ATO Interpretative Decision

ATO ID 2004/141

Income Tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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.

Issue

Are dividends received by a dual resident of Australia and the United States (US) assessable under paragraph 44(1)(a) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Decision

No. Dividends received by a dual resident of Australia and the US are not assessable under paragraph 44(1)(a) of the ITAA 1936 as they are deemed to be a resident of the US for the purposes of the US double tax Convention.

Facts

The taxpayer is a citizen of the US.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer is a resident of the US for taxation purposes.

The taxpayer's habitual abode and personal and economic ties are in the US.

The taxpayer receives dividends from US sources.

Reasons for Decision

Paragraph 44(1)(a) of the ITAA 1936 provides that, subject to certain provisions, the assessable income of an Australian resident taxpayer, who is a shareholder of a company (whether the company is a resident or non-resident), includes dividends paid to the taxpayer 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 (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).

Schedule 2 to the Agreements Act contains the double tax agreement between Australia and the US (the US Convention). The US Convention operates to avoid the double taxation of income received by Australian and US residents.

As the taxpayer is a dual resident, it is necessary to consider the tie breaker rules in the US Convention.

Article 4(2) of the US Convention sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income under the US Convention. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

Article 4(2) of the US Convention provides that if an individual is a resident of both Australia and US, they shall be deemed to be a resident of the State:

(a)

in which they maintain a permanent home

(b)

if the provisions of (a) do not apply, in which they have an habitual abode, or

(c)

if the provisions of (a) and (b) do not apply, with which their personal and economic relations are closer.

As the taxpayer's habitual abode and personal and economic ties are in the US, the taxpayer will be considered a resident of the US under the US Convention.

Article 10(1) of the US Convention provides that dividends paid by a company in the United States, being dividends to which a resident of Australia is beneficially entitled, may be taxed in Australia.

As the taxpayer is resident of the US under the US Convention, Article 10(1) does not give Australia any taxing rights on the taxpayer's US sourced dividends.

Accordingly, the US sourced dividends received by the dual resident taxpayer does not from part of the taxpayer's assessable income under paragraph 44(1)(a) of the ITAA 1936.

Year of income:  Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005

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

Keywords
Dividend income
Double tax agreements
International law
Residency
Treaties
United States

Siebel/TDMS Reference Number:  3774338

Business Line:  Public Groups and International

Date of publication:  13 February 2004

ISSN: 1445-2782