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Ruling

Subject: Dividend withholding

Question 1

Is the dividend regarded as 'income' in the hands of the recipient?

Answer: The Commissioner declines to provide a ruling on this question as the shareholder is not a rulee for this application. However, the general advice given for Question 3 covers this issue.

Question 2

a) For the Australian payer is the payment of the dividend subject to Pay As You Go (PAYG) withholding required under section 12-210 of Schedule 1 to the Taxation Administration Act 1953 (TAA)?

Answer: Yes.

b) If so, what rate of PAYG withholding under Section 12-210 of Schedule 1 to the TAA 1953 should be withheld from the gross amount of the dividend?

Answer: A 15% rate of withholding.

Question 3

a) For the Australian and US residents who are members of the US limited liability company (LLC) that receive the dividend payment, is the dividend subject to dividend withholding tax imposed under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer: The Commissioner declines to provide a ruling on this question as the members of the US LLC are not rulees for this application. However, general advice has been provided on the issue.

b) If so, what rate of dividend withholding tax imposed under section 128B of the ITAA 1936 should be imposed on the gross amount of the dividend?

Answer: Question 2(b) deals with the rate of withholding tax imposed on the dividend.

c) Specifically does the Double Tax treaty apply in this case?

Answer: Question 2(b) deals with the application of the double tax treaty and the rate of withholding that applies.

This ruling applies for the following period:

Year ending 30 December 2010.

The scheme commenced on:

1 January 2010.

Relevant facts and circumstances

An unfranked dividend was paid in the particular financial year by an Australian company to the LLC in the US.

The dividend was not declared to be conduit foreign income.

This payment was declared as a dividend as you considered that the criteria contained in section 254T of The Corporations Act 2001 were met.

The financial statements show the dividend paid was allocated to 'Accumulated losses' in the equity section of the balance sheet.

The LLC is not taxed in its own right under US income tax law, it is treated as a fiscally transparent entity under US tax law.

The LLC is not controlled by the Australian resident and/or its associates and is not a Controlled Foreign Company (CFC) for the purposes of the CFC provisions of the ITAA 1936.

The Australian resident member of the LLC has validly elected that its interests in the LLC be treated as an interest in a foreign hybrid entity in terms of subsection 830-15(5) of the Income Tax Assessment Act 1997 (ITAA 1997).

The US resident members of the LLC have filed the relevant return as required by an LLC.

The Australian company made a withholding from the payment at the rate of 15% and included the amount in a BAS.

Relevant legislative provisions

Income Tax Assessment Act 1936, section128B.

Income Tax Assessment Act 1936, section 6(1)

Taxation Administration Act 1953, section 12-210.

Reasons for decision

Summary

The payment will be treated as a dividend for income tax purposes, as it meets the definition of a dividend in subsection 6(1) of the ITAA 1936 and does not satisfy the exclusion in paragraph (d) of the definition, that it was debited against an amount standing to the credit of the share capital account.

A withholding at the rate of 15% was required, as the LLC will not be treated as a company for the purposes of the double tax convention between Australia and the US.

Detailed reasoning

Question 1

Is the dividend regarded as 'income' in the hands of the recipient?

The Commissioner declines to provide a ruling on this question as the shareholder is not a rulee for this application. However, the general advice given for Question 3 covers this issue.

Question 2(a)

For the Australian payer is the payment of the dividend subject to Pay As You Go (PAYG) withholding required under section 12-210 of Schedule 1 to the TAA?

Section 12-210 of the TAA states:

A company that is an Australian resident must withhold an amount from a *dividend it pays if:

(a) according to the register of the company's members, the entity, or any of the entities, holding the *shares on which the dividend is paid has an address outside Australia; or

(b) that entity, or any of those entities, has authorised or directed the company to pay the dividend to an entity or entities at a place outside Australia.

For limits on the amounts to be withheld, see section 12-300.

For income tax purposes subsection 6(1) of the ITAA 1936 defines 'dividend' to include any distribution made by a company to any of its shareholders, subject to a number of exclusions.

Paragraph (d) of the definition of dividend excludes an amount of money paid to a shareholder that is debited against an amount standing to the credit of the share capital account of the company.

Subsection 6(1) of the ITAA 1936 provides that 'share capital account' has the same meaning as in the Income Tax Assessment Act 1997 (ITAA 1997).

Section 975-300 of the ITAA 1997 defines share capital as:

(1) A company's share capital account is:

(a) an account that the company keeps of its share capital; or

(b) any other account (whether or not called a share capital account) that satisfies the following conditions:

(i)  the account was created on or after 1 July 1998;

(ii)  the first amount credited to the account was an amount of share capital.

(2) If a company has more than one account covered by subsection (1), the accounts are taken, for the purposes of this Act, to be a single account.

(3) However, if a company's *share capital account is *tainted, that account is taken not to be a share capital account for the purposes this Act, other than:

(a) subsection 118-20(6); and

(b) Division 197; and

(c) the definition of paid-up share capital in subsection 6(1) of the Income Tax Assessment Act 1936; and

(d) subsection 44(1B) of the Income Tax Assessment Act 1936; and

f) subsection 159GZZZQ(5) of the Income Tax Assessment Act 1936.

Dividend

A primary issue to determine is whether or not a dividend has been paid for tax purposes from which a withholding should have been made.

The Australian company made a distribution of $X to its shareholder the LLC which is located in the US.

The payment will be treated as a dividend under the definition in subsection 6(1) of the ITAA 1936 unless one of the exclusions applies.

Paragraph (d) of the definition excludes from being a dividend, an amount of money paid to a shareholder that is debited against an amount standing to the credit of the share capital account of the company.

The journal entries recording the transaction did not record a debit to a share capital account of the company and its eventual treatment in the financial reports included the amount in accumulated losses.

As none of the other exclusions are relevant in this case, the payment is treated as a dividend under the definition in subsection 6 (1) of the ITAA 1936.

Note: Paragraph 24 of TR 2012/5 details the situation where a distribution may be a return of share capital for company law purposes and yet not be debited to amounts standing to the credit of a share capital account and thus satisfy the definition of dividend in subsection 6(1) of the ITAA 1936.

Paragraph 24 concludes that in such cases, the tax law dividend or distribution will be assessable income of a shareholder under section 44 of the ITAA 1936 and will not be frankable pursuant to subsection 202-45(e) of the ITAA 1997.

As a result of subsection 44(1A), even where it can be said that the distribution is debited to an amount 'other than profits', then it will be deemed to be out of profits for the purposes of the dividend assessment provisions in section 44 of the ITAA 1936.

Whilst not relevant for the present case as the Australian company did not frank the distribution, any such distribution would be unfrankable under subsection 202-45(e) of the ITAA 1997, as the distribution would be 'sourced' from share capital.

Withholding

Section 12-210 of the TAA shown above requires a resident company to withhold an amount from a dividend it pays where the entity receiving the dividend has an address outside Australia on the company register.

Section 12-300 of the TAA provides that an entity is not required to withhold an amount from a dividend if no withholding tax is payable and is not required to withhold more than the withholding tax that is payable. The section notes that section 128B of the ITAA 1936 deals with the withholding tax liability.

The discussion for Question 2(b) explains that withholding was required at the rate of 15% in this case. The withholding was required to be made under section 12-210 of the TAA as:

· an Australian resident company made the payment

· the payment was a dividend for tax purposes

· the shareholder receiving the dividend had an address outside Australia, and

· the rate of withholding was 15%.

Question 2(b)

If so, what rate of PAYG withholding under Section 12-210 of Schedule 1 to the TAA 1953 should be imposed of the gross amount of the dividend?

Sub-subregulation 40(1)(b) of the Taxation Administration Regulations 1976 (TAR) provides that where the address of the shareholder mentioned in subsection 12-210(a) of the TAA is in a double tax country and sub-subregulation 40(1)(a) does not apply (tax sharing countries), the withholding is calculated at the rate provided for in the double tax convention.

Regulation 39A provides that where a double tax agreement includes provisions that have the force of law because of the International Tax Agreements Act 1953 (Agreements Act) and relate to a withholding payment on income of a non-resident or dividends on or after a particular day, the other party to the agreement is a 'double tax county' for the purposes of this Division.

Section 6 and 6AA of Agreements Act provides as follows:

6  Convention with United States of America

             (1)  Subject to this Act, on and after the date of entry into force of the United States convention, the provisions of Articles 1 to 22 (inclusive) and Articles 24 to 29 (inclusive) of the convention, so far as those provisions affect Australian tax, have the force of law in relation to tax in respect of:

                     (a)  income, being dividends, interest or royalties to which Article 10, 11 or 12, as the case may be, of the convention applies, derived on or after the first day of the second month following the month in which the convention enters into force, and in relation to which the convention remains effective; and

                     (b)  income to which paragraph (a) does not apply, being income of a year of income commencing on or after the first day of the second month following the month in which the convention enters into force, and in relation to which the convention remains effective.

             (3)  The provisions of the previous United States convention, so far as those provisions affect Australian tax, continue to have the force of law in relation to tax in respect of income in relation to which the convention remains effective.

(4) The provisions of the convention with the United States of America do not have the effect of subjecting to Australian tax any interest paid by a resident of Australia to a resident of the United States of America that, apart from that convention, would not be subject to Australian tax.

6AA  Protocol with the United States of America

Subject to this Act, on and after the date of entry into force of the United States protocol, the provisions of the protocol, so far as those provisions affect Australian tax, have the force of law according to their tenor.

As section 6 of the Agreements Act gives the force of law to provisions in the double tax agreement with the US in relation to the taxation of dividends, the US is a 'double tax country' for the purposes of the Division 4 of the TAR.

As the US is a double tax country (and not a tax sharing country), sub-subregulation 40(1)(b) of the TAR provides that the withholding is calculated at the rate provided for in the convention.

Article 10(2) of the Convention, provides that a contracting state may tax a dividend paid by a resident of that state to a resident of the other state that is beneficially entitled to the dividend.

Article 10(2)(b) of the Convention provides that the tax charged shall not exceed 15% of the dividend where subparagraph (a) doesn't apply.

Article 10(2)(a) of the Convention provides that the tax charged shall not exceed 5% of the dividend where it is a company that is beneficially entitled to the dividend and it holds at least 10% of the voting power in the company paying the dividend.

Is the LLC a company for the purposes of the Convention?

The relevant double tax agreement between the US and Australia is the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1983] ATS 16, as amended by the Protocol Amending the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [2003] ATS 14 (referred to here in a consolidated form as 'the Convention').

The Convention defines 'company' in Article 3(1)(b):

the term "company" means any body corporate or any entity which is treated as a company or body corporate for tax purposes;

Article 4(2) of the Convention states:

As regards the application of this Convention by one of the Contracting States, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has under the laws of that State relating to the taxes to which this Convention applies.

The term 'body corporate' is not defined in the Convention and will therefore take its meaning from that given by the taxation laws of Australia, 'unless the context otherwise requires'. The term 'body corporate' is not defined in Australian income tax legislation, therefore the ordinary meaning of the term will need to be examined. ATO Interpretative Decision 2010/81 Income tax - US Limited Partnership: whether it is a company for the purposes of Article 10 of the US Convention examines this term in the context of whether a US limited partnership will be treated as a company for Article 10 purposes. ATOID 2010/81 states:

The Butterworths Australian Legal Dictionary, 1997 defines a 'body corporate' as 'an artificial legal entity having separate legal personality'. The Macquarie Dictionary , Fourth edition, 2005 defines 'body corporate' in its legal context, as 'a person, association or group of persons legally incorporated in a corporation'. Generally a 'body corporate' is established under an Act of Parliament or under a statutory procedure of registration, such as the Corporations Act 2001 (refer to paragraphs 22-23 of Taxation Ruling IT 2634 and paragraphs 30-34 of Miscellaneous Taxation Ruling MT 2006/1).

In Ford's Principles of Corporations Law online edition at [1.051] the general law meaning of 'body corporate' is discussed in the context of the Corporations Act 2001:

The expression "body corporate", which is a component of both "entity" and "body", emanates from the general (or common) law where it refers to vehicles to which the legal system, by the process of incorporation, has given the capacity to have legal rights and duties as a fictional legal person.

The ATO in Miscellaneous Taxation Ruling MT 2006/1 defines 'body corporate' in the context of GST as:

'Body corporate' is not a defined term. The term takes its meaning from the general law. 'Body corporate' is a general term to describe an artificial entity having a separate legal existence. A body corporate has the ability to continue in existence indefinitely and to keep its identity regardless of changes to its membership. It also has the power to act, hold property, enter into legal contracts, sue and be sued in its own name, just as a natural person can.

The general law definitions of 'body corporate' refer to the process of incorporation as a primary factor in determining whether an entity is a body corporate. The LLC in this case was formed under particular law. The Corporations and Associations portion of the relevant law defines 'limited liability company' as a permitted form of unincorporated business organisation:

"Limited liability company" or "domestic limited liability company" means a permitted form of unincorporated business organization which is organised and existing under this title.

Based on the requirement of formal 'incorporation', the LLC would not be considered a 'body corporate'. However, the definitions of 'body corporate' emphasise that the result of the process of incorporation is the creation of separate legal personality and the capacity to have legal rights and duties. These characteristics are granted to an LLC under the relevant legislation. The powers of an LLC are

Unless otherwise provided by law or its articles of organization, a limited liability company has the general powers, whether or not set forth in its articles of organization, to:

(1) Have perpetual existence, although existence may be limited to a specified period of time if the limitation is set forth in its articles of organization;
(2) Sue, be sued, complain, and defend in all courts;
(3) Transact its business, carry on its operations, and have and exercise the powers granted by this article in any state and in any foreign country;
(4) Make contracts and guarantees, incur liabilities, and borrow money;
(5) Sell, lease, exchange, transfer, convey, mortgage, pledge, and otherwise dispose of any of its assets;
(6) Acquire by purchase or in any other manner, take, receive, own, hold, improve, and otherwise deal with any interest in real or personal property, wherever located;
[…]
(16) Cease its activities and dissolve; and
(17) Do every other act not inconsistent with law which is appropriate to promote and attain the purposes set forth in its articles of organization.

Additionally, the members of the LLC are not held personally liable due to their status as members of the LLC and assignment of interests in the LLC does not dissolve the LLC These elements are characteristic of an incorporated structure.

A US limited liability company (LLC) is described by the US Internal Revenue Service (IRS) ¹as:

…a business structure allowed by state statute. … The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return. … A business with at least 2 members can choose to be classified as an association taxable as a corporation or a partnership…²
If the LLC is a partnership, it should file a …..Return of Partnership³

The LLC in question has chosen to be treated for tax purposes as a partnership and will be considered as a fiscally transparent entity.⁴ However, the taxation treatment of an entity is relevant for the purposes of interpreting the second element of the definition of 'company' in the Convention: i.e. whether it is 'an entity which is treated as a company or body corporate for tax purposes'. Additionally, the disregarding of the entity under US tax law is a matter which only goes toward the determination of taxation liability. It does not change the legal reality that the LLC is, for practical purposes, a separate legal entity under law.

ATOID 2010/81 dealt with the case of a limited liability partnership (LLP) and determined that, although it did have characteristic indicia of a partnership, it would still be considered a body corporate under the general meaning of the term. As such, the LLP would prima facie fall within the first tier of the 'company' definition in the Convention.

However, ATOID 2010/81 points out that the interpretation of 'body corporate' is dependent upon the condition in the interpretative provision of the Convention of 'unless the context otherwise requires' in the undefined terms provision.

Thiel v Commissioner of Taxation (1990) 171 CLR 338 at 357 (per McHugh J) states that it is proper to have regard to 'supplementary means of interpretation' in interpreting a DTA, which includes reference to the Commentary to the OECD Model Tax Convention. The Commentary to the undefined terms provision of the Convention (Article 3(2)) states that the use of the domestic law of a Contracting State to interpret undefined terms within the Convention:

…applies only if the context does not require an alternative interpretation. The context is determined in particular by the intention of the Contracting States when signing the Convention as well as the meaning given to the term in question in the legislation of the other Contracting State (an implicit reference to the principle of reciprocity on which the Convention is based). The wording of the Article therefore allows the competent authorities some leeway.⁵

There is no definition of 'body corporate' in US tax legislation. However, the discussion of the definition of 'company' in Article 3 of the OECD Commentary shows a focus on the fact that the term 'company' is primarily used in the context of the dividend article (Article 10):

The term "company" means in the first place any body corporate. In addition, the term covers any other taxable unit that is treated as a body corporate according to the tax laws of the Contracting State in which it is organised. The definition is drafted with special regard to the Article on dividends. The term "company" has a bearing only on that Article, paragraph 7 of Article 5, and Article 16. [Emphasis added.]⁶

The reason for distinguishing the taxation of partnerships from the taxation of companies is set out in paragraphs 2 and 3 of the Commentary to Article 10:

2. The profits of a business carried on by a partnership are the partners' profits derived from their own exertions; for them they are business profits. So the partner is ordinarily taxed personally on his share of the partnership capital and partnership profits.

3. The position is different for the shareholder; he is not a trader and the company's profits are not his; so they cannot be attributed to him. He is personally taxable only on those profits which are distributed by the company (apart from the provisions in certain countries' laws relating to the taxation of undistributed profits in special cases). From the shareholders' standpoint, dividends are income from the capital which they have made available to the company as its shareholders.

Under the particular law, the distributions and the sharing of profits and losses of an LLC are dealt with and states:

Except as otherwise provided in the operating agreement:
(1) The profits and losses of a limited liability company shall be allocated among the members in proportion to their respective capital interests; and
(2) Distributions by the limited liability company shall be made to the members in proportion to their right to share in the profits of the limited liability company.

This appears to have the characteristics of a partnership and a corporation. However, it is clear from the US federal tax treatment that the LLC and its members in this case are taxed as if the LLC were a partnership, not as a company.

The extension of the definition of company in Article 3 is to taxable units 'treated as a body corporate according to the tax laws of the Contracting State in which it is organised'. This demonstrates that the focus is on the actual tax treatment of the entity in question. Although it is an extension of the definition, and there is no limitation to exclude entities that are not treated as a body corporate under tax law, the implication is that an assumption has been made that bodies corporate are taxed as bodies corporate in the State in which they are organised. This is not the case in the current situation; although a body corporate under general law, the LLC is not a body corporate in terms of taxable fact.

As stated in ATOID 2010/81:

It would be contrary to the intention of Article 10(2) if the reduced inter-corporate dividend withholding tax rate was to apply where the tax law of the resident company treated the beneficial owner of the dividends as a partnership.

This is also supported by the Commentary to Article 4 (residency) which states:

Where a State disregards a partnership for tax purposes and treats it as fiscally transparent, taxing the partners on their share of the partnership income, the partnership itself is not liable to tax and may not, therefore, be considered to be a resident of that State. In such a case, since the income of the partnership "flows through" to the partners under the domestic law of that State, the partners are the persons who are liable to tax on that income and are thus the appropriate persons to claim the benefits of the conventions concluded by the States of which they are residents. This latter result will be achieved even if, under the domestic law of the State of source, the income is attributed to a partnership which is treated as a separate taxable entity. For States which could not agree with this interpretation of the Article, it would be possible to provide for this result in a special provision which would avoid the resulting potential double taxation where the income of the partnership is differently allocated by the two States. [Emphasis added.]⁷ (Commentary on Article 3, OECD Model Tax Convention (Condensed Version) (2010) at [8.8]).

The statements made in Article 4 emphasise the importance of identifying the appropriate persons to obtain the benefits of the Convention. The excerpt above discusses partnerships, but the situation described is analogous to that of the LLC in the present case.

For the above reasons, although the LLC is legally a body corporate, the taxation treatment of the entity is a sufficient contextual requirement to remove it from the categorisation of 'body corporate' (and therefore 'company') for the purposes of the Convention.

'Beneficially entitled to the dividends'

The requirement of 'beneficial entitlement' to amounts paid appears a number of times in Article 10 of the Convention, as well as in the Article 11 (Interest) and Article 12 (Royalties).

While the meaning of 'beneficially entitled' has been discussed in domestic Australian jurisprudence, this is not the meaning used for the purposes of the Convention. As there is no definition of 'beneficially entitled' within the Convention, it is appropriate to have regard to supplementary material such as the OECD Model Tax Convention and its attendant commentary: Thiel v Commissioner of Taxation (1990) 171 CLR 338 at 357 (per McHugh J).

The commentary to Article 10 states at paragraph 12:

The requirement of beneficial ownership was introduced in paragraph 2 of Article 10 to clarify the meaning of the words "paid ... to a resident" as they are used in paragraph 1 of the Article. It makes plain that the State of source is not obliged to give up taxing rights over dividend income merely because that income was immediately received by a resident of a State with which the State of source had concluded a convention. The term "beneficial owner" is not used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance. [Emphasis added.]

Although the Commentary (and the Model Tax Convention) use the term 'beneficial ownership' rather than 'beneficial entitlement', the concepts are analogous⁸

. (See TR 2001/13 at paragraph 49: 'Differing wording in two DTAs may represent the same intended meaning (such as, in the ATO's view, the terms 'beneficial entitlement' in the Dividends , Interest and Royalties Articles of some DTAs and 'beneficial ownership' in the corresponding Articles in other DTAs).

It would appear that a broad application of the concept of beneficial entitlement must be undertaken in a treaty context. That broad application must be undertaken in a taxation sphere, rather than a general law sphere, and should reflect the reality of taxation that occurs. In this case, it is the members of the LLC who are the beneficiaries of the dividend from a taxation perspective. It is therefore the members of the LLC who should be considered to be beneficially entitled for the purposes of the treaty.

This is supported by the Commentary to Article 4 (residency), which refers to a situation in which a partnership is treated as fiscally transparent and the income of the partnership 'flows through' to the partners under the domestic tax law. In such a case:

…the partners are the persons who are liable to tax on that income and are thus the appropriate persons to claim the benefits of the conventions concluded by the States of which they are residents. This latter result will be achieved even if, under the domestic law of the State of source, the income is attributed to a partnership which is treated as a separate taxable entity. [Emphasis added.]⁹ (Commentary on Article 3, OECD Model Tax Convention (Condensed Version) (2010) at [8.8]).

Such an interpretation avoids the problems that arise if the LLC is considered as beneficially entitled, but will not (for definitional reasons¹⁰ - see below) be considered a resident. In such a case, the requirements of Article 10(1) would not be satisfied, as no resident of the US would be beneficially entitled. As such, the US would not be permitted to tax that payment. Consequently, the dividends would not be considered as 'those dividends' (i.e. those that fell within the criteria required under Article 10(1)) under Article 10(2). This would probably not be a problem for tax administration in Australia, as the lack of qualification under Article 10(2) should merely remove the restrictions imposed under that Article on Australian withholding tax. However, it is clearly not the intent of the Convention that this should be the case.

Residency

If the LLC were to be considered to be a 'company' for Convention purposes, it would not be a resident for Convention purposes. Article 4(1)(b) states that a person is a resident of the United States if the person is:

(i) a United States corporation - this is defined under Article 3(1)(g)(i) and only includes corporations treated as such for US tax purposes. This is not the case for the relevant LLC

(ii) a United States citizen - the LLC is not a natural person and so will fail this test also.

(iii) 'any other person (except a corporation or unincorporated entity treated as a corporation for United States tax purposes) resident in the United States for purposes of its tax' - although the LLC falls within the category of 'any other person', it is then excluded by the statement 'except a corporation'. The LLC, if a company for treaty purposes, is clearly a corporation.

As such, the LLC would not be considered to be a resident.

The rate of withholding from the dividend is 15% under article 10(2)(b) of the convention as subparagraph (a) doesn't apply, because the LLC is not treated as a company and is not a resident for the purposes of the Convention.

Question 3(a)

For the Australian and US residents who are members of the US LLC that receive the dividend payment, is the dividend subject to dividend withholding tax imposed under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936)?

The Commissioner declines to provide a ruling on this question as the members of the US LLC are not rulees for this application.

The following is general advice on the issue.

Subsection 128B(1) of the ITAA 1936 provides that, subject to exclusions, section 128B applies to income derived as a dividend by a non resident, where the dividend was paid by a resident company

Subsection 128B(4) of the ITAA 1936 provides that a person who derives income as a dividend that the section applies to, is liable to pay income tax on that income at the rate declared by Parliament.

Section 128D of the ITAA 1936 provides that income upon which withholding tax is payable is not assessable or exempt income of a person, subject to certain exceptions.

The first exceptions are income that is subject to section 128B of the ITAA 1936 by virtue of the following subsections in section 128B:

· (2A) - interest derived by a resident

· (2C) - royalty paid to a resident, or

· (2C) - relating to interest.

The second exceptions are where income would have been subject to withholding tax but for:

· paragraph 128B(3)(ga) part of a franked dividend

· paragraph 128B(jb) foreign superannuation fund that is exempt on the income

· section 128F interest on debentures or debt interests

· section 128FA interest on debentures or debt interests or

· section 128GB interest on offshore borrowings.

The Commissioner may serve a notice of tax payable on the recipient of a dividend under subsection 128C(7) of the ITAA 1936 where the Commissioner considers that a correct withholding has not been made. A failure to withhold penalty, equal to the amount that should have been withheld would also be imposed.

This means that non-resident shareholders do not have to pay any more tax provided the company correctly withheld an amount from the non-residents and paid it to the ATO and the only income they receive in Australia is from interest, dividends or royalties.

This is because non-resident withholding tax on interest, dividends and royalties is a final tax. They do not include this income on a tax return.

Question 3(b)

If so, what rate of dividend withholding tax imposed under section 128B of the ITAA 1936 should be imposed on the gross amount of the dividend?

The reasons given for Question 2(b) deal with the rate of dividend withholding.

As discussed in Question 3(a), if a company correctly withholds an amount from a dividend and pays it to the ATO and the only income they receive in Australia is from interest, dividends or royalties, there would be no need for any further tax to be paid in relation to the dividend.

The Commissioner would not need to issue a notice of tax payable under subsection 128C(7) of the ITAA 1936.

Question 3(c)

Specifically does the Double Tax treaty apply in this case?

Question 2(b) deals with the application of the double tax treaty and the rate of withholding that applies.

Disclaimer

You cannot rely on the rulings in the Register of private binding rulings in your tax affairs. You can only rely on a private ruling that we have given to you or to someone acting on your behalf.

The Register of private binding rulings is a public record of private rulings issued by the ATO. The register is an historical record of rulings, and we do not update it to reflect changes in the law or our policies.

The rulings in the register have been edited and may not contain all the factual details relevant to each decision. Do not use the register to predict ATO policy or decisions.

¹ The treatment of the LLC under US state taxation legislation is not relevant for the purposes of the Convention, which applies only for the purposes of US and Australian federal taxation: see Article 2(1)(a).

² United States Internal Revenue Service, Limited Liability Company (LLC) (10 May 2012) <http://www.irs.gov/businesses/small/article/0,,id=98277,00.html>.

³ United States Internal Revenue Service, LLC Filing as a Corporation or a Partnership (17 February 2012) <http://www.irs.gov/businesses/small/selfemployed/article/0,,id=205014,00.html>.

⁴ See the letter from the IRS provided by the taxpayer.

⁵ Commentary on Article 3, OECD Model Tax Convention (Condensed Version) (2010) at [12].

⁶ Commentary on Article 3, OECD Model Tax Convention (Condensed Version) (2010) at [3].

⁷ Commentary on Article 3, OECD Model Tax Convention (Condensed Version) (2010) at [8.8].

⁸ '

⁹ Commentary on Article 3, OECD Model Tax Convention (Condensed Version) (2010) at [8.8].

¹⁰ See below.

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