ATO Interpretative Decision

ATO ID 2007/178

Income Tax

Assessability of dividends under Article 10(3) of the US Convention - determination made under Article 16(5) of the US Convention
FOI status: may be released

This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Are unfranked dividends paid by an Australian resident subsidiary to the taxpayer, a United States (US) resident company, not taxed in Australia under Article 10(3) of the tax treaty between Australia and the United States of America (the US Convention) contained in Schedules 2 and 2A to the International Tax Agreements Act 1953 where the Australian competent authority determined under Article 16(5) of the US Convention that the taxpayer shall obtain tax treaty benefits?

Decision

Yes. Unfranked dividends paid by the Australian resident subsidiary to the taxpayer are not taxed in Australia where the Australian competent authority has made a determination under Article 16(5) of the US Convention that the taxpayer shall obtain tax treaty benefits.

Facts

The taxpayer is a US resident company.

The taxpayer was incorporated before the US Convention entered into force and has owned all of the shares of an Australian resident company since that time. The taxpayer is beneficially (and legally) entitled to any dividends paid by its Australian resident subsidiary.

The Australian resident company paid unfranked dividends to the taxpayer during the income year.

The taxpayer is not a qualified person for the purposes of the Limitation of Benefits Article (Article 16) of the US Convention.

The Australian competent authority has determined under Article 16(5) of the US Convention that the taxpayer shall obtain the benefits of the US Convention.

Reasons for Decision

Article 10(3) of the US Convention provides that dividends paid by a company that is a resident of Australia shall not be taxed in Australia if the person who is beneficially entitled to the dividends is a company that is a resident of the US that has owned shares representing 80% or more of the voting power of the company paying the dividends for a 12 month period ending on the date the dividend is declared and:

(a): is a qualified person by reason of Article 16(2)(c) of the US Convention (Limitation on Benefits), or
(b): is entitled to benefits with respect to the dividends under Article 16(5) of the US Convention.

Article 16(5) of the US Convention provides that a resident of the US that does not meet the requirements of Article 16(2) of the US Convention shall, nevertheless, be granted benefits of the US Convention if the Australian competent authority determines, in accordance with the law of Australia, that the establishment, acquisition or maintenance of such person and the conduct of its operations did not have as one of its principal purposes the obtaining of benefits under the US Convention.

As the Australian competent authority has determined in accordance with Article 16(5) of the US Convention that the taxpayer shall be granted benefits of the US Convention, the conditions for Article 10(3) of the US Convention to apply in the present case have been satisfied. Accordingly, the unfranked dividends paid by the Australian resident subsidiary to the taxpayer will not be subject to tax in Australia.

Date of decision: 30 August 2007

Year of income: Year ended 30 June 2007

Legislative References:
International Tax Agreements Act 1953
   Schedule 2
   Schedule 2A
   Schedule 2, Article 10(3)
   Schedule 2, Article 16(2)(c)
   Schedule 2, Article 16(5)

Keywords
Double tax agreements
International law
International tax
Non resident dividend withholding tax
Unfranked dividends
United States

Siebel/TDMS Reference Number: 5157508

Business Line: Public Groups and International

Date of publication: 7 September 2007

ISSN: 1445-2782

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