House of Representatives

Income Tax (International Agreements) Bill 1973

Income Tax (International Agreements) Act 1973

Second Reading Speech

Mr Hayden (Oxley-Minister for Social Security) (2.53)-I move:

That the Bill be now read a second time.

This Bill is a measure to give the force of law to 2 double taxation agreements. One of the agreements is with Italy and applies only to profits derived from international airline operations. The other is with New Zealand and replaces the agreement concluded with that country in 1960. It covers all forms of income flowing between Australia and New Zealand. The 2 agreements were signed for the respective governments during 1972 but cannot take effect until the passage of enabling legislation. A comprehensive double taxation agreement with the Federal Republic of Germany, which was also signed towards the end of 1972, is at present being considered by the Government.

The limited agreement with Italy provides that each country is to exempt, from its tax, profits derived from international traffic by the other country's international airline. In effect, each country will have the sole right to tax profits from international traffic derived by its international airline in the other country. This is the basis for avoiding double taxation of airline profits recommended by the International Civil Aviation Organization in order to spare international airlines the difficulties raised by the taxation in a number of countries of the profits from a single flight. It is the basis generally adopted in international double taxation agreements, whether of the comprehensive or the limited type, including Australia's existing double taxation agreements, On entering into force the agreement will apply as from 1966, the year in which the possibility of entering into these mutually convenient arrangements was first discussed between the 2 countries.

The revised agreement with New Zealand brings up to date the agreement concluded with that country in 1960. Basically, the revision was made necessary by changes since 1960 in Australian and New Zealand taxation laws but it also takes account of subsequent developments reflected in Australia's more recent double taxation agreements, notably those with the United Kingdom and Japan. In particular, the new agreement includes provisions that will resolve cases of unrelieved double taxation that have occurred under the 1960 agreement due to each country claiming to be the source of certain interest and royalty income. The relevant provisions require the country of residence to recognise the other country's source rules for the income years concerned. They will also prevent cases of this nature arising in the future.

Provisions of the new agreement dealing with income such as business profits and shipping and airline profits will have substantially the same practical effects as those of the 1960 agreement. Other provisions of the new agreement were not included in the 1960 agreement but follow the same lines as corresponding provisions in Australia's more recent agreements.

The tax which may be levied by the country of source on dividends remains generally limited, as in the 1960 agreement, to 15 per cent of the gross payment. Under new provisions broadly equivalent in scope to those in Australia's more recent agreements, a corresponding limitation will generally apply in relation to royalty income. The tax of the country of source on interest is to be limited to 10 per cent. The limitations will not apply to dividends, royalties or interest that form part of the business profits of a branch that a resident of one country has in the other country, or to interest payments between associated persons.

The agreement introduces provisions that, for the purposes of the agreement, will resolve the residential status of persons who are regarded by each country as resident for taxation purposes under its own domestic law. It also introduces a provision-now commonly adopted in double taxation agreements-which exempts certain payments from overseas sources to visiting students. It also includes usual provisions governing the taxation of visiting businessmen, teachers and professors, public entertainers, government employees and pensioners.

Turning to the measures for the relief of double taxation that will apply as a result of this Bill, the country of residence will provide relief, by way of credit for the other country's tax, in respect of income that would otherwise remain taxable in both countries. Thus interest and royalties derived from New Zealand by residents of Australia, and in respect of which the New Zealand tax is limited to 10 per cent and 15 per cent respectively, will be taxed in Australia with credit being allowed for the New Zealand tax. Dividends from New Zealand received by Australian individuals will be eligible for a tax credit, while those received by Australian companies will remain tax-free by reason of the rebate allowed on inter-corporate dividends. Other income of Australian residents derived in New Zealand will be exempt from Australian tax if taxed in New Zealand.

When given the force of law on assent being given to this Bill, the agreement with New Zealand will generally have effect in Australia from 1st July 1972, and in New Zealand from 1st April 1972. The agreement also has some back-dating to cover the dual-source interest and royalty cases that I referred to earlier. In addition, the agreement will continue -for income years commencing before it enters into force-any provisions of the 1960 agreement that give a result more favourable to a taxpayer than the new agreement does.

A memorandum containing more detailed explanations of technical aspects of the Bill and of the agreements is being made available to honourable members. I commend this Bill to the House.