ATO Interpretative Decision
ATO ID 2006/120
Income tax
Application of the Limitation on Benefits Article of the US ConventionFOI 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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Is a United States (US) resident company entitled to treaty benefits under Article 16(3) (the Limitation on Benefits Article) of the Australia - United States Double Taxation Convention (the US Convention)?
Decision
Yes. The taxpayer is entitled to claim treaty benefits under Article 16(3) of the US Convention.
Facts
The taxpayer is a US resident company which is a member of a large wholly owned foreign banking group.
Under a financing arrangement, the taxpayer will provide funding to an Australian resident corporate limited partnership. Those funds are ultimately used to invest in Australian interest bearing deposits, fixed rate loans and other interest bearing assets in return for redeemable limited partnership interests issued under a Partnership Deed.
The taxpayer does not conduct a banking business in the US and it does not carry on any activities at or through a permanent establishment in Australia.
The taxpayer is not a 'qualified person' within the meaning of Article 16(2) of the US Convention.
Reasons for Decision
Schedule 2 to the International Tax Agreements Act 1953 contains the tax treaty between Australia and the United States (the US Convention). Schedule 2A of the Agreements Act contains the protocol amending the United States Convention (the United States Protocol). The United States Agreement and United States Protocol operate to avoid double taxation of income received by Australian and United States residents.
Article 16 of the US Convention is designed to prevent persons of third countries from using companies or other entities resident in either Australia or the US to inappropriately access treaty benefits conferred by the US Convention.
Treaty benefits will generally only be available for 'qualified persons' specified in Article 16(2). However, other persons may also qualify for treaty benefits, under Article 16(3).
Under Article 16(3), the taxpayer will be able to meet an exception to the qualified person rule where it is engaged in the 'active conduct of a trade or business' in the US and that active conduct of a trade or business is 'substantial' in comparison to the trade or business activity conducted in Australia. The taxpayer may also look to persons connected with it to establish whether it is engaged in active conduct of a trade or business.
Active conduct of a trade or business is not defined in the US Convention. However, Article 16(3)(a) notes that the active conduct of a trade or business does not include the business of making or managing investments for the resident's own account, unless those activities are banking, insurance or securities activities carried on by a bank, insurance company or a registered, licensed or authorised securities dealer.
Under Article 16(3)(c) of the US Convention a person will be connected to the taxpayer if the person holds at least half of the aggregate vote and value of the company's shares or of the beneficial equity interest in the company. Each person in a group of entities that share 50% common ownership held directly or indirectly by a head entity are also to be treated as connected. As the taxpayer is wholly owned by other entities in the foreign banking group, the activities of these entities are relevant in determining whether the taxpayer is engaged in active conduct of trade or business.
Although the taxpayer is not a bank and does not conduct an active business in the US, the persons connected to it are entities that actively conduct banking activities in the US and elsewhere. Accordingly, the taxpayer will be considered to be engaged in active conduct of trade or business in the US for the purposes of Article 16(3).
A further condition for satisfying Article 16(3), based upon on all the facts and circumstances, is whether the active conduct of a trade or business in the US by the taxpayer, together with its connected persons, is 'substantial' in comparison to the trade or business activities conducted in Australia. As the value of gross assets held by the banking group in the US is significant in comparison to the gross value of the assets held in Australia, the activities in the US are considered substantial.
As the requirements of Article 16(3) have been met, the benefits of the US Convention will be granted.
Date of decision: 20 April 2006Year of income: Year ended 30 June 2005
Legislative References:
International Tax Agreements Act 1953
Schedule 2-Article 11(3)
Schedule 2-Article 16(2)
Schedule 2-Article 16(3)(a)
Schedule 2-Article 16(3)(b)
Schedule 2-Article 16(3)(c)
Other References:
Explanatory Memorandum to the International Tax Agreements Amendment Bill (No 1) 2002
Keywords
Double tax agreements
Foreign banks
International tax
Non resident companies
Residence of companies
Treaties
United States
ISSN: 1445-2782