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House of Representatives

Income Tax (International Agreements) Amendment Bill (No. 2) 1980

Income Tax (International Agreements) Amendment Act (No. 2) 1980

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

Introductory note

The main purpose of this Bill is to give the force of law in Australia to a revised comprehensive double taxation convention (agreement) between Australia and Canada that was signed in Canberra on 21 May 1980.

The new convention, which replaces an agreement concluded in 1957, became necessary because of changes in the tax laws of both countries, particularly in Canada, where major reforms of the tax system came into effect in 1976. On entering into force the revised convention will have effect, in broad terms, in Australia from 1 July 1975 and in Canada from 1 January 1976. However, under transitional provisions, the old agreement will continue to apply generally, in Australia, in respect of the 1979- 80 and earlier income years and, in Canada, in respect of the 1980 and earlier calendar years, in cases where it would give greater relief from tax of either country than the new convention does.

The Bill specifies that interest and royalties, and income attributable to interest and royalties, derived from Canada by residents of Australia, and in respect of which the Canadian tax is limited by the terms of the convention to 15 per cent or 10 per cent, will not, by reason of the payment of that limited tax, be exempt from Australian tax. Australia will instead allow credit for the limited tax against the Australian tax on this income. As a transitional measure, because the convention is expressed to have effect from a date prior to its signature, provision is made to the effect that Australian residents deriving interest or royalties from Canada will not be disadvantaged by the changed arrangements in relation to such income derived up to and including the date of signature of the revised convention.

The convention sets out the basis on which, and the extent to which, income derived in one country by residents of the other, is to be taxed in each country and the basis on which relief from double taxation is to be effected where income may be taxed by both countries. The main features of the revised arrangements with Canada are as follows:

Business profits, if they are derived by a resident of one country from a branch or other "permanent establishment" in the other country, may be taxed in the latter country, otherwise they are to be taxed only in the country of residence.
Dividends, interest and royalties will be subject to tax in the country of source, but there is a general limit on the tax that that country may charge of 15 per cent for dividends and interest and 10 per cent for royalties.
Income from real property is taxable in full in the country in which the property is situated.
Profits from international operations of ships and aircraft will be taxed only in the country of residence of the operator.
Income from independent personal services will be taxed only in the country of residence of the recipient unless the income is attributable to a fixed base of the recipient in the other country.
Income from dependent personal services, i.e., employees' remuneration, will generally be taxable in the country where the services are performed. However, where the services are performed during a short visit to one country by a resident of the other country and either the remuneration does not exceed the greater of $CAN3000 and $AUS2600, or the employer is not a resident of or a permanent establishment in the country visited, the income will be taxed only in the country of residence of the recipient.
Government officials are to be taxed by their home country.
Directors' fees will generally be taxed in the country of residence of the paying company.
Income derived by public entertainers from their activities as such are to be taxed by the country in which the activities take place.
Pensions and annuities may be taxed in the country of source, subject to a limitation of the amount of tax that may be charged.
Professors and teachers are not the subject of a special rule, and their remuneration is to be dealt with according to the generally-applicable rules of the convention.
A student from one country who is temporarily present in the other country solely for the purpose of receiving an education will be exempt from tax in the latter country in respect of payments made from abroad for the purposes of his or her maintenance or education.
Dual residents of both countries are, according to specified criteria, to be treated for the purposes of the convention as being residents of only one country.
Associated enterprises may be taxed on the basis of dealings at arm's length.
Exchange of information and consultation between the taxation authorities of each country is authorised.
Double taxation relief to be allowed by the country of residence in respect of income taxed in the other country will be:

in Australia, by allowance of credit against Australian tax for the Canadian tax on interest and royalties, where that tax is limited by the convention, and on dividends received by individuals - dividends received by Australian companies from Canada and all other categories of income received by Australian residents from Canada being freed from Australian tax by Australian tax law;
in Canada, broadly, by allowance of credit against Canadian tax for the Australian tax on income derived by residents of Canada from sources in Australia.

Notes on the clauses of the Bill are given below and these are followed by explanations of the articles of the convention.

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