House of Representatives

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

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

Second Reading Speech

by the Treasurer, the Hon. John Howard, M.P.

This Bill will provide legislative authority for the entry into force of a revised comprehensive double taxation Agreement with Canada. The Agreement that it replaces was concluded in 1957.

The new treaty was signed earlier this year, but cannot enter into force until all necessary constitutional processes are completed by Australia and Canada. For Australia, this Bill will, when assented to, complete the processes required of us.

Revision of the 1957 Agreement 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. When it enters into force the new Agreement will replace the previous Agreement, with effect in Australia from 1 July 1975 and in Canada from 1 January 1976.

The revised Agreement covers in a more detailed way than did the old treaty, all forms of income flowing between Australia and Canada. It corresponds closely with other modern double taxation agreements Australia has concluded.

Under this Agreement, Australia will continue to limit to 15 per cent its tax on dividends flowing to Canada. Canada will similarly limit its tax on dividends flowing to Australia.

While there was, as I have just indicated, an article dealing with dividends in the old Agreement, there was not one for interest, and only a very limited coverage of royalties. Comprehensive articles covering these forms of income are a feature of the new agreement.

A limit of 15 per cent on each country's tax on interest flowing to the other is specified in the new Agreement. For Australia, this will mean no reduction in our Interest Withholding Tax, which is charged at a rate of 10 per cent. On the Canadian side, the reciprocal 15 per cent limit contrasts with the rate of 25 per cent fixed by Canadian domestic law.

For royalties flowing to Canada, our tax will be limited to 10 per cent of gross payments, instead of tax at general rates on net royalties. Instead of being able to charge the 25 per cent fixed by its own law Canada too will limit to 10 per cent its tax on royalties coming in this direction.

Apart from other changes that bring the arrangements with Canada into line with Australia's modern agreements, the Agreement provides for limited taxation rights for the country of source in respect of pensions paid to residents of the other country. There is also some relaxation of the rules under which residents of one country working for short periods in the other are free from tax in the country being visited. Reflecting the difficulties that Canada has experienced with such articles, the Agreement does not include a provision specifically covering the remuneration of professors and teachers of one country who are visiting the other.

The Agreement contains measures for the formal relief of double taxation of income that may be taxed by both countries. As is customary, the country of residence of the taxpayer is obliged to provide the necessary relief.

So far as Australian residents are concerned, the combined effect of the Agreement and of amendments to Australian tax law proposed by the Bill will be that dividends received by individuals, and interest and royalties on which Canadian tax is limited by the Agreement, will be taxed here but with credit being allowed for the Canadian tax. Because of the general rebate on inter-company distributions there is effectively no tax on dividends received from Canada by Australian companies. Other items of income thtr an Australian resident derives from Canada will continue to be tax-free in Australia if taxed in Canada.

There will be transitional measures associated with the rules I have just outlined and with the fact that in some areas the old Agreement gave greater relief from tax of one of the countries than does the new Agreement. These will ensure that there is no retrospective increase in tax liability.

For example, where there is a provision of the previous Agreement that gives greater relief from the tax of either country than the new Agreement does, the former will apply in Australia for the 1979-80 and any earlier income year. I recall here that I announced this rule on 21 May last, when the Agreement was signed.

An explanatory memorandum containing more detailed explanations of technical aspects of the Bill and of the arrangements with Canada is being made available to Honourable Members.

I commend the Bill to the House.