House of Representatives

Income Tax (International Agreements) Bill 1974

Income Tax (International Agreements) Act 1974

Second Reading Speech

by the Treasurer, the Honourable Frank Crean, M.P.

This Bill will amend the Income Tax (International Agreements) Act in two respects, one minor and the other substantial.

The minor amendment is quite technical and is necessary because of the proposed surcharge on property income for 1974/75. It will provide a means of taking the surcharge into account in calculating the amount of Australian tax on particular income. This calculation has to be made in order to determine a limit for double taxation credits for foreign tax so that they do not exceed Australian tax on foreign income, and to establish the rebate to be allowed where the Australian tax payable by a non-resident on Australian income is limited under an agreement.

The substantial amendment will give the force of law to a comprehensive double taxation agreement with the Federal Republic of Germany which was signed in 1972. The agreement will not, however, become actually operative until 30 days after it has been ratified by both countries and instruments of ratification exchanged.

The agreement is comprehensive and, by and large, it accords in practical effects with other such agreements to which Australia is a party. I should, however, refer to a particular matter that is dealt with somewhat differently in this agreement.

Under the agreement with the Federal Republic, withholding tax on dividends will generally be limited by each country to 15 per cent. The Federal Republic has, however, a system of taxing company profits which involves much lower rates on distributed profits than on undistributed profits. If, in a case of direct investment (that is, where foreign holding is 25 per cent or more) the Federal Republic limited its tax on dividends to 15 per cent, the situation would be wide open to exploitation. As in other agreements to which it is a party therefore, there is in our agreement with the Federal Republic provision for that country to impose its withholding tax in direct investment cases at a higher rate. The rate agreed is 25.75 per cent. This means that under the agreement, the combined company and withholding tax rate on profits leaving the Federal Republic as dividends in direct investment cases will be 43.98 per cent. The corresponding Australian rate based on the proposed company tax rate of 45 per cent will be 53.25 per cent.

As I have said, other provisions of the agreement are largely conventional in nature. Explanations of them are spelt out in some detail in the explanatory memorandum which I am circulating with the Bill. There are two things I should add. One is that, due to the delay that has unavoidably occurred in giving force to it, the agreement will have retrospective effect to the 1971/72 income year in Australia and the 1971 calendar year in the Federal Republic. The other is that I am sure all Honourable Members would regard the new agreement as further evidence of the harmonious relations that exist between the Federal Republic and Australia.

I commend the Bill to the House.

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