ATO Interpretative Decision
ATO ID 2003/932
Income Tax
Withholding Tax: entitlement to reduced treaty rate for unfranked dividends passing through an entity that is a resident of a non treaty countryFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Will the taxpayer, an entity which is resident in a treaty country and which is beneficially entitled to unfranked dividends from Australian companies, be subject to withholding tax under subsection 128B(4) of the Income Tax Assessment Act 1936 (ITAA 1936) on those dividends at the rate stipulated in the double tax agreement (DTA) that Australia has with that treaty country, when those dividends pass through an arm's length interposed entity that is not a resident of a treaty country?
Decision
Yes. Even though the withholding tax rate for the purposes of subsection 128B(4) of the ITAA 1936 would have been 30%, section 17A of the International Tax Agreements Act 1953 (Agreements Act) operates to limit the withholding tax rate to that stipulated in the DTA. The reduction in the rate of withholding tax will occur because only the taxpayer (not the interposed entity) is beneficially entitled to the dividends and the taxpayer is a resident of a country to which Australia has entered a double tax agreement (DTA).
Facts
The taxpayer, a non-resident entity, has invested in Australian company shares through an arm's length entity in a third country.
The taxpayer is beneficially entitled to unfranked dividends.
The taxpayer is a resident of a country with which Australia has a DTA.
The investment vehicle is not a resident of a country with which Australia has a DTA.
The investment vehicle is treated as a 'look through' entity and is not taxed on the dividends.
The investment vehicle is not beneficially entitled to the unfranked dividends.
Reasons for Decision
Subsection 128B(1) of the ITAA 1936 provides that, subject to certain exclusions, section 128B of the ITAA 1936 will apply to income derived by a non-resident that consists of a dividend paid by an Australian resident company (franked dividends are specifically excluded from the operation of section 128B by paragraph 128B(3)(ga) of the ITAA 1936).
Subsection 128B(4) of the ITAA 1936 provides that a person who derives dividend income to which section 128B of the ITAA 1936 applies, is liable to pay withholding tax on that dividend income. The withholding tax rate applicable is generally 30% of the dividend amount (section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974).
Unfranked dividends derived by the taxpayer from Australian resident companies are therefore subject to withholding tax.
However, in determining liability to Australian tax on Australian source income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable DTA contained in the Agreements Act.
Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).
The Article in the DTA that deals with dividends provides that dividends derived from an Australian resident company which are beneficially owned by a resident of the foreign country may be taxed in Australia, but the tax is not to exceed 15% of the gross amount of the dividends.
As the taxpayer beneficially owns the dividends, the Article in the DTA will apply, notwithstanding that the dividends flow through an interposed arm's length entity.
Subsection 17A(1) of the Agreements Act further provides that the amount of withholding tax imposed shall not exceed the tax limit specified in the DTA, if a limit is so specified. Therefore, section 4 of the Agreements Act will operate to override the general rate of withholding tax that would apply under subsection 128B(4) of the ITAA 1936.
Accordingly, the unfranked dividends derived by the taxpayer are subject to withholding tax under subsection 128B(4) of the ITAA 1936. The rate of withholding tax that will apply to the dividends will be limited to 15% even though the dividends pass through an interposed arm's length entity that is not a resident of a treaty country because only the taxpayer beneficially owns the dividends.
Date of decision: 10 September 2003Year of income: Period 1 July 1995 to 31 March 2001
Legislative References:
Income Tax Assessment Act 1936
section 128B
subsection 128B(1)
subsection 128B(4)
paragraph 128B(3)(ga)
section 128D
section 7 International Tax Agreements Act 1953
section 4
section 17A
Keywords
Double tax agreements
Non resident dividend withholding tax
Passive investment income
Conduit income or flow through income
ISSN: 1445-2782