Internationals Sub-group minutes, September 2012

[H1]DRAFT Meeting details

Venue:

ATO Office Melbourne

 

 

Date:

17 September 2012

 

 

Start:

10.00am

Finish:

1.30pm

Chair:

Jonathan Woodger

 

 

Contact and Secretariat:

Geoff Tarran

Contact phone:

03 9285 1466

Attendees

Jonathan Woodger

ATO

Geoff Tarran (Secretariat)

ATO

Michael McCormack

ATO

Michael Jenkins

ATO

Louise Clark

ATO (by telephone)

Jenny Wong

Institute of Chartered Accountants Australia (ICAA)

Frank Drenth

Corporate Tax Association (CTA)

Alyson Rodi

Certified practising Accountants Australia (CPAA)

Vivian Chang

Law Counsel Australia (LCA)

Denise Honey (for Jane Michie)

The Taxation Institute (TTI)

Lisa Clifton

Treasury

 

 

Apologies

 

Michael O'Neill

ATO

Glenn Davies

ATO

Disclaimer

NTLG Internationals Sub Group agendas, minutes and related papers are not binding on the Tax Office or any of the other bodies referred to in these papers. While every effort is made to accurately record views expressed, the wording necessarily represents a summary of statements of general position only, and care should be taken in interpreting those statements. These papers reflect the position at the date of release (unless otherwise noted) and readers should note that the position on any issue may subsequently change.

[H2]Agenda items

1.1 Introduction & Previous Minutes

[H4]Chair's opening comments

The Chair, Jonathan Woodger opened the meeting at 10.10 am and welcomed participants and Denise Honey who was standing in for Jane Michie as the professional representative for the Tax Institute.

The Chair acknowledged the efforts and contribution made by the previous Chair, Des Maloney.

[H5]Confirmation of the previous minutes

Confirmation of the draft minutes for the 23 July 2012 meeting.

¦ Members advised of some minor spelling and grammatical changes.

¦ Members requested that at Agenda 2, item 7, the minutes reflect comments made during the meeting concerning the web based IDS instructions and the difficulty in using them in that format. Members had suggested in the meeting that the availability of the instructions in a Portable Document Format (PDF), available as a download, would be helpful.

¦ Subject to the changes above, the minutes were accepted as final and recommended they be published to the ATO internet site.

1.2 Update on work at the Transfer Pricing Working Group (TPWG)

Item 1

Update on the TPWG.

 

Meeting discussion

Michael Jenkins provided an update to members on the progress of this working group. The external membership of this group has now been established with tax industry representatives nominated by the following external Professional Associations.

¦ Law Council of Australia (LCA)

¦ CPA Australia (CPAA)

¦ Institute of Chartered Accountants Australia (ICAA)

¦ The Taxation Institute (TTI)

¦ Federal Chamber of Automotive Industries (FCAI)

¦ Corporate Tax Association (CTA)

¦ Minerals Counsel of Australia (MCA)

The first meeting of the TPWG was held on the 8th August at the Melbourne ATO office.

At the meeting there was discussion amongst the members regarding the purpose of the working party and protocols for its operation.

Member were advised at that meeting that the TPWG is intended to focus on administrative issues and implementation issues arising from the Government's transfer pricing reform announcements, specifically, the recently introduced laws concerning Cross Border Transfer Pricing Rules (Division 815A of the ITAA97). The legislation had obtained royal asset and was now law.

Broader transfer pricing issues were still to be raised and addressed in International Sub-group or the peak NTLG forum.

A primary concern of TPWG members related to the issue of 'reconstruction'. Mr. Jenkins advised the new laws only codified what the ATO considered the existing law and it did not amount to an expanded power. At a practical level there should be no observed behavioural change on the part of the ATO's administration of transfer pricing cases. Such messages had already been communicated by other senior officers through other public statements. In terms of retrospectivity the ATO would not go back and look at issues because of the new law but only in the context of other typical business as usual reasons.

TPWG members suggested developing an Issues Register for the working party. The TPWG Chair took this on board and would come back to members as to what would be recorded on the register.

Between TPWG meetings the ICAA representatives volunteered to develop a draft document setting out the scope of the reconstruction issue.

In relation to the development of a charter the Chair would review similar charters of other ATO consultative forums with a view to developing an appropriate draft TPWG charter by next meeting.

The next meeting of TPWG is scheduled for 10 October 2012.

1.3 Update on Issues from previous meetings

Item 1

Update on Section 23AH/23AJ (ITAA1936) issue

(ATO ID 2007/184).Does section 23AJ apply to all non-portfolio dividends received by an Australian resident company from non-resident companies including whether or not the shares are attributable to an offshore permanent establishment of the Australian company?

Meeting discussion

Louise Clark provided an update for this item.

The draft TD is still in progress and is unlikely to be available in pre-release consultation form before the end of October. In relation to the issue there are a number of arguments for & against and the ATO is still considering its view.

The Chair indicated that as the topic emanated from this forum the a pre-public release draft of the TD will be made available to sub-group members for comment when ready.

Status

Draft TD in progress.

Item 2

Royalty issues

Are payments (royalty) paid by an Australian resident to a Singaporean resident for a right to modify software, which does not carry on business in Australia at or through a permanent establishment (PE), subject to Australian withholding tax (WHT)?

Background

The issue was originally raised at the April meeting, with a subsequent submission provided prior to the July meeting. (see Appendix one)

At the July meeting the ATO advised the Submission has been considered by the Finance and International technical group. A draft ATO ID which was to issue on this topic would now be reconsidered to reflect comments in the submission received.

Also at the July meeting members raised the notion that Australia's current double tax agreement (DTA) with Singapore has some unique aspects when dealing with royalty matters. The members discussed whether the treaty Articles 5, 10 or 16 applied. There was consensus that essentially the treaty did not operate in respect of royalty payments in connection with Software, leaving the non-resident recipient subject to Australian tax by assessment, (depending on expenses as to net profit). Members indicated that there may be inconsistent approaches taken by industry with some taxpayers withholding on payments made to Singapore entities and some recipients not aware they may be subject to Australian tax by assessment.

The Treasury Observer at that meeting indicated that Treasury are aware of the unique operation of the Treaty but its re-negotiation is unlikely in the near term.

Meeting discussion

Members reiterated comments at the July meeting that there may be inconsistent practice in the industry with some taxpayers withholding on payments made to Singapore entities and some non-recipients recipients not aware they may be subject to Australian tax by assessment.

The ATO advised it was considering a number of general approaches so as the widest audience could be reached from any educational initiative.

Members advised that the Tax Treaties Advisory Panel had discussed the mater but the actual treaties affected may not be amended for some time.

Members also raised a second example in which there was a third country involved, the United States. Members inquired whether the respective withholding amount should only be 5% in this scenario.

The professional representative for the ICAA suggested further information could be supplied to the ATO exploring this example between meetings.

Status

ATO ID 2012/67 issued on 3 August 2012. The ATO is in discussion with Australian personnel of software companies with Singapore associated entities that are affected by this ATOID. The ATO has also communicated the outcome of the ATO ID to those entities (in Australia or Singapore) that it knows are affected and is considering further approaches to facilitate compliance with the view expressed.

Item 2

Thin Capitalisation and securitised entity definition in section 820-39

 

Topic

At the April meeting members raised the matter of Thin Capitalisation and securitised entity definition is section 820-39. Prior to the July meeting ATO ID 2012/31 concerning Thin Capitalisation and the exemption of certain special purpose entities, was released on the 27 April 2012.

At the July meeting members considered that whilst the ATOID was helpful securitisation was broadly defined in different situations. In the context of the thin capitalisation provisions the Explanatory Memorandum for the amendment of the act appears to support a 'carve out' for the securitisation industry. There was some discussion on how wide such a carve out is. Does it cover public private partnerships (PPPs) and their variations? Other members suggested the provision appears to be written in the form of 'what is in' rather than 'what is out'.

Members indicated that the industry have been applying the law in terms of back to back loan arrangements and it would appear that this has not previously been a concern for the ATO. Members suggested there are existing private binding rulings (PBRs) that indicate the industry view has been accepted.

The ATO indicated that between meetings Treasury had been consulted.

It is proposed that a draft tax determination will be released for public consultation, subject to clearance by the public rulings panel.

Meeting discussion

The ATO advised the draft tax determination was scheduled to be discussed at the next Rulings Panel on the 27 September. It is intended to seek instructions at the Rulings Panel as to whether the reasoning in the determination would be applied on a retrospective or prospective basis given industries concerns raised in prior meetings about industry practices and prior advice contained in a number of PBRs.

The ATO has had discussion with treasury and the ATO's interpretation was considered consistent with the intended policy objective. It was suggested that the explanatory memorandum introducing the provision was quite clear. Prior the amendments receiving royal assent a report went to the Senate Economics Committee on this aspect.

In relation to previously issued advice in this area a number of assumptions had been made on the part of taxpayers when seeking such advice, which were accepted by the ATO for the purposes of this advice but were critical aspects which should not have been accepted by assumption.

This aspect was particularly relevant for sub-paragraph 820-39(3)(c) being "the entity is an insolvency-remote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the entity's circumstances".

Members queried why it was seen that this particular criteria could not be assumed in the context of the facts and assumptions of an arrangement. The ATO advised the criteria is considered critical in determining the exemption of a special purpose entity (SPE) from compliance with the Thin Cap regime. The insolvency remote criteria becomes more important as the debt to asset ratio approaches 100%.

Other members suggested that not allowing a flow through entity the exemption available under the SPE criteria may otherwise distort taxation outcomes.

The ATO advised that the comments will be taken on board while the final product is being drafted.

Status

Draft TD is in progress and expected to issue in early December.

item 4

The deemed the existence of a PE and the carrying on of business.

Withdrawal of ATO ID 2008/117 and replacement ATO ID 2011/35.

Topic

This item was originally raised at the September 2011 meeting. It concerns whether the business income derived through a permanent establishment (PE) of a US Limited Liability Company, which is treated as foreign hybrid for Australian income tax purposes, is non-assessable non-exempt income under section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

A further issue related to a matter not dealt with in the replacement ATO ID, viz. what the position was for a resident taxpayer who does not have a PE in its ordinary sense (a fixed place of business), but rather a 'deemed' PE (such as where a taxpayer has substantial equipment).

The ATO advised that this particular product had been difficult to draft. It raised a difficult question about the nature of the requirement to carry on a business for s23AH purposes. In other respects, there were reasonably strong competing views which had to be mentioned and considered.

The Secretariat forwarded to members a copy of the pre-release discussion draft of the TD for circulation within the sub-group only.

Meeting Update

The Author of the TD could not attend the meeting.

Members considered the current discussion draft did not address a partnership or trust scenario under sub-section 23AH(10) (ITAA36). Also it does not address a scenario involving a Controlled Foreign Company (CFC).

In relation to example 2 in the discussion draft members thought the facts needed to be clarified in considering advertising of the lease both in the US and outside the US.

In relation to example 3 clarifications was needed as to whether the carrying on of a business was required/maintained through the whole period of the lease.

Members were asked to submit feedback on the discussion draft to the Author.

Status

Comments from members to be submitted directly to the author. Further discussion and comments on the draft to be undertaken at the November meeting.

1.4 New Issues

1.4.1 ATO ID 2012/71 and Foreign Superannuation Funds

Whether certain Foreign Superannuation Funds are eligible for the Managed Investment Trusts (MIT) concessional withholding tax rate under s.840-805.

ATO ID 2012/71 deals with whether certain Foreign Superannuation Funds are eligible for the MIT concessional withholding tax rate under s.840-805. Essentially, the ATO ID indicates that the concession does not apply to a foreign superannuation fund that holds an indirect interest in a MIT because it is a beneficiary in the capacity of a trustee of another trust and paragraph 840-805(4)(c) of the ITAA 1997 is therefore not satisfied.

Members wanted to understand the reasoning behind the ATO ID as the outcome could be considered curious given the policy intention of the MIT regime, which is to allow foreign superannuation funds entitlement to the concessional withholding tax rate who have invested in a MIT.  Members considered that depending on the reasoning (whether very specific or could apply more generally), further discussion and clarification on the topic is warranted.

Meeting discussion.

External members considered that in tracing through the interposed trust that the concession of a reduced rate of withholding tax (WHT) would still apply. There were other questions that the ATOID did not seem to consider such as:

¦ was the trust is a civil law country?

¦ was the trust in a common law country?

¦ is the trust a trust from an Australian tax law purposes?

¦ would sub-section 98(4) (ITAA36) otherwise apply?

¦ How are these types of funds set up in the United Kingdom or the United States?

Members indicated that an OECD paper has been released on these matters.

The ATO indicated it will take members concerns on board and consider the issue between meetings.

Action item

Reference No.

INTLG 0912/03.1

Issue

Consider the MIT issue raised by members concerning ATO ID 2012/71.

Responsibility

ATO

1.4.2 Foreign currency conversion method

Foreign currency conversion method of lump sum payments from a foreign superannuation fund. (See Appendix two).

Background

At the July meeting member presented a submission which revolved around section 960-C of the ITAA97.

Members commented that clarification is required as there are a number of entries in the register of private binding rulings where there seems to be some inconsistency in the application of the provisions. Members commented that the wording in section 960-50(4) appears to be consistent with TD 2006/54 .

Meeting discussion.

Members advised that they considered that previous ATO advice products in this area have been inconsistent. Members had identified approximately 127 advice products on the topic and considered that 7 of these appeared to arrive at the wrong outcome as they adopt the mark to market approach.

Members suggested that the appropriate process for these types of cases should involve converting the amount to Australian currency and then work out any capital gain. This follows the process of converting the elements first and then calculating the gain or loss. Tax determination TD 2006/54 indicates the same process.

Members suggested that The ATO indicated sub-section 960-50(4) provides and ordering rule and sub-section 960-50(6) provides a timing rule and that both sub-section can operate in tandem. There is an inconsistency in the way these provisions are administered as one published ATO view is that the calculation is performed in foreign currency amounts with the net amount then being converted to AUD at the prevailing exchange rate at time of payment.

The alternate method also ruled on favourably by the ATO is to convert both amounts to AUD at the exchange rates at the start date and payment date identified above (per section 960-50(4)) rather than the calculation occurring in foreign currency and the result in foreign currency translated into Australian dollars. That is, this provision takes precedence over table item 7.

The Chair indicated that the best approach to resolve the matter would be to consider drafting a TD on the issue.

Action item

Reference No.

INTLG 0912/03.2

Issue

The ATO to give consideration to developing an advice product covering the appropriate foreign currency conversion method of lump sum payments from a foreign superannuation fund.

Responsibility

ATO

1.4.3 Interpreting double tax agreements following the Zentai decision

Interpreting double tax agreements following a recent High Court decision- Commonwealth v Charles Zentai [2012] HCA 28.

Members raised the following for discussion prior to the meeting. In a recent article entitled "Interpreting double tax agreements following a recent High Court decision" by John Balazs in Thomson Reuters 2012 Weekly Tax Bulletin No 38, the implications of the decision in Minister for Home Affairs of the Commonwealth v Charles Zentai [2012] HCA 28 is discussed.

Meeting discussion.

The members indicated that the author concludes that "[i]t is now clear that the interpretation of double tax agreements will be less influenced by the fact they are bilateral treaties". That is, where the treaty is incorporated into domestic legislation, the High Court seems to be interpreting such treaties based on (domestic) statutory construction principles and giving less weight to the Vienna Convention and other international law treaty interpretation principles (contrary to Thiel). This would have implications for tax treaties and the use of OECD Commentary material.

The author also concludes that the Commissioner will "either press for legislative change, just as he has with transfer pricing, or he will need to revisit a significant number of rulings and interpretative decisions; beginning with TR 2001/13 (Interpreting Australia's Double Tax Agreements)".

The ATO advised that in line with our transfer pricing process we take an ambulatory approach to reading and applying treaties. The main ATO advice product on this topic is TR2001/13.

1.5 Issues Registers

1.5.1 Issue register

Determine the status and priority of open items.

The issues register was reviewed with items updated with their progress and status.

1.5.2 'TOP 3' NTLG International Issues.

The Secretariat advised that the peak NTLG has asked that all sub groups discuss with their members what they consider to be their top three issues for each of their respective forums. This information is reported to the peak NTLG as part of each subgroup's update before their meeting.

1. Thin Capitalisation and securitised entity definition in section 820-39.

2. Managed Investment Trust Issue.

3. How s23AJ interacts with s23AH and whether section 23AJ applies to all non-portfolio dividends received by an Australian resident company from non-resident companies including whether or not the shares are attributable to an offshore permanent establishment of the Australian company.

1.6 Treasury Update

Transfer Pricing

Phase 1 received Royal Assent on 8 Sep 2012. in relation to Phase 2, work is progressing and there will be the usual consultation period once it is released.

IMR

Stages 1 and 2 is awaiting Royal Assent. Some issues were raised since introduction and Treasury is interested in receiving information on funds adversely impacted by the current drafting of the tests and any consequences for funds if amendment (or regulations) were not made until the introduction of IMR 3.

CGT & NR

Drafting has commenced for exposure draft. The forward work program indicates an expected release date of late 2012.

Clean MITs

The exposure draft was released 16 August - submissions were due by 13 Sep. It I scheduled for a Spring introduction to Parliament.

FATCA

Submissions are due on 28 Sep 2012 around the advantages and disadvantages of an intergovernmental agreement between Australia and the US.

Business Tax Working Group

A discussion paper was released on the 13 August with submissions due Friday 21st August. Plans to release draft of final report late October 2012 and final report to Treasurer is due Dec 2012.

Post meeting update: The draft final report was released on 24 October and Final report was released on the 1 November.

Board of Tax

Attribution of profits to Permanent Establishments (PEs): A draft discussion paper is well advanced and Board is to report to the Government by 30 April 2013.

Post meeting update: The Board of Taxation released a discussion paper on 31 October 2012.

1.7 Other Business

1.7.1 Tax Issues Entry System (TIES) items

Opportunity to raise any Tax Issues Entry System (TIES) items.

No new TIES related items were raised by members.

1.7.2 International Dealings Schedule (IDS)

Members inquired whether there would be any further consultations on the IDS schedule. They acknowledged the creation of an ATO mailbox where queries could be lodged but asked whether any further face to face meetings could be organised to discuss the schedule or alternatively conduct telephone conferences.

The Chair advised that he would relay members concerns and ideas to the IDS Project Team.

Action item

Reference No.

INTLG 0912/07

Issue

Refer to the IDS Project Team the members inquires on whether further consultation will take place on the IDS schedule.

Responsibility

ATO

[H19]Next meeting

Thursday 22 November Sydney Office.

The meeting closed at 01.30 pm.

Issues Register

Reference

May 2011

Description

How the ATO treats voluntary adjustments in relation to TP activity

Progress

Member's prioritised this item as a medium.

Status

Medium

Reference

01/11052011

Description

ATOID 2007/184 (Withdrawn)

Will a non-portfolio dividend (within the meaning of section 317 of the Income Tax Assessment Act 1936 (ITAA 1936)) received by a taxpayer through its permanent establishment in Hong Kong be non-assessable non-exempt income under section 23AH of the ITAA 1936?

Progress

The ATO is in the process of drafting a TD setting out the Commissioner's view on the how s23AJ interacts with s23AH.

Status

High

Reference

May 2011

Description

Role of Part IVA in relation to cross border transactions

Progress

This matter has been held over until the next meeting

Status

To be considered at a future meeting.

Reference

09/19072011

Description

s23AJ/s25-90 - the ATO's position

Progress

A Tax determination has been placed on the rulings program. Members will be updated with its progress.

Status

Medium

Reference

3.1/20092011

Description

Investment Manager Regime (IMR)

Can the ATO advise how they propose to engage with the consultative forums on the new IMR?

Progress

The legislation for the IMR is yet to be passed by parliament. Any inquiries at this stage about the management of the regime should be directed through Treasury.

Status

On Hold

Reference

3.4/20092011

Description

Withdrawal of ATO ID 2008/117 and replacement ATO ID 2011/35

Issue: Is the business income derived through a permanent establishment of a US Limited Liability Company, which is treated as foreign hybrid for Australian income tax purposes, non-assessable non-exempt income under section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936)?

Progress

Member were provided with a pre-release draft of the TD prior to the September meeting for their consideration. Members should submitted comments directly to the author. Further discussion and comments on the draft to be undertaken at the November meeting

Status

Medium

Reference

3.3/16042012

Description

Royalty issues - Aust/Singapore treaty and payment for the use of software.

Application of the Australia/Singapore treaty in relation to the royalty article and how it applies in relation to payments for the use of software.

Progress

ATO ID 2012/67 issued on 3 August 2012.

Status

Medium

Reference

4/16042012

Description

Thin Capitalisation and securitised entity definition in section 820-39

Progress

The ATO advised that the this meetings discussion will be taken on board while the final product is being drafted. The draft TD expected to issue in early December.

Status

Medium

Reference

3/23072012

Description

ATO ID 2012/71 and Foreign Superannuation Funds.

Whether certain Foreign Superannuation Funds are eligible for the Managed Investment Trusts (MIT) concessional withholding tax rate under s.840-805.

Progress

The ATO to consider the MIT issue raised by members concerning the reasoning in ATO ID 2012/71.

Status

Medium

Reference

3/23072012

Description

Foreign currency conversion method of lump sum payments from a foreign superannuation fund.

Members made a submission seeking clarification of the rules in Subdivision 960-C of the 1997 Act for the conversion of foreign currency amounts in respect of a lump sum payment from a foreign superannuation fund

There are a number of entries in the register of private binding rulings where there seems to be some inconsistency in the application of the provisions.

Progress

The ATO to give consideration to developing an advice product covering the situation.

Status

Medium

Transfer Pricing issues register

Reference

4.2/20092011

Description

Transfer pricing:

To comment on the use of year-end adjustments outside of the context of APAs and in particular collateral issues associated with tax deductibility and characterisation for withholding tax and customs duty purposes

Progress

This item will be held over to a future meeting.

Status

Medium

Reference

4.2/20092011

Description

Transfer pricing:

In light of the OECD's new intangibles project, to discuss on an ongoing basis issues relating to the definition, when a transfer occurs, and valuation of intangible assets for transfer pricing purposes as the OECD's project progresses. In addition, to clarify whether the ATO is going to develop its own intangibles project in parallel with the OECD's project.

Progress

This item is carried forward from NTLG TP Sub-group and will be a standing item update for future meetings.

Status

Medium

Reference

4.2/20092011

Description

New item

Transfer pricing:

Can the ATO please comment on the potential application of reportable tax positions for taxpayers that have prepared transfer pricing documentation and made sufficient disclosures in their Schedule 25A or IDS (as applicable). In particular could the ATO confirm that where transfer pricing documentation concludes that the outcome is arm's length, that the relevant international related party transactions would not be 'reportable'.

Progress

The reportable tax positions (RTP) was discussed at the Large Business Advisory Group (LBAG), in April 2011. Senior Assistant Commissioner, Mr O'Neill advised he would seek an update from this forum.

Status

High

[H20]Appendix

[H21]Appendix one

NTLG INTERNATIONALS SUB-GROUP 23 July 2012

Professional Association/s Joint Professional Bodies

Date of submission 13 July 2012

SUBJECT:

Taxation of payments for right to modify software made by an Australian resident to a Singaporean resident

ISSUE:

There is currently a lack of clarity as to the treatment of payments for a right to modify software (royalty) paid by an Australian resident to a Singaporean resident which does not carry on business in Australia at or through a permanent establishment (PE).

Are such royalty payments subject to Australian withholding tax (WHT)? If so, at what rate?

Alternatively, is the Singaporean resident subject to Australian tax on an assessment basis?

BACKGROUND:

Australia - Singapore double taxation treaty (Singapore DTA)

In Article 10 of the Singapore DTA, "royalty" is defined to include a payment for the right to use any copyright other than a literary, dramatic, musical or artistic copyright.

Under the Copyright Amendment Act 1984, the Copyright Act 1968 was amended to protect computer software as a literary work. (As noted in Taxation Ruling (TR) 93/12)

As such, Article 10 of the Singapore DTA would appear not to apply to reduce the WHT rate from 30% to 10%. 

Even though the Singapore recipient does not have a PE in Australia, Article 5 (business profits article) only protects from Australian tax "profits of an enterprise of one of the Contracting States".

Article 2(1)(k) specifies that "profits of a Singapore enterprise" excludes payments to the extent that they are received as consideration for the use of, or the right to use of "literary, dramatic, musical or artistic copyright".  As such, Article 5 does not protect the royalty income from Australian tax.

Article 16A (other income article) provides that items of income not expressly mentioned in the foregoing Articles are taxed in accordance with respective domestic laws.

AUSTRALIAN DOMESTIC LAW

Per section 6(1) ITAA 1936 a 'royalty' is defined as any amount paid as consideration for the use of, or right to use, any copyright.

Section 128B(2B) ITAA 1936 gives rise to a liability to WHT in respect of royalty income paid by an Australian resident to a non-resident of Australia. Hence, Singapore recipient is prima facie subject to Australian domestic law WHT rate of 30%.

However, section 17A(5) of the International Tax Agreements Act 1953 states that s128B ITAA 1936 will not apply to a payment of a royalty as defined in s6(1) where the royalty article (i.e. Article 10 of the Singapore DTA) of a treaty either excludes that type of royalty or the relevant agreement does not treat that payment as a royalty.

On the basis that the payments constitute a royalty under section 6(1), the deemed source rule in section 6C(2) would appear to imply that the Singapore company is deriving Australian sourced income which is not protected by the treaty hence can be taxed in Australia on an assessment basis under section 6-5 ITAA 1997.

INDUSTRY VIEW/SUGGESTED TREATMENT:

10% royalty WHT should apply to such payments.

IMPACT ON CLIENTS:

Significant impact as practice is to apply 10% WHT to such royalties.

[H22]Appendix two

NTLG INTERNATIONALS SUB-GROUP 23 July 2012

Professional Association/s ICAA

Date of submission 13 July 2012

SUBJECT:

Foreign currency conversion method of lump sum payments from a foreign superannuation fund.

ISSUE:

Clarification is required of the rules in Subdivision 960-C of the 1997 Act for the conversion of foreign currency amounts in respect of a lump sum payment from a foreign superannuation fund.

The rules have two methods for conversion of foreign currency amounts in respect of lump sum payments from a foreign superannuation fund.

The assessable amounts (if any) are converted to AUD by;

a) Using the market to market method. The AUD value of entitlements at first residency date of the recipient are deducted from the AUD amount of the lump sum payment. Any positive difference between the two AUD amounts is assessable income according to section 305-75 of the 1997 Act.

b) Reference to increase in foreign currency value of entitlements (if any) between time of first residency and payment date. Any positive amount when converted to AUD at prevailing exchange rate at time of payment is assessable income according to section 305-75 of the 1997 Act.

BACKGROUND:

An Australian resident is subject to tax under Subdivision 305-B of the 1997 Act in respect of a lump sum payment on withdrawal of entitlements in a foreign superannuation fund.

While the calculation of assessable amounts is determined under the formula for applicable fund earnings, the conversion of foreign currency amounts is determined by the rules in Sub-Division 960-C of the 1997 Act.

The applicable fund earnings are arrived at by deducting the sum of the value of entitlements at the time of first residency of the recipient plus subsequent contributions from the lump sum payment amount. The object of the formula is to bring into assessable income so much of the fund earnings as relate to the period of Australian residency of the recipient.

Subdivision 960-C provides the rules for conversion of the foreign currency amounts into Australian currency to determine the assessable value for Australian tax purposes.

There are two views on the correct method, which give rise to vastly differing results.

One published ATO view is that the calculation is performed in foreign currency amounts with the net amount then being converted to AUD at the prevailing exchange rate at time of payment.

The alternate method also ruled on favourably by the ATO is to convert both amounts to AUD at the exchange rates at the start date and payment date identified above (per section 960-50(4)) rather than the calculation occurring in foreign currency and the result in foreign currency translated into Australian dollars. That is, this provision takes precedence over table item 7.

The Explanatory Memorandum to the Bill (New Business Tax System (Taxation of Financial Arrangements) Bill (No 1) 2003) which introduced Subdivision 960-C and uses section 26BB of the 1936 Act as an example of how section 960-50(4) applies. The Explanatory Memorandum specifically indicates that "any amounts which are elements in the calculation of another amount are to be translated prior to calculating the other amount".

Further, Taxation Determination TD 2006/54 points out that section 960-50(4) requires that any foreign currency elements in a calculation must first be translated from foreign currency to Australian dollars before the final amount is worked out. This point is further reiterated in Appendix 1 of Taxation Determination TD 2006/30, a determination discussing how the foreign exchange rules apply to calculating any loss or gain made from the disposal of traditional securities.

Section 960-50 provides for the translation of amounts in foreign currencies into Australian dollars. Amounts that are elements of other amounts should be calculated as per section 960-50(4).

As section 960-50(4) specifically refers to amounts that are elements in the calculation of other amounts and because section 27CAA/ Division 305-B does not specifically fit any of the special translation rules in 960-50(6), it follows that the general section 960-50(4) must be applied.

The ATO has published two other PBRs, 101666190851 and 1011578805452 which support the alternative view. To balance out the uncertainty there is one more PBR (1011578805452) which supports the earlier view.

Business/industry affected and/or revenue impact

Lump sum payments and transfers of entitlements from foreign superannuation funds is a not uncommon transaction. Given the quantum of such amounts and the strong Australian dollar over all other currencies since the Global Financial Crisis and the quite different results that can arise because of the conflicting Rulings given in Private Binding Rulings by the Australian Tax Office, it is considered this matter should be given high priority.

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