ATO Interpretative Decision

ATO ID 2004/203

Income Tax

• This ATO ID has been amended to remove references in the Reasons for Decision to repealed legislation dealing with foreign tax credit rules. With effect from 1 July 2008 the foreign tax credit system will be replaced by the foreign tax offset system.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is a dividend received by a resident taxpayer from shares held in a Malaysian company, which is exempt from tax in Malaysia, assessable under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. A dividend received by a resident taxpayer from shares held in a Malaysian company, which is exempt from tax in Malaysia, is assessable under subsection 6-10(4) of the ITAA 1997.

Facts

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer owns shares in a Malaysian company.

The taxpayer received a dividend from those shares during the year ended 30 June 2002.

The dividend is exempt from tax in Malaysia because it was distributed from tax exempt income arising from a special incentive to encourage investments in Malaysia.

Reasons for Decision

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident taxpayer includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with dividends. Subsection 44(1) of the ITAA 1936 provides that the assessable income of an Australian resident shareholder of a company (whether the company is a resident or a non resident) includes dividends paid by the company out of profits derived by it from any source.

In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act) .

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

Schedule 16 to the Agreements Act contains the double tax agreement between Australia and Malaysia (the Malaysian Agreement). Schedules 16A and 16B of the Agreements Act contains the protocols amending the Malaysian Agreement (the Malaysian Protocol and Second Malaysian Protocol, respectively). The Malaysian Agreement, the Malaysian Protocol and the Second Malaysian Protocol operate to avoid the double taxation of income received by Australian and Malaysian residents.

The Second Malaysian Protocol enters into force from 1 July 2004, with the exception of Article 5(a), dealing with amendments to Article 23 of the Malaysian Agreement, which entered into force with effect from 1 July 1992.

Article 10 of the Malaysian Agreement deals with dividends. Article 10(1) of the Malaysian Agreement provides that dividends paid by a Malaysian company to a resident of Australia may be taxed in Australia.

Article 10(3) of the Malaysian Agreement provides that subject to Article 10(4), those dividends, being dividends to which a resident of Australia is beneficially entitled, shall be exempt from any tax in Malaysia which is chargeable on dividends in addition to the tax chargeable in respect of the income or profits of the Malaysian company.

Article 10(4) of the Malaysian Agreement provides that if after the date of signature of the Malaysian Agreement the existing system of taxation in Malaysia applicable to the income and distributions of companies is altered by the introduction of a tax on the income or profits of a company (for which no credit or only partial credit is given to its shareholders) and of a further tax on dividends paid by the company, the Malaysian tax on dividends paid by a Malaysian company to which a resident of Australia is beneficially entitled, shall not exceed 15 per cent of the gross amount of the dividends.

Article 23(3) of the Malaysian Agreement (as amended by Article 9 of the Malaysian Protocol) provides that, subject to the provisions of the law of Australia, a credit for any tax paid in Malaysia will be allowed against Australian tax paid on income from Malaysian sources.

Malaysian tax forgone is deemed to be 'tax paid in Malaysia' under Article 23(6) of the Malaysian Agreement if it answers the description of 'Malaysian tax forgone' under Article 23(4) and is not of a type referred to in Article 23(5). (Note: Articles 23(4), 23(5) and 23(6) of the Malaysian Agreement were amended with effect from 1 July 1992 by Article 5 of the Second Malaysian Protocol).

Under Article 23(4) of the Malaysian Agreement, Malaysian tax forgone means an amount which would have been payable as Malaysian tax on income had that income not been wholly or partly exempted from Malaysian tax in accordance with:

•

Schedules 7A and 7B of the Income Tax Act 1967 of Malaysia, or

•

sections 22, 23, 29, 29A, 29B, 29C, 29D, 29E, 29F, 29G, 29H, 31E, 35, 37 and 41B of the Promotion of Investments Act 1986 of Malaysia and section 45 of that Act to the extent that it relates to sections 21, 22, 26, or 30Q of the Investment Incentives Act 1968, so far as the sections were in force on, and have not been modified since, the date of signature of the Protocol second amending the Agreement or have been modified only in minor respects so as not to affect their general character.

Under former Article 23(7) of the Malaysian Agreement, former Articles 23(5) and 23(6) of the Malaysian Agreement were applicable only in relation to income derived in any of the 5 years of income commencing on 1 July 1987 and in any later year of income that may be agreed in an Exchange of Letters for this purpose by the Governments of Australia and Malaysia.

The Second Malaysian Protocol and associated exchange of letters were signed on 28 July 2002 which resulted in the operation of new Articles 23(4), 23(5) and 23(6) being extended to 30 June 2003, at which time they will expire permanently (Article 23(7) of the Malaysian Agreement, as amended by Article 5 of the Second Malaysian Protocol).

A taxpayer is entitled to a foreign tax credit where the assessable income of a resident taxpayer includes foreign income and the taxpayer had paid foreign tax for which they are personally liable in respect of that income.

The Malaysian tax forgone is deemed to be Malaysian tax paid under Article 23(6) of the Malaysian Agreement for which a credit is to be allowed under Article 23(3) of the Malaysian Agreement.

The assessable income of the taxpayer will include the Malaysian dividends received under subsection 44(1) of the ITAA 1936. Accordingly, the Malaysian dividends received by the taxpayer form part of their assessable income under subsection 6-10(4) of the ITAA 1997. However, the taxpayer will be entitled to a foreign tax credit for the Malaysian tax forgone.

Year of income:  Year ended 30 June 2002

Legislative References:
Income Tax Assessment Act 1936
   subsection 6AB(5)
   subsection 44(1)

ATO Interpretative Decisions overturned by this decision
ATO ID 2003/144

Keywords
Dividend income
Double tax agreements
Exempt income
Foreign income
Foreign income tax credits
International tax
Malaysia

Business Line:  Public Groups and International

Date of publication:  5 March 2004

ISSN: 1445-2782