Notes for Treasurer's Second Reading Speech
By this Bill the Parliament is asked to approve - and give the force of law to - a new double taxation agreement between Australia and the United Kingdom. Some changes in the income tax law are also proposed by the Bill. These flow from the new agreement and I shall refer to them again briefly later on.
The new agreement - which followed some months of negotiation - was signed in Canberra on behalf of each Government on 7th December 1967. Shortly after that, I arranged for a copy of the agreement - together with some explanatory notes on it - to be sent to each member of the Parliament so as to provide members with an opportunity to study its terms before it came up for debate in the Parliament. I mention also that the agreement has been a public document since last December and, while I have received one or two enquiries about some aspects of it, the evidence is that it has found general acceptance with people likely to be affected by it.
The Parliament of the United Kingdom has already debated and approved the new agreement. It will not, however, come into force either in the United Kingdom or here until we also approve it and give it the force of law.
There is, of course, an earlier double taxation agreement of long standing with the United Kingdom. It was concluded in 1946. The new agreement, if it is approved, will replace the 1946 agreement and I think I should say at this point that it is the opinion of the Government that the new agreement is, from Australia's standpoint, far better balanced than the one it is designed to replace.
Before I go on to talk about the provisions of the new agreement and how they differ from those contained in the 1946 agreement, perhaps I should say a few words about the general aims and purposes of double taxation agreements. I think this would be appropriate because arrangements of this kind have not come before the Parliament for discussion very often. The last occasion was in 1960 when our agreement with New Zealand was approved.
Bilateral taxation agreements have two principal functions. One is the formal prevention of double taxation on income flowing between the two contracting countries; the other concerns the apportionment between the two governments of the taxation collected on this income.
The first of these functions is clearly of importance to businessmen and others who reside in one country and receive income from investments or activities in the other. It is obviously in the interests of harmony in the commercial relationships between two countries that businessmen and investors residing in one of the countries should know with a strong degree of certainty what the taxation consequences of transactions with, or investment in, the other country will be, and that the income will not be taxed by both countries without any double tax relief.
The second matter is the one that causes most difficulty in negotiations, particularly where there is an imbalance in the flow of income between the two countries. One viewpoint is that any country should be able to look to its own residents to contribute at normal rates towards the cost of the government of the country and the benefits it provides for its residents. It is also said that the country which is the source of capital invested in the other country - presumably to the benefit of that other country - is entitled to a reasonable share of the taxation of the income yielded by the investment. From the contrary point of view, the country in which the income originates can argue that, in providing the conditions necessary for producing the income, it acquires the main right to the taxation revenue on that income.
All methods of relieving double taxation between two countries involve each country in giving up some or all of the tax it might otherwise collect. One method may require either the country of residence or the country of source to exempt particular classes of income from its tax. Other methods require the country of source to limit its tax on particular classes of income, or the country of residence to give credit for the tax imposed by the country of source. Each of these bases of relief is to be employed, in one context or another, in relation to the new agreement with the United Kingdom.
In the Government's opinion, the new agreement represents a mutually satisfactory compromise as to each country's taxing rights and will serve very well to facilitate and encourage the flow of investment and trade between the two countries. It is to be borne in mind that the agreement was negotiated against the background of fundamental changes in the British tax law designed to make overseas investment less attractive than it had previously been.
The new agreement differs from the 1946 agreement in a number of important respects. I think it may be convenient if I refer to the main differences under appropriate headings.
Under the 1946 agreement, dividends paid by an Australian company to a United Kingdom company that wholly owns the Australian company are, in general, completely exempt from Australian tax. Other dividends paid to residents of the United Kingdom are subject to 15 per cent Australian withholding tax, i.e., half the general withholding tax rate of 30 per cent. Under the new agreement the exemption for United Kingdom parent companies disappears as from 15th December 1967 and all dividends flowing from Australia to the United Kingdom will - unless, in broad terms, they are part of the receipts of a business carried on here - be subject to the 15 per cent rate. Conversely, dividends flowing from the United Kingdom to Australia will, with the exception I have mentioned, be subject to 15 per cent United Kingdom tax. The normal United Kingdom rate is currently 41.25 per cent.
I mention that profits of Australian public companies distributed as dividends to United Kingdom residents will initially have borne Australian tax at the company rate of 42.5 per cent, so that when the dividends also bear withholding tax of 15 per cent, the total Australian tax on each 100 dollars of profit derived in Australia is 51 dollars 12 cents. I suggest this represents a reasonable contribution to Australian revenue and that the arrangements I have outlined secure a fair share of the tax revenue to Australia without discouraging investment here of United Kingdom capital.
Where dividends are part of the proceeds of a business carried on in one country by a resident of the other, the country where the business is carried on will be able to exact its full rate of tax on the dividends by ordinary assessment processes. A corresponding provision will apply to royalties and interest in respect of which, as I shall now explain, the country of origin will otherwise be required to limit its tax.
Under the 1946 agreement, the country of residence of the recipient has the sole taxing rights as to most royalties. The country in which they originate is obliged to exempt them from its tax. The new agreement provides that the country where royalties originate may tax them, but generally its tax is not to exceed 10 per cent. This means that Australia will regain important taxing rights that it had forfeited under the 1946 agreement. I should mention at this stage that another Bill which will be introduced later on is designed to ensure that the taxing rights regained will prove fully effective.
Under the new agreement each country is generally to limit to 10 per cent its tax on interest flowing to the other. The normal rate of Australian withholding tax is, of course, 10 per cent. The British rate, on the other hand, is currently 41.25 per cent.
Under the 1946 agreement - as indeed under our other three agreements with the United States, Canada and New Zealand - the basic principle is that the country of residence of a shipowner, or of an airline company, has the sole right to tax shipping and airline profits. The new agreement with the United Kingdom continues this as regards profits derived in the course of international traffic but concedes taxing rights to the other country as regards profits from voyages or flights solely between places in that country.
The new agreement follows the customary arrangement that the business profits of an enterprise of one country may be taxed in the other if, broadly speaking, they are derived there through what amounts to a branch or, as it is called in the language of double taxation agreements, a "permanent establishment". The definition of permanent establishment for this purpose is a comprehensive one quite satisfactory to Australia.
What I have said so far covers the main income categories to which the agreement extends. There are other provisions - customary in international tax agreements - regarding visiting businessmen, entertainers, teachers and students. As to a visiting businessman who is an employee or director, the general rule is that his salary is not to be taxed in the country visited unless his visit exceeds 183 days in a year of income. This rule does not apply to entertainers. These may be taxed by the country visited on income derived from their activities there, no matter how long the length of the visit, and whether or not they are self-employed persons or employees of someone else.
Government remuneration will, in general, remain taxable by the paying Government. On the other hand, pensions, either governmental or private, will be exempt from tax in the country of source whether or not they are taxable in the country where the pensioner resides.
An important point I should mention is that there are comprehensive credit arrangements which ensure that, where both countries tax the same income, the country in which the taxpayer resides will give credit for the tax of the country of source. The general effect is that the total tax payable cannot exceed the higher of the taxes imposed by each country. A further point of some substance is that, except where otherwise specified in the agreement, the country of source of income will retain its full rights to tax the income on whatever basis it considers appropriate from time to time.
In Australia the new agreement will apply as from 1st July 1967 and the 1946 agreement will be terminated at that time. There are, however, special provisions for the 1967/68 income year to facilitate smooth transition from the 1946 agreement to the new agreement.
As well as giving force to the agreement, the Bill makes some amendments to the existing income tax law. I foreshadowed these in a statement I made on 15th December 1967. Except as to dividends, Australia's general way of relieving its residents from double taxation on income derived abroad, and taxed there, is to grant an exemption from Australian tax. Dividends taxed abroad we tax again here but we allow a credit for the foreign tax, up to the amount of the Australian tax. The Bill proposes that this credit system be extended to interest and royalties in respect of which the United Kingdom tax is limited to 10 per cent. I have already explained in my statement of 15th December 1967 that it would be anomalous to allow these classes of income to go free of Australian tax merely because they have borne a rate of tax no higher than 10 per cent in the United Kingdom. To do so would be to give up revenue the United Kingdom has conceded us.
The credit system will be applied to interest, royalties and dividends from the United Kingdom by including the gross amount of this income in Australian assessable income, ascertaining the Australian tax payable on the income, comparing that with the United Kingdom tax paid, and allowing a credit for the United Kingdom tax to the extent that it does not exceed the Australian tax. Formulae are provided by the Bill for ascertaining the Australian tax. There will be no credit for United Kingdom tax on dividends derived by Australian companies. Because of a rebate allowed in Australia, such dividends are effectively free of Australian tax.
Detailed explanations of technical aspects of the agreement and the Bill are contained in a comprehensive explanatory memorandum being made available to Honourable Members and I do not propose to speak at greater length about them at this stage.
I commend the Bill to the House.