ATO Interpretative Decision

ATO ID 2001/186 (Withdrawn)

Income Tax

• ATO ID 2001/186 has been withdrawn from the database because it contains references to the tax treaty between Australia and New Zealand that was replaced with a new tax treaty which entered into force on 19 March 2010. Despite its withdrawal from the database, this ATO ID continues to be a precedential view in respect of decisions up to, and including, 30 April 2010.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer, a resident of New Zealand, liable to pay withholding tax on unfranked dividends paid by an Australian resident company at a rate greater than that specified in Article 10 of Schedule 4 of the International Tax Agreements Act 1953?

Decision

No, the taxpayer, a resident of New Zealand, is not liable to pay withholding tax on unfranked dividends paid by an Australian resident company at a rate greater than that specified in Article 10 of Schedule 4 of the International Tax Agreements Act 1953.

Facts

The taxpayer is a resident of New Zealand who owns shares in an Australian resident company. The taxpayer received unfranked dividends in respect of these shares, from which 15% withholding tax was deducted by the payer.

The taxpayer subsequently lodged an Australian income tax return and included the unfranked dividends in his assessable income.

The taxpayer's shareholding in the Australian company is not related to any business, or independent personal services, carried on by the taxpayer through a permanent establishment or fixed base in Australia.

Reasons For Decision

Subsection 128B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) imposes withholding tax on dividends paid to non-residents by Australian resident companies. This means that an amount of tax is withheld from the dividend and is remitted by the payer directly to the Australian Taxation Office.

Dividends which are subject to withholding tax are excluded from the assessable income of non-residents, by virtue of section 128D of the ITAA 1936. The taxpayer therefore should not have included these Australian sourced unfranked dividends in their Australian income tax return.

Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 (WHT Act) provides that the rate of withholding tax on dividends paid to non residents is generally 30%. However, Article 10, Schedule 4 of the International Tax Agreements Act 1953 provides that the amount of tax levied on dividends paid by an Australian resident company to a resident of New Zealand can not exceed 15% of the dividend payment. A provision of an international agreement overrides the domestic law as contained in section 7 of the WHT Act.

Therefore, the taxpayer is liable to withholding tax on the unfranked dividends, at a rate of 15%.

Legislative References:
Income Tax Assessment Act 1936
   subsection 128B(1)
   section 128D

Keywords
Unfranked dividends
Non resident dividend withholding tax

Business Line:  Small Business/Individual Taxpayers

Date of publication:  10 August 2001

ISSN: 1445-2782