ATO Interpretative Decision

ATO ID 2010/158

Income Tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
  Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are profits derived by the taxpayer, a New Zealand resident company, in respect of which New Zealand has exclusive taxing rights under the tax treaty between Australia and New Zealand signed on 27 January 1995 as amended by the Protocol signed on 15 November 2005 (the 1995 New Zealand Agreement), 'exempt income' under section 6-20(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The profits derived by the taxpayer, a New Zealand resident company, in respect of which New Zealand has exclusive taxing rights under the 1995 New Zealand Agreement is 'exempt income' under section 6-20(2) of the ITAA 1997.

Facts

The taxpayer is a company that is a resident of New Zealand for New Zealand income tax purposes and under the 1995 New Zealand Agreement.

The taxpayer derives during the income year 'profits' that include ordinary income from an Australian source for the purposes of subsection 6-5(3) of the ITAA 1997 from the carrying on of its business in New Zealand.

Under the 1995 New Zealand Agreement, Australia has no right to tax these profits, as this Agreement provides that the profits are taxable only in New Zealand.

Reasons for Decision

Subsection 6-20(2) of the ITAA 1997 states:

* Ordinary income is also exempt income to the extent that this Act excludes it (expressly or by implication) from being assessable income.

Paragraphs 106 of the Taxation Ruling TR 2002/9 states:

Income will also be exempt where it is not taxable by virtue of the provision of one of the International Treaties. Subsection 6-20(2) provides that ordinary income is exempt to the extent that this Act excludes it from being assessable income. 'This Act' is defined to include the Income Tax Assessment Act 1936. Subsection 4(1) of the International Tax Agreement Act 1953 (ITA Act 1953) provides that 'the Assessment Act is to be incorporated and shall be read as one with this Act'. This means that the provisions of the two Acts are to be considered as if they are all in the one Act.

In respect of the last sentence of paragraph 106 of Taxation Ruling TR 2002/9 quoted above, Middleton J in GE Capital Finance (as trustee for the Highland Finance Unit Trust) v. Federal Commissioner of Taxation (2007) 159 FCR 473; 2007 ATC 4487; (2007) 66 ATR 447:

The incorporation has the consequence, as a matter of a drafting technique, of incorporating the text of the Assessment Act into the Agreements Act.

Furthermore, paragraph 7.26 of D C Pearce and R S Geddes, 2001, Statutory Interpretation in Australia, 5th Edition, Butterworths states:

It is not uncommon to find in an Act a provision saying that it is to be read as one with, ..., or to be incorporated with, another Act. The effect of such a provision is, in effect, to mould the two Acts into one - to require the incorporated Act notionally to be written in the incorporating Act. Accordingly, each of the provisions of the two Acts must be construed as if it were included in the one Act - ...

This statement as to the effect of such provisions is consistent with the view of Williams J in Cadbury-Fry-Pascall Pty Ltd v. Federal Commissioner of Taxation (1944) 70 CLR 362; (1944) 7 ATD 471.

As a result, the term 'this Act' in subsection 6-20(2) refers in the present case to the ITAA 1997 incorporated into the International Tax Agreements Act 1953 (Agreements Act) and read as one Act.

Article 7.1 and Article 8.1 of the 1995 New Zealand Agreement, which are part of the Agreements Act as they are contained in Schedule 4 to that Act, provide for present purposes that the profits of the taxpayer, which include ordinary income, are taxable only in New Zealand for the purposes of subsection 6-20(2) of the ITAA 1997, Article 7.1 and Article 8.1 exclude from being assessable income by implication at least, the ordinary income included in the profits of the taxpayer as these profits may not be taxed in Australia.

Accordingly, the profits of the taxpayer in respect of which New Zealand has exclusive taxing rights under the 1995 New Zealand Agreement are 'exempt income' under subsection 6-20(2) of the ITAA 1997.

Year of income:  Year ended 30 June 2007 Year ended 30 June 2008 Year ended 30 June 2009 Year ended 30 June 2010

Legislative References:
Income Tax Assessment Act 1936
   The Act

Case References:
Cadbury-Fry-Pascall Pty Ltd v Federal Commissioner of Taxation
   (1944) 70 CLR 362
   (1944) 7 ATD 471

Related Public Rulings (including Determinations)
Taxation Ruling TR 2002/9

Other References:
D C Pearce and R S Geddes, 2001, Statutory Interpretation in Australia, 5th edition, Butterworths)

Keywords
Foreign income
Double tax agreement
Exempt income
New Zealand
International law
International tax

Business Line:  International Centre of Expertise

Date of publication:  10 September 2010

ISSN: 1445 - 2782