ATO Interpretative Decision

ATO ID 2003/144

International tax

• 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 relevant 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

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

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

Paragraph (2) of Article 10 of the Malaysian Agreement provides that Malaysian dividends may also be taxed in Malaysia but that the rate of tax is not to exceed 15%.

Paragraph (3) of Article 23 of the Malaysian Agreement (amended by 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. For the purpose of paragraph (3) of Article 23 of the Malaysian Agreement, Malaysian tax forgone which answers the description in subparagraph (a) of paragraph (5) of Article 23 of the Malaysian Agreement deemed to be as tax paid in Malaysia (subparagraph (a) of paragraph 6 of Article 23 of the Malaysian Agreement).

Under subparagraph (a) of paragraph (5) of Article 23 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 exempted from Malaysian tax in accordance with:

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Schedule 7A of the Income Tax Act 1967 of Malaysia or sections 22, 23, 29, 35 and 37 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 of Malaysia, or

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any other provisions which may be subsequently agreed in an Exchange of Letters between the Governments of Australia and Malaysia.

Under paragraph (7) of Article 23 of the Malaysian Agreement, paragraphs (5) and (6) of Article 23 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.

As there are no agreements currently in place extending the 5 year period commencing on 1 July 1987 under paragraph (7) of Article 23 of the Malaysian Agreement for the purpose of providing a credit for the Malaysian tax forgone, no credit is allowable to the taxpayer under paragraphs (5) and (6) of Article 23 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 with no credit for the Malaysian tax forgone.

Year of income:  Year ended 30 June 2002

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

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

Business Line:  Public Groups and International

Date of publication:  15 March 2003

ISSN: 1445-2782