stock of goods from which orders are satisfied.

"resident of Australia": This expression is defined in the Assessment Act and it will have the same meaning for the purposes of the agreement. A "resident of Australia" may also be a resident of Canada and the expression is not identical with the defined term "Australian resident".

Paragraph (2) of the Article has been inserted to cover cases in which a Canadian enterprise sells to an Australian resident goods manufactured in Australia by an associated enterprise. The profit of the transactions may depend upon the manufacturing activities in Australia but the contracts may be so arranged that the profits legally accrue to the Canadian enterprise by reason of the sale of the goods. By deeming the Canadian enterprise to have a permanent establishment in Australia, it becomes practicable to impose Australian tax on the profit. A corresponding position would apply if a comparable position were established in Canada on behalf of an Australian enterprise.

Paragraph (3) ensures that in applying the agreement each country will give to terms not defined in the agreement the same meanings as they have in its own taxation laws.

Article III.

This Article deals with the taxation of industrial and commercial profits where an enterprise of one of the contracting countries carries on business in the other country. As in the case of the agreements with the United Kingdom and the United States of America, the principle of the Article is that the industrial or commercial profits of an enterprise of one country shall be taxed in the other country only where the enterprise carries on trade or business through a permanent establishment in that other country.

Paragraph (1) applies this principle in relation to a Canadian enterprise deriving profits from sources in Australia.

The great bulk of the profits derived in Australia by Canadian enterprises are attributable to permanent establishments and will bear Australian tax. It will, however, be noted that industrial or commercial profits derived in Australia other than through a permanent establishment e.g., through certain commission agents, will not be liable to Australian tax. This latter exemption will not extend to investment income, which is taxable in the country in which the income arises.

The limitation of Australian taxation to income attributable to the permanent establishment follows the principle of Article III of the United Kingdom agreement, but differs from that of the United States agreement. In the latter case, a United States enterprise engaged in trade or business through a permanent establishment in Australia is subject to Australian tax on its income from all sources in Australia. From the viewpoint of the revenue, the practical effect of this difference is not significant.

The proviso to paragraph (1) will preserve for Australia the special basis of assessment applied to income derived from Australian sources by film businesses controlled abroad or from insurance with non-residents, whether or not those activities are conducted in such a way as to constitute a permanent establishment in Australia.

If Canada taxes industrial or commercial profits attributable to a permanent establishment in Australia, Article XIII will ensure that Canada allows a credit to relieve the double taxation.

Paragraph (2) is the complementary provision in relation to an Australian enterprise deriving industrial or commercial profits in Canada. Where the trade or business of the enterprise in Canada is carried on through a permanent establishment in that country, the profits attributable to the permanent establishment will be subject to Canadian tax. Under present Australian law, the profits will be free from Australian tax.

It is mentioned that paragraph (3) of Article III of the United States agreement contains specific reference to expenses, including executive and general administrative costs, reasonably attributable to a permanent establishment. The paragraph requires that these expenses be treated as deductible in determining the profits of a permanent establishment which are to be subjected to tax. As in the case of the United Kingdom agreement, a similar provision is unnecessary in relation to Australia and Canada, as it is the established practice of both countries to allow such expenses as deductions in arriving at the amount of profits liable to tax.

Paragraph (3) is similar to corresponding provisions in the United Kingdom and United States agreements and is designed for the protection of the revenue in determining the quantum of profit attributable to a permanent establishment. This will be determined on the basis of the amount of profit which might be expected to be derived by the permanent establishment if it were an independent enterprise in the country in which it is located and its dealings with its head office or other branches were at "arm's length". In other words, the provision will operate to counter any attempt which might be made to reduce the normal tax liability of the permanent establishment by inflating charges for goods and services supplied by the head office or other branches of the enterprise.

Paragraph (4) will apply where the information available is insufficient to enable a precise assessment of the profits attributable to the permanent establishment. In such circumstances, the amount of profit to be subjected to tax will be determined by the taxation authority according to the relevant discretionary or estimating provisions of the law of the country concerned. In the case of Australia, the Commissioner will be permitted to apply the provisions of section 136 of the Assessment Act which, under certain conditions, provides for assessment on the basis of such portion of the total receipts of a business as the Commissioner determines.

Paragraph (5) will apply where an Australian enterprise derives profits from the sale of goods purchased by its permanent establishment in Canada. The enterprise will not be liable to Canadian tax solely because of its buying of the goods in Canada. A corresponding position will apply if a Canadian enterprise buys goods through a permanent establishment in Australia. The paragraph accords with existing practice.

Article IV.

The provisions of paragraphs (3) and (4) of Article III for allocation of profits between a permanent establishment and its parent enterprise do not apply to interconnected companies, which are, in law, separate entities. Article IV accordingly contains complementary provisions for determining the allocation of profits, where an enterprise of one country controls or shares in the control of an enterprise of the other country. It may also be invoked where enterprises of the two countries are controlled by the same persons.

The principle of determining the allocation under Article IV is the same as that adopted in Article III, namely the "arm's length" basis. If, for example, an enterprise in one country should impose upon a subsidiary company in the other country charges which are in excess of those which it could obtain for goods or services supplied to an independent enterprise, the subsidiary company will be allowed income tax deductions for only the amount which an independent enterprise would have paid. For income tax purposes, a proper allocation of profits between parent and subsidiary companies and other associated enterprises whose management, control or capital are inter-connected will be practicable.

Article V.

Under this Article, shipping and aircraft profits derived by Australian and Canadian enterprises will be taxable only in the country of residence of the enterprise, provided the ships or aircraft are registered in that country.

Where the Article does not apply, e.g., where the owner or charterer of a ship is resident in Canada and the port of registry is elsewhere, the profits will continue to be taxed on an origin basis and double taxation will be avoided by the allowance of credit by the country of residence of the enterprise.

Article VI.

Under section 44(1.)(b) of the Income Tax Assessment Act, dividends paid to non-residents of Australia are liable to Australian tax to the extent that they are paid out of profits having a source in Australia. Where these dividends are paid by an Australian company the collection of the tax gives rise to few, if any, difficulties. If, however, the company which pays the dividends is not a resident of Australia, the same powers to enforce payment do not exist and, in practice, it is seldom practicable to collect the tax. The country in which the shareholder resides is, of course, in a position to obtain payment of the tax which it imposes.

Paragraph (1) of Article VI will exempt dividends received by non-residents of Australia where the company paying the dividend is a resident of Canada. In view of the inability to enforce the collection of tax nominally imposed under Section 44(1.)(b), the loss of Australian revenue will be negligible. The exemption will not apply to dividends paid by Canadian companies to Australian shareholders who will remain liable for Australian tax, subject to a credit in respect of Canadian tax (not exceeding 15%) on the dividends.

Paragraph (2) of the Article requires Canada to grant a corresponding exemption in respect of dividends paid by Australian companies to non-residents of Canada.

It may be noted that the exemptions are somewhat wider than the corresponding exemptions provided in the agreements which Australia has concluded with the United Kingdom and the United States of America. In those agreements the exemption is limited to dividends paid to shareholders resident in the country in which the company resides. Under the agreement with Canada, Australia will exempt all but its own residents on dividends paid by Canadian companies, while Canada will exempt dividends paid by Australian companies to all shareholders other than those residing in Canada. The extension will apply in only a few cases and will involve little or no loss of revenue, since the collection difficulties already noted at present render it impracticable to enforce the existing liability.

Article VII.

Article VII relates to dividends paid by a company resident in either Australia or Canada to a shareholder who resides in the other country.

The profits earned by a company in the country where it is resident bear the tax of that country, which may impose its usual rates of tax without regard to the place of residence of the company's shareholders. This principle will not be changed by the agreement.

In addition to company tax on the profits, that country may also tax dividends distributed out of those profits. However, where dividends are paid by company resident in Australia or Canada to a shareholder who resides in the other country, the rate of tax on the dividends (but not on the profits out of which the dividends are paid) will be limited by Article VII to 15%. This limitation will not apply unless the shareholder is liable for tax in the country in which he resides or if he carries on trade or business through a permanent establishment in the other country.

Taking the example of an Australian subsidiary paying a dividend to its parent which is a Canadian public company, it may be noted that the Australian profits of the Australian subsidiary company will bear the same rates of tax as are payable by other public companies. These rates are at present 6/6d in the Pd on the first Pd5,000 of taxable income and 7/6d in the Pd on the balance of the taxable income. The dividends paid out of the profits so taxed will bear 3/-d in the Pd Australian tax and the aggregate liability for Australian tax will generally approximate 9/4d in the Pd.

In the case of private companies, the corresponding figure will be 8/6d in the Pd and, in addition, undistributed profits will be liable for tax.

When the dividends of either public or private companies are ultimately distributed to shareholders of the Canadian parent company, there will be a liability for Canadian tax.

Under the 1946 Australia - United Kingdom agreement, dividends paid to a United Kingdom parent company by a wholly-owned Australian subsidiary are generally exempt from Australian tax. A corresponding exemption is not provided in the agreements with Canada and the United States of America. It may also be mentioned that whilst the 15% limitation on dividends paid to United States shareholders is contingent upon the dividends being liable to United States tax, the corresponding requirement in the Canadian agreement is that the Canadian shareholder be liable to Canadian tax. The variation in terminology has been adopted because of a somewhat different procedure provided under the Canadian law in respect of foreign dividends received by Canadian parent companies.

Article VIII.

Article VIII may apply where a person resident in Australia or Canada receives remuneration from an individual or company resident in the same country for services rendered during a short-term visit to the other country.

If, in an income year, the time spent in the country visited does not exceed 183 days the remuneration derived in that year is exempt from tax in that country. The agreement does not, however, provide exemption in a country in which the recipient of the remuneration resides.

It will be observed that exemption is not provided in respect of remuneration paid for services rendered to a resident of the country visited. For example, a Canadian resident may be exempt in Australia on remuneration for services rendered in Australia for a Canadian resident, but the Article would not apply if the Canadian visitor were rendering services to an individual or company resident in Australia.

Where the conditions mentioned are not satisfied, both countries may tax the remuneration. In this event, the country in which the visitor normally resides will allow a credit to relieve the double taxation.

The Article will not apply to the remuneration or other income of public entertainers, such as stage, motion picture, radio or television artists and musicians, or of athletes. Persons in these classes will be liable to tax in the country in which the income is derived and the country of residence will relieve any double taxation by the allowance of a credit in respect of tax paid in the other country.

The Article will not affect the existing provisions of the Australian law under which exemption for periods of up to two years may be granted in respect of the remuneration of visiting business executives, consultants and technicians assisting in the development of Australian industry.

Article IX.

This Article relates to cultural royalties, comprising royalties in respect of literary, dramatic, musical or artistic works in which copyright subsists, derived by a resident of either Australia or Canada from sources in the other country. If a recipient who is a resident of one of the countries does not carry on business through a permanent establishment in the other country, the royalties will be taxed only in the country of residence.

Royalties in relation to motion picture films are specifically excluded from the Article. Provision is made in Article III(1) for Australia to continue the existing basis of taxing film rentals and other income from motion picture films in accordance with Division 14 of Part III of the Assessment Act.

Royalties which do not fall within this Article will be taxed in the country of source and any double taxation will be relieved by the allowance of credit by the country of residence.

Article X.

This Article provides for the reciprocal exemption of the official remuneration of Australian and Canadian government employees stationed in the other country. Where the employee is not ordinarily resident in the country where he renders services, or is resident there solely for the purpose of his official duties, his remuneration will be taxed only by the country which pays his remuneration. The Article extends to the remuneration of State or Provincial Government employees.

The Article will not apply in relation to employees of the Commonwealth or State Governments of Australia, or those of the Canadian or Provincial Governments of Canada, who are engaged in any trade or business conducted by those Governments.

Article XI.

Under this Article, a pension or purchased annuity derived by an Australian or Canadian resident from a source in the other country will be exempt from tax in that country and will accordingly be taxed only in the country in which the recipient resides.

Annuities paid under a will or trust instrument are not covered by the Article and may, therefore, be taxed in the country in which they have their source. Any double taxation will be relieved by the country of residence allowing a credit under Article XIII.

Article XII.

This Article relates to the remuneration of professors and teachers who are either Australian or Canadian residents and who visit the other country in order to teach at an educational institution in that country for a period of up to two years. The Article will exempt from tax in the country visited the remuneration received for the teaching during that period. The country in which the professor or teacher normally resides will, however, be free to impose its tax.

Article XIII.

This Article contains general provisions for the relief of double taxation on incomes taxed in both Canada and Australia.

As noted previously, some classes of income flowing between the two countries are taxed only in the country in which the recipient resides, e.g., shipping and air transport profits. However, in the generality of cases, income is taxed in the country in which it has its origin. If the country in which the recipient resides also imposes its tax, it falls on that country to provide relief from the double taxation.

In order to achieve that end, Article XIII requires the country in which a person resides to allow a credit against any tax it may impose upon income derived and taxed in the other country. The amount of the credit is determined by the laws of the country which allows the credit. In practice, credit is allowed for the amount of tax imposed on the particular income by the country in which the income has its origin, subject to the limitation that the credit shall not exceed the amount of the tax levied on that income by the country of residence.

Paragraph (1) applies where a Canadian resident derives from sources in Australia income on which Australian tax is payable. If Canada taxes that income a credit is allowed against the Canadian tax. Similarly, paragraph (2) requires Australia to allow a credit for Canadian tax imposed on a resident of Australia in respect of income derived and taxed in Canada.

Except in respect of a dividend, Australia does not tax its residents on income having a source outside Australia if that income is taxed in the country of origin. In these circumstances, Australia will not allow a credit as no double taxation arises. Where, however, a resident of Australia derives a dividend from a Canadian company, tax will be levied in Australia, which will allow a credit of an amount equal to the Canadian tax on the dividend, or the Australian tax on the dividend, whichever is the less. This credit takes the place of a credit which is now allowable under section 45 of the Income Tax Assessment Act.

Paragraph (3) of the Article specifies three conditions to be observed in the application of the Article. Under sub-paragraph (a), the source of profits and remuneration for personal services is deemed to be the country in which the services are performed, thus ensuring that a credit to relieve any double taxation arising will be allowed by the country in which the recipient of the remuneration resides.

Sub-paragraph (b) deems income derived from film rentals and related income, and certain income of non-resident insurance undertakings, which is subject to Division 14 or 15 of Part III of the Assessment Act, to have its source in Australia. This will preserve for Australia the prior right of taxing on the existing basis these classes of income arising in Australia.

Sub-paragraph (c) excludes from the terms "Australian tax" and "Canadian tax" any penalties or interest imposed under the respective taxing laws. The effect of this provision, which corresponds with similar provisions of the United Kingdom and United States agreements, is that credit will not be allowed in respect of any amounts imposed by way of penalty.

Article XIV.

Since the income tax laws of both Australia and Canada contain prohibitions against the disclosure by officials of information concerning the affairs of taxpayers, this Article is required to enable the respective taxation authorities to exchange information necessary for the effective operation of the agreement.

Only such information may be exchanged, however, as is necessary to carry out the provisions of the agreement or for the prevention of fraud or for the administration of the provisions of the laws of the respective countries against the avoidance of the taxes covered by the agreement. Except that it may be made available to a Court or reviewing authority in relation to appeals against assessments, the information exchanged will not be disclosed by the taxation authorities to other persons.

There will be no exchange under the agreement of any information which would disclose a trade secret or trade process.

Article XV.

This Article will enable the taxation authorities of the two countries to communicate directly for the purpose of carrying out the provisions of the agreement. The provision will facilitate the administration of the agreement and will also ensure that information exchanged will be available only to taxation officials bound to maintain secrecy.

Article XVI.

Paragraph (1) of this Article provides that the agreement shall come into force when both countries have completed all procedures necessary to give the agreement the force of law.

When this requirement is satisfied, the agreement will commence to apply to Canadian tax levied for the taxation year, that is, the calendar year, in which the procedures are completed by both countries. In Australia, the agreement will commence to apply to tax levied for the income year, that is, the twelve months ending 30th June, in which the procedures are completed.

The Canadian legislation to give effect to the agreement has been passed by the Canadian Parliament and received the Royal Assent on 31st January, 1958. If the corresponding Australian legislation now proposed becomes law before 1st July, 1958, the agreement will apply to Canadian tax levied for the calendar year 1958 and to Australian tax levied in respect of the income year 1957- 1958.

The agreement will apply for an indefinite period, but under paragraph (2), either country may give notice of termination in the first quarter of 1961 or any subsequent year. If notice of termination is given, the agreement will be ineffective in Australia from the commencement of the succeeding year of income and in Canada from the beginning of the next taxation year.