ATO Interpretative Decision

ATO ID 2005/138

International tax

• Note: This ATO ID has been amended to remove references to repealed legislation dealing with foreign tax credit rules. With effect from 1 July 2008 the foreign tax credit system is replaced by the foreign income tax offset system
  This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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 the dividends paid from a private company resident in the Federal Republic of Germany (Germany) received by an Australian resident taxpayer, assessable under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The dividends paid from a private company resident in Germany received by an Australian resident taxpayer are assessable under subsection 6-10(4) of the ITAA 1997.

Facts

The taxpayer is an Australian resident for income tax purposes.

The taxpayer owns shares in a family trading company which is incorporated and managed in Germany.

The company declares a dividend to its shareholders.

The taxpayer receives the dividend from the company after paying a 15 per cent withholding tax in Germany.

Reasons for Decision

Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes statutory income from all sources, whether in or out of Australia.

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 a resident shareholder of a company (whether the company is a resident or a non resident) shall include 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 9 to the Agreements Act contains the double tax agreement and the protocol between Australia and the Federal Republic of Germany (the German Agreement). The German Agreement operates to avoid the double taxation of income received by Australian and German residents.

Article 10(2) of the German Agreement provides that dividends paid by a company which is subject to unlimited tax liability in Germany, to a resident of Australia, may be taxed in Germany but the tax so charged shall not exceed 15 per cent of the gross amount of the dividends.

Article 10(3) of the German Agreement defines the term 'dividends' to mean income from shares, and other income assimilated to income from shares, by the taxation law of the country of which the company making the distribution is a resident.

Article 22(1) of the German Agreement provides that, subject to the provisions of the law of Australia, a credit for German tax paid will be allowed against Australian tax payable on income from German sources.

Accordingly, as the dividend income received by the Australian resident taxpayer from a company resident in Germany is assessable under subsection 6-10(4) of the ITAA 1997, the taxpayer will be entitled to a foreign tax credit for the German tax paid.

Year of income:  Year ending 30 June 2005

Legislative References:
Income Tax Assessment Act 1936
   subsection 44(1)
   subsection 160AF(1)

Keywords
Dividends
Foreign income
Foreign tax credits
Germany
International tax

Siebel/TDMS Reference Number:  4273727

Business Line:  Public Groups and International

Date of publication:  13 May 2005

ISSN: 1445-2782