Explanatory Memorandum(Circulated by authority of the Acting Treasurer, the Hon. Bill Hayden, M.P.)
The main purpose of this Bill is to give the force of law in Australia to:
- a new comprehensive double taxation agreement between Australia and New Zealand that was signed in Melbourne on 8 November 1972 to replace the agreement concluded with New Zealand in 1960 (an outline of the new agreement is at pages 6 to 13 of this memorandum) - clause 4; and
- an agreement between Australia and Italy for the avoidance of double taxation of income derived from international air transport that was signed in Canberra on 13 April 1972 (an outline of the agreement is at pages 14 and 15 of this memorandum) - clause 5.
The Bill also specifies that interest and royalties derived by residents of Australia from New Zealand and in respect of which New Zealand tax is limited by the new agreement with New Zealand to 10 and 15 per cent respectively will not, by reason of the payment of that limited New Zealand tax, be exempt from Australian tax. (Australia will instead allow credit for the New Zealand tax against the Australian tax on this income.) The Bill further provides that provisions of the new agreement designed to overcome for the future cases of unrelieved double taxation of certain interest and royalty payments received from New Zealand by Australian residents will also apply to any such cases that have occurred since the 1968-69 income year, i.e., the year in which this double taxation was first effective.
Notes on the clauses of the Bill are given below and these are followed by explanations of the articles of each agreement.
NOTES ON CLAUSES
This clause formally provides for the short title and citation of the Amending Act and of the Principal Act as amended.
Section 5(1A) of the Acts Interpretation Act 1901-1966 provides that unless the contrary intention appears every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent. By this clause the Amending Act will come into operation on the day on which it receives the Royal Assent, thus enabling early implementation of the agreements.
Section 3 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act. Paragraphs (a) and (b) of clause 3 of the Bill effect purely formal amendments of section 3. Paragraphs (c) and (d) of clause 3 will insert in section 3 definitions of the Italian airlines profits agreement and the new comprehensive agreement with New Zealand (which are being incorporated as schedules to the Principal Act by clauses 7 and 8 of the Bill) and of the 1960 agreement with New Zealand which the latter replaces.
This clause will give the force of law in Australia to the new agreement with New Zealand, and will cause the previous New Zealand agreement to cease to have the force of law in Australia. Section 6B of the Principal Act (which gave the force of law to the 1960 agreement with New Zealand ) is to be repealed by sub-clause (1) of clause 4 and a new section 6B inserted in its place. Sub-section (1) of the new section will give the force of law in Australia to the new agreement with effect from the times stated in the agreement itself (see the explanation given below of article 22 of the new agreement).
Sub-section (2) of the new section 6B will give effect in Australia to article 22(2) of the new agreement with New Zealand, which is designed to resolve certain cases of unrelieved double taxation that have arisen since the beginning of the 1968-69 year as a result of changes in New Zealand law. Those changes led to the situation where the two countries operated under laws under which each country was the "source" of certain interest and royalty payments derived by Australian residents. New Zealand taxed the payments on this basis. Australia also taxed them, but was unable to give double taxation relief available for foreign-source income because the payments were regarded as having an Australian source under Australian law.
Sub-section (2) of new section 6B will require Australia to exempt these "dual-source" payments from its tax where they were derived during any of the four income years preceding the income year (1972-73) from which the agreement will otherwise have effect in Australia. This result will be achieved through acceptance by Australia - by means of article 18(3)(b) of the new agreement - that interest and royalty payments treated by New Zealand law as being from a source in New Zealand, and taxed there, are exempt from Australian tax under section 23(q) of the Income Tax Assessment Act. In broad terms, that section exempts from Australian tax income from a source in another country if it is subjected to tax in that country.
Sub-section (3) of new section 6B will give legislative effect to article 22(4) of the new agreement with New Zealand which makes provision for the 1960 agreement to continue to have the force of law in certain circumstances. Those circumstances are mentioned in the notes on article 22.
Sub-clause (2) of clause 4 of the Bill will empower the Commissioner of Taxation to amend assessments for the purpose of giving effect to sub-sections (1) and (2) of new section 6B. It is necessary to give the Commissioner this power because, although the new agreement with New Zealand will not enter into force until the Bill receives the Royal Assent, its provisions will have effect - pursuant to sub-sections (1) and (2) of new section 6B - in relation to income in respect of which assessments may already have been made.
This clause proposes the insertion in the Principal Act of new section 10. Sub-section (1) of the new section will give the force of law in Australia to the airline profits agreement with Italy with effect from the time stated in the agreement (see the notes on article 4 of that agreement).
The agreement is to enter into force on the date of exchange of formal instruments of ratification (article 4). As it is not possible to indicate in this Bill when this will occur, sub-section (2) of new section 10 provides for the notification in the Gazette of the relevant date in order to provide a readily available and authoritative reference to the fact and date of entry into force of the agreement.
The purpose of this clause is to ensure that the credit system, rather than the exemption system, of relief of double taxation will apply to interest and royalties that are derived by residents of Australia from New Zealand and in respect of which New Zealand tax is limited by the new agreement to 10 per cent and 15 per cent respectively. Section 12 of the Principal Act, which is to be amended by this clause, already achieves a corresponding result in relation to interest and royalties derived by residents of Australia from the United Kingdom, Singapore and Japan, where the double taxation agreements with those countries limit the foreign tax on the income.
Paragraph (a) of sub-clause (1) of clause 6 will effect a formal drafting amendment consequent on the addition to section 12(1) of a new paragraph (ac).
Paragraph (b) of sub-clause (1) will insert a new paragraph (ac) in section 12(1) of the Principal Act. This will mean that section 23(q) of the Income Tax Assessment Act - which provides a general exemption from Australian tax for foreign-source income (other than dividends) of residents of Australia that is taxed in the country of source - is not to apply to interest or royalties derived by a resident of Australia from New Zealand after the commencement of the year of income to which the new agreement with New Zealand is to first apply (1972-73) where, under the agreement, the New Zealand tax is limited to 10 or 15 per cent respectively of the gross amount of the interest or royalties. The interest and royalties will thus be assessable income for the general purposes of the Income Tax Assessment Act and the new agreement (article 18) will require a credit for the New Zealand tax to be allowed against the Australian tax on the income. Existing sections 14 and 15 of the Principal Act will govern the allowance of credit for the New Zealand tax.
Sub-clause (2) of clause 6 is designed to avoid any retrospective increase in overall tax liability that may otherwise result from the application of the credit method of relief to relevant interest and royalty income derived from New Zealand by Australian residents after the commencement of the 1972-73 income year, but on or before the date of announcement of signature of the new agreement on 16 November 1972. The sub-clause provides, in effect, that any increase in the Australian tax payable in respect of the interest or royalties, resulting from the change from the exemption system to the credit system, is not to exceed the amount by which the New Zealand tax on the income is reduced by reason of the new New Zealand agreement.
Sub-clause (3) of clause 6 has a similar purpose to that of sub-clause (2) of clause 4 of the Bill. It will empower the Commissioner to amend any 1972-73 income year assessment that may already have issued, to apply the credit method of double taxation relief in accordance with sub-clauses (1) and (2) of the clause.
This clause will replace the present Fourth Schedule to the Principal Act (a copy of the 1960 agreement with New Zealand) by a new Fourth Schedule (a copy of the new agreement with New Zealand).
This clause will include a copy of the airlines profits agreement with Italy as the Eighth Schedule to the Principal Act.
This article provides that the agreement will apply to the existing income taxes of each country. It will also apply to any identical or substantially similar taxes which may subsequently be imposed by either country in addition to, or in place of, the existing taxes.
This article defines a number of the terms used in the agreement. Definitions of some other terms are contained in the articles to which they relate and terms not defined in the agreement are to have the meanings which they have under the taxation law of the country applying the agreement.
Definitions in paragraph (1) of article 2 calling for comment are -
- : As in Australia's other recent double taxation agreements, this term is defined as including external territories (other than Papua New Guinea) and areas of the continental shelf. One purpose of the definition is to enable Australia to retain taxing rights in relation to the latter areas, particularly as regards petroleum exploration and mining activities. The definition also has relevance to Australia's right to tax shipping and airline profits under article 7 of the agreement.
- "industrial or commercial profits"
- : This definition is of relevance for the purposes of article 5 of the agreement, which provides for such profits to be taxable only by the country of residence, unless the recipient enterprise carries on trade or business in the other country through a permanent establishment situated therein. Items of income that are dealt with elsewhere in the agreement, such as dividends, interest, industrial and copyright royalties, profits from operating ships or aircraft and remuneration for personal (including professional) services, are excluded from industrial or commercial profits. So are other items of income such as natural resource royalties, income from the sale or other disposition of land, income from the grant, renewal or sale of timber or mining rights, and rent. The country of source retains taxing rights in respect of income classes so excluded, whether or not the recipient of the income has a permanent establishment in that country.
This article sets out the basis on which, in doubtful cases, the residential status of a person is to be established for the purposes of the agreement. It provides rules for determining how residency is to be allocated to one or other of the countries for the purposes of the agreement where a taxpayer - whether an individual, a company or other entity - is regarded as a resident under each country's domestic law. (Residential status is one of the criteria for determining taxing rights, and the provision of relief, under the agreement.)
The application of various provisions of the agreement (principally article 5) is dependent upon whether a resident of one country has a "permanent establishment" in the other, or whether income he derives in the other country is effectively connected with a "permanent establishment". This article defines the term for the purposes of the agreement. Its primary meaning in paragraph (1) is that of a fixed place of business in which the business of an enterprise is wholly or partly carried on. The other paragraphs elaborate on and refine the general definition by giving examples of what constitutes a permanent establishment and defining the circumstances in which a resident of one country shall, or shall not, be deemed to have a permanent establishment in the other country.
This article, which largely accords with the comparable provision in the 1960 agreement, sets out the general basis of taxation of "industrial or commercial profits" (a term defined in article 2) derived by a resident of one country from sources in the other. Broadly, for a country to be able to tax the industrial or commercial profits of an enterprise resident in the other country, that enterprise must carry on business in the first country through a permanent establishment situated therein. If this is the case, that country may tax the whole of the industrial and commercial profits of the enterprise from sources within that country whether or not those profits are attributable to that permanent establishment. This basis, known as "force of attraction", is the same as that provided for in the 1960 agreement.
The article also provides for the profits attributable to a permanent establishment to be ascertained as if the permanent establishment were a separate enterprise dealing with the enterprise of which it forms part on an arm's length basis.
Each country is empowered by the article to continue to apply special provisions in its domestic law relating to the taxation of any income from the business of any form of insurance .
This is a conventional provision which authorises the re-allocation, on an arm's length basis, of profits between associated companies where the commercial or financial arrangements between them differ from those that might be expected to exist between independent companies.
Under this article the right to tax profits from the operation of ships or aircraft in international traffic is reserved to the country of residence of the operator. However, any profits derived by a resident of one country from internal traffic in the other country may be taxed in that other country. By reason of the definition of "Australia" in article 2 and the terms of paragraph (3) of article 7, any shipments from a place in Australia to another place in Australia, its continental shelf or external territories are to be treated as forming part of internal traffic.
The broad scheme of this article is to limit to 15 per cent of the gross amount of dividends the tax imposed by the country of source on dividends payable by companies resident in that country to shareholders resident in the other country. This is in line with Australia's other comprehensive agreements (and the 1960 agreement). Under the article, Australian withholding tax on dividends paid to New Zealand residents will be at the rate of 15 per cent rather than at the general rate of 30 per cent. The New Zealand domestic rate of withholding tax is 15 per cent. The country of source will remain free to impose its normal rate of tax where the holding giving rise to the dividends is effectively connected with a permanent establishment that the recipient has in that country.
This article, which did not appear in the 1960 agreement, requires the country of source generally to limit its tax on interest income derived by residents of the other country to 10 per cent of the gross amount of the interest. The 10 per cent limitation accords with the Australian interest withholding tax rate of 10 per cent but requires New Zealand to reduce its withholding tax rate of 15 per cent.
The 10 per cent limitation does not apply where the resident of the other country deriving the interest has in the country of source a permanent establishment with which the indebtedness giving rise to the interest is effectively connected (e.g., interest received from New Zealand customers by an Australian bank operating in New Zealand). The article contains a general safeguard (paragraph (4)) against payments of excessive interest - in cases where there is a special relationship between the persons associated with a loan transaction - by restricting the application of the 10 per cent tax limitation in such cases to an amount of interest which might have been agreed upon by persons dealing at arm's length. The 10 per cent limitation is also inapplicable (paragraph (3)) where the person paying the interest and the beneficial owner of it are "associated" with each other, i.e., where (in the case of companies) either one controls the other or each is under common control.
This article differs from the corresponding provisions of the 1960 agreement which provided for literary, musical and artistic royalties (i.e., broadly, copyright royalties) to be taxed only in the country of residence of the recipient and for other royalties to be taxed in the country of source. Under the new agreement, all royalties may be taxed in both countries with the country of source limiting its tax to 15 per cent of the gross royalties to which this article applies, and the country of residence allowing credit against its tax for the tax of the country of source. The 15 per cent limitation is not to apply to natural resource royalties, which are to remain fully taxable in the country of source.
The limitation on the tax of the country of source also is not to apply if the asset giving rise to the royalties is effectively connected with a permanent establishment which the recipient has in the country of source or, where the royalties are paid by a person not independent of the payee, to the extent that the amount paid is in excess of what might have been agreed upon by independent persons acting at arm's length.
The article is broadly comparable with corresponding provisions in Australia's other recent agreements except that, in those agreements, the tax of the country of source is limited to 10 per cent of the gross royalties. The limitation of 15 per cent corresponds with New Zealand's withholding tax rate on industrial and copyright royalties. For industrial royalties, however, the 15 per cent withholding tax is a minimum tax which, in the absence of an agreement, is increased if the ordinary tax assessable on the royalties net of expenses produces a larger amount of tax. In Australia gross royalties as reduced by allowable expenses are, in the absence of an agreement, taxed by assessment at ordinary rates of tax.
This article sets out the basis for taxing remuneration derived by visiting employees or professional people. As under the 1960 agreement, a resident of one country will generally be taxed in the other country on salaries, wages, fees, etc. from an employment or from personal services where the services are rendered during a visit to the other country but, subject to specified conditions, there is an exemption from this rule for short-term visitors.
Paragraph (1) of this article ensures that income derived by visiting entertainers from their personal activities as such may be taxed by the country in which the activities are exercised, no matter how short their visit to that country.
Paragraph (2) of the article is a safeguard against attempts by entertainers to circumvent paragraph (1) by, e.g., channelling fees to an associated enterprise which arranges the provision of his services. The paragraph will mean that the income derived by the enterprise may be taxed (pursuant to article 5) in the country in which the entertainer exercises his activities.
This article, like corresponding articles in the 1960 agreement and in Australia's other agreements, provides that pensions and annuities may be taxed only by the recipient's country of residence.
This article provides for each country to exempt from its tax remuneration derived by employees of the government of the other country. The exemption will not apply where the employee is resident for taxation purposes in the country where the services are performed, and is not resident there solely for the purpose of rendering those services, or where the services are rendered in connection with a trade or business carried on by a government. The article is substantially the same as corresponding provisions in Australia's other agreements, including the 1960 New Zealand agreement.
This article applies in respect of professors or teachers resident in one country who are temporarily present in the other country for the purpose of teaching at an educational institution for a period of not more than two years. The remuneration of the professor or teacher for his teaching is to be exempt from the tax of the country visited provided it is subjected to tax in his country of residence. There is a corresponding provision in the 1960 agreement.
This article, like corresponding articles in Australia's other recent agreements, provides that a student from one country who is present in the other country solely for the purposes of his education is not to be taxed in the country visited on payments received from sources outside that country for the purposes of his maintenance or education. A corresponding article was not included in the 1960 agreement.
This article refers to dual residents of Australia and New Zealand who, in accordance with article 3, are deemed to be resident solely in one of the countries. The country to which the dual resident is allotted for the purposes of the agreement is given the sole right to tax income from sources in that country or from a third country. A corresponding article was not included in the 1960 agreement which did not provide any solution to the problem of dual residence and so did not provide complete relief from double taxation in any such cases that occurred.
This article provides for the relief of double taxation of income, derived by a resident of one country from sources in the other, which remains taxable in both countries. Each country is required to allow its residents a credit against its own tax for the other country's tax on income from a source in the other country. The article also sets out "source" rules to be applied for the purposes of the article.
When the Income Tax Assessment Act and the Income Tax (International Agreements ) Act (as amended by the present Bill) are read together the measures that will operate in future to relieve double taxation of income derived from New Zealand by Australian residents are as follows. Australia will allow credit for New Zealand tax on dividends derived by individuals from New Zealand and on interest and royalties in respect of which the New Zealand tax is limited to 10 and 15 per cent respectively by articles 9 and 10. (See the notes above concerning clause 6 of the Amending Bill.) Other income that is taxed in New Zealand will continue to qualify for exemption from Australian tax under section 23(q) of the Income Tax Assessment Act, while section 46 of that Act will continue to free from Australian tax dividends from New Zealand derived by Australian resident companies. In these cases, since there will be no Australian tax payable, there will be no credit for New Zealand tax.
The source rules in paragraph (3) of the article will obviate difficulties in relation to the allowance of credit by the country of residence for the other country's tax that might otherwise occur should income, by the application of the source rules applicable under domestic tax laws, technically have a source in both countries. In particular, the source rules in paragraph (3)(b) for interest and royalties will avoid areas of unrelieved double taxation that the 1960 agreement fails to avoid, and which have been referred to earlier in these notes. Sub-section (2) of new section 6B of the Principal Act, which gives legislative force to paragraph (2) of article 22 of the agreement (see the notes above on clause 4 of the Amending Bill), will apply those source rules for the purposes of section 23(q) in relation to the "dual-source" cases that have occurred since the beginning of the Australian 1968-69 income year.
The source rules in paragraph (3)(b) of article 18 require, in effect, that each country, as the country of residence of a taxpayer, will recognise the other country's source rules. Interest or royalty income derived by a resident of Australia from New Zealand and taxed in New Zealand will be exempt from Australian tax pursuant to section 23(q) of the Assessment Act if derived in income years from 1968-69 - when the "dual-source" problem referred to earlier first arose - to 1971-72 inclusive. Such income derived since the beginning of the 1972-73 income year will be similarly exempt from Australian tax under section 23(q) if the New Zealand tax thereon is not limited under articles 9(1) or 10(1) of the new agreement, but will be taxed in Australia with credit being allowed for the New Zealand tax if the New Zealand tax is limited by those articles.
This article provides for consultation between the respective taxation authorities to ensure proper application of the agreement.
This article authorises the exchange of information between the taxation authorities of each country, subject to certain restrictions along the lines of Australia's other double taxation agreements as to the purposes for which information may be exchanged and the persons to whom it may be disclosed. Information may be exchanged where this is necessary for the carrying out of the provisions of the agreement, or for the prevention of evasion or avoidance.
This article sets out the basis on which the agreement may be extended, if both countries so desire, either as it stands or with such modifications as may be agreed upon, to any territory for whose international relations either country is responsible. In the absence of any such extension, the agreement does not apply in relation to any income tax levied by either country's territories.
By this article the agreement will enter into force on the date on which all steps necessary to give it the force of law in both countries have been completed. As all necessary steps have been completed in New Zealand, the agreement will enter into force on Royal Assent being given to the present Bill. On entry into force it will have general effect:
- in Australia -
- in relation to withholding tax, in respect of income derived on or after 1 July 1972;
- in relation to other Australian tax, in respect of income derived during any year of income beginning on or after 1 July 1972, or during any substituted accounting period adopted in lieu of that year.
- in New Zealand -
- in relation to New Zealand tax in respect of income derived during any income year beginning on or after 1 April 1972.
Paragraph (2) of article 22 provides for the "source rules" in the agreement for interest and royalties to have effect, for the purposes of the double taxation relief provisions of each country's domestic law, for the four income years preceding the income year for which the agreement will first have general effect. As explained in the notes above dealing with article 18, this provision is designed to resolve certain cases of unrelieved double taxation that have occurred under the 1960 agreement following domestic law changes in 1968-69. It will be given legislative effect in Australia by clause 4 of the amending Bill.
Paragraph (3) of article 22 provides for the 1960 agreement to cease to have effect on the new agreement coming into effect, but paragraph (4) of the article continues, for fiscal years commencing before the new agreement enters into force , any provision of the 1960 agreement that is more beneficial to the taxpayer than the new agreement. An example of the operation of article 22(4) is provided by the effect of the two agreements on copyright royalties. Under the 1960 agreement (article IX) a taxpayer resident in one country is exempt from the tax of the other country on such royalties having a source there. By contrast, the new agreement allows the country of source to tax the royalties, its tax being limited to 15 per cent. This change would, apart from article 22(4), have effect from the beginning of the 1972-73 income year (i. e ., from a date prior to signature of the new agreement). Article 22(4) avoids that result by requiring that the exemption under article IX of the 1960 agreement is to apply for any income year that commences before the agreement enters into force, i.e., before the present Bill receives the Royal Assent.
This article declares that the agreement is to continue in effect indefinitely but either country may give written notice of termination on or before 30 June in any calendar year after 1975. In that event the agreement would cease to apply to the fiscal year commencing in the calendar year subsequent to the year in which notice is given.
This agreement is limited to the taxation of profits from international traffic of airlines of either country - in practice Qantas and Alitalia. It reserves the right to tax such profits solely to the country in which the airline operator has its place of effective management. It is similar to the agreement between Australia and France that was signed on 27 March 1969, a copy of which is included as the Seventh Schedule to the Principal Act. Its provisions give relief comparable with that provided in relation to airlines profits in Australia's comprehensive double taxation agreements.
This article provides for the agreement to apply to the existing income taxes of each country and to any substantially similar taxes subsequently imposed by either country.
This article defines terms used in the agreement. Its main provision is the definition of the phrase "operation of aircraft in international traffic". In effect this term defines the flights the income from which is to qualify for the exemptions afforded by the agreement. Its result is that airline profits of an airline of one country will be exempt from tax in the other country except where derived from the carriage of passengers, cargo or mail between places in that other country.
Article 3 is the operative provision conferring reciprocal exemptions from tax on income derived from the operation of aircraft in international traffic. It also confirms that income derived by an airline from the operation of aircraft between places in its home country, (and so not falling within the term "operation of aircraft in international traffic") will not be taxed by the other country.
By this article the agreement will enter into force on the exchange of instruments of ratification. Enactment of the present Bill is a necessary prelude to ratification. On entering into force the agreement will have effect in Australia for the 1966-67 and subsequent years of income and in Italy for taxable periods commencing on or after 1 January 1966.
The agreement is to continue in effect indefinitely but this article allows either country to give notice of termination to the other on or before 30 June in any calendar year after 1973. In that event, the agreement would cease to be effective as from the time specified in the article.