ATO Interpretative Decision

ATO ID 2010/24 (Withdrawn)

Income Tax

• This ATO ID is withdrawn from the database due to legislative changes to the Irish domestic laws that repealed the Income Levy and replaced with the Universal Social Charge effective from 1 January 2011. Despite its withdrawal, this ATO ID continues to be a precedential view in respect of decisions up to 31 December 2010.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the income levy imposed by the Government of Ireland a 'substantially similar' tax to the 'existing taxes' in Ireland for the purposes of Article 2(2) of the tax treaty between Australia and Ireland (the Irish Agreement) contained in Schedule 20 to the International Tax Agreements Act 1953 (Agreements Act)?

Decision

Yes. The income levy imposed by the Government of Ireland is a 'substantially similar' tax to the 'existing taxes' in Ireland for the purposes of Article 2(2) of the Irish Agreement contained in Schedule 20 to the Agreements Act.

Facts

Income levy

A new tax called 'income levy' was introduced by the Government of Ireland under the Finance (No.2) Act 2008 which amends the Taxes Consolidation Act 1997 (TCA) effective from 1 January 2009.

Subsection 531B(1) of the TCA imposes the income levy.

Generally, resident individuals of Ireland are liable to pay the income levy if their gross income exceeds a certain threshold. Non resident individuals of Ireland are also liable to pay the income levy on income sourced from Ireland.

The income levy is generally calculated based on the gross income of the individual by applying the progressive rates before any relief for capital allowances, losses or pension contributions.

There is no statutory definition of the word 'income' under the income levy legislation.

The income levy is payable by an individual taxpayer as part of their annual tax assessment in addition to Irish 'income tax'.

Subsection 531H(1) of the TCA provides that the income levy shall be assessed, charged and paid in all respects as if it was an amount of income tax assessed and charged under the Income Tax Acts and may be stated in one sum with the amount of income tax contained in any computation of assessment of income tax made by or on the individual.

Irish Income Tax

The Irish income tax is imposed by the Government of Ireland under the TCA.

All individuals who are resident in Ireland for tax purposes are liable to pay Irish income tax on their total world-wide income. Non resident individuals who are not ordinarily resident and domiciled in Ireland are liable to income tax on their Irish sourced income.

There is no statutory definition of the word 'income' under the Irish income tax legislation. Under the Irish income tax law, the tax payable by an individual for an income tax year requires the ascertainment of the individual's 'total income' for the year. The term 'total income' is defined in subsection 3(1) of the TCA as 'total income from all sources as estimated in accordance with the Income Tax Acts'.

The individual's 'taxable income' is determined by deducting certain allowances or reliefs from the total income. The Irish income tax payable for the year is then calculated by applying the appropriate income tax rates to the 'taxable income' of the individual taxpayer.

Reasons for Decision

For present purposes, Article 2(2) of the Irish Agreement provides that the Irish Agreement applies to identical or 'substantially similar' taxes imposed after the date the Irish Agreement was signed in addition to, or in place of the existing taxes. Under Article 2(1)(b) of the Irish agreement, the existing taxes to which the Irish Agreement applies in the case of Ireland are:

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the income tax;

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the corporations tax; and

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the capital gains tax.

The term 'substantially similar' is not defined in the Irish Agreement. Article 3(3) of the Irish Agreement provides that unless the context otherwise requires, any term not defined in the Agreement will have the meaning which it has under the law of the State applying the Agreement, relating to the taxes to which the Agreement applies.

As 'substantially similar' is not defined in Australia's domestic tax law provisions, the ordinary meaning of the term applies as per tax treaty interpretation principles contained in paragraph 64 of Taxation Ruling TR 2001/13 'Income tax: Interpreting Australia's Double Tax Agreements'.

The Macquarie Dictionary (2005, 4th edn, The Macquarie Library Pty Ltd, NSW) gives the word 'similar' the following meaning:

having likeness or resemblance, especially in a general way.

The meanings in The Macquarie Dictionary of the adjective 'substantial' of which 'substantially' is the adverb include the following:

1.

of a corporeal or material nature; real or actual.

2.

of ample or considerable amount, quantity, size, etc.: a substantial sum of money

...

4.

being such with respect to essentials: two stories in substantial agreement

...

7.

relating to the substance, matter, or material of a thing

In the present context, the Commissioner considers the meaning of the term 'substantially similar' is that the law that imposes the relevant tax has a likeness or resemblance to the law preceding that is of a material nature in relation to the essentials or the substance of the particular laws.

This is consistent with the approach taken by Edmonds J in Virgin Holdings SA v. Federal Commissioner of Taxation [2008] FCA 1503; 2008 ATC 20-051; (2008) 70 ATR 478 (Virgin Holdings SA). In establishing whether the capital gains tax introduced under Part IIIA of the Income Tax Assessment Act 1936 (ITAA 1936) after the signing of Australia's tax treaty with Switzerland (the Swiss Agreement) is a 'substantially similar' tax to the Australian income tax for the purposes of Article 2(2) of the Swiss Agreement, Edmonds J:

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examined certain operative provisions in the ITAA 1936 referred to in the applicant's submissions and enacted before Australia entered into the Swiss Agreement relevant to taxing amounts that were not ordinary income; and

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compared these provisions with the operative provisions in the regime for taxing capital gains under Part IIIA of the ITAA 1936. References were also made to the operative provisions in Part 3-1 of the Income Tax Assessment Act 1997.

This is demonstrated in what Edmonds J said:

Where a tax on capital gains is effected, as it has been in this country, by the inclusion of the capital gains, or some figure computed there from, in the tax base upon which income tax is imposed on an annual basis, I have great difficulty in comprehending why the tax on the capital gain is not substantially similar, if not identical, to the income tax on the tax base not including the capital gain or the figure computed there from. ...

Second, if the tax with respect to which the tax on capital gains is being compared for similarity, also taxes capital gains, albeit depending on circumstances (s 25A) and time (s 26AAA) of acquisition, the more readily will a conclusion of substantial similarity be reached.

In considering the same question as that stated above in Virgin Holdings SA in the context of Article 1(2) of the 1967 tax treaty between Australia and the United Kingdom, Lindgren J in Undershaft No 1 v. Federal Commissioner of Taxation [2009] FCA 41; 2009 ATC 20-091 adopted the same approach as Edmonds J in Virgin Holdings SA. This is demonstrated at paragraph 131 of the judgment where his Honour concluded:

131. In my view, the only assumption to be made for the purposes of Art 1(2) is that the Pt IIIA regime tax is not within the expressions "the Commonwealth income tax" and I am not to go further and make any assumptions as to the reason. The Pt IIIA regime tax can then be seen to be substantially similar to the remaining tax for which the ITAA 1936 provided, if for no other reason than because other kinds of capital gains remain included in a taxpayer's assessable income.

Following the approach used in the above cases, the Commissioner considers that a comparison of the operating provisions of the newly introduced tax (in this case the income levy) to Irish income tax is sufficient in order to determine whether the income levy is a 'substantially similar' tax to the Irish income tax for the purposes of Article 2(2) of the Irish Agreement. A comparison of the operating provisions of the taxes shows that:

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the income levy is a tax based on the income derived by individual taxpayers. The Irish income tax is also a tax based on the income derived by individual taxpayers.

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the income levy is calculated by applying the progressive rates on the gross income of the taxpayer. The Irish income tax is calculated by applying the relevant income tax rate to the taxable income of the taxpayer.

Although there are certain differences between the Irish income tax and income levy, such as the tax rates, gross income versus taxable income and exemptions available, the Commissioner considers that the income levy is 'substantially similar' to the Irish income tax as both are taxes imposed by the Government of Ireland, under the TCA, based on the income of the individual.

Accordingly, the Commissioner considers that the income levy imposed by the Government of Ireland is a 'substantially similar' tax to the existing taxes in Ireland for the purposes of Article 2(2) of the Irish Agreement.

Year of income:  Year commencing 1 January 2009 onwards

Legislative References:
International Tax Agreements Act 1953
   Schedule 20
   Schedule 20, Article 2
   Schedule 20, Article 2(1)
   Schedule 20, Article 2(2)
   Schedule 20, Article 3(3)

Case References:
Virgin Holdings SA v Federal Commissioner of Taxation
   [2008] FCA 1503
   2008 ATC 20-051
   (2008) 70 ATR 478

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13

Other References:
Finance (No.2) Act 2008 (Ireland)
Taxes Consolidation Act 1997 (Ireland)
OECD Commentary on the Model Tax Convention on Income and on Capital, July 2008.
The Macquarie Dictionary, 2005, 4th edition, The Macquarie Library Pty Ltd, NSW

Keywords
Double tax agreements
International tax
Treaties
Republic of Ireland

Business Line:  International Centre of Expertise

Date of publication:  5 February 2010

ISSN: 1445-2782