Edited version of your written advice

Authorisation Number: 1012727156783

Ruling

Subject: Convention between the Australia Government and the Overseas Government's

Question 1

Does the Holding Co Preference Share or the Group Co Preference Share, each held by Entity A, prevent the satisfaction of Article 10(3)(b) of the Convention between the Government of Australia and the Government of the overseas Countries for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains ('the overseas Convention')?

Answer

No.

Question 2

If the answer to Question 1 is yes, will the competent authority of Australia determine under Article 10(3)(c) of the overseas Convention that Holding Co B did not have as one of its principal purposes the obtaining of benefits under the overseas Convention?

Answer

Not necessary to answer.

This ruling applies for the following periods:

2015 - 2019 income years

The scheme commences on:

2014

Relevant facts and circumstances

Group Co is an overseas resident listed on a recognised stock exchange for the purpose of the overseas Convention.

Group Co supplies particular products and services to international customers in targeted sectors. In Australia, a subsidiary of Group Co, Aust Co, provides particular services and solutions to Australian clients.

Group Co group

• Aust Co is an Australian resident.

• Holding Co B is an overseas resident and the 100% beneficial owner and legal owner of all the shares in Aust Co. Holding Co B does not carry on business in Australia through a permanent establishment.

• Holding Co is an overseas resident and the 100%x beneficial owner and legal owner of all the shares in Holding Co B.

• The share capital of Holding Co is divided into two classes:

(i) ordinary shares with the rights to voting power, dividends and capital distributions of Holding Co B, and

(ii) one (1) share (the Holding Co Preference Share), with limited rights to the voting power of Holding Co, and which is held by the Entity A.

• Group Holding Co is an overseas resident and the legal owner of all ordinary shares in Holding Co, which represent 100% of the rights to the dividends and capital distributions of Holding Co.

• Group Co is the ultimate head company of the Group Co group and is the 100% beneficial owner and legal owner of all shares in and dividends from Group Holding Co.

• The share capital of Group Co is divided into two classes:

(i) ordinary shares, and

(ii) one (1) Preference Share (the Group Co Preference Share) which is held by Entity A.

• Group Co's principal class of shares are its ordinary shares. Group Co's principal class of shares have been publicly listed and regularly traded on a recognised stock exchange for the purpose of the overseas Convention.

The Holding Co Preference Share

The Holding Co Preference Share is a special rights redeemable preference share.

The Holding Co Preference Share may only be issued to, held by, or transferred to a stated class of entities. The Holding Co Preference Share is currently held by Entity A.

The Holding Co Preference Share may be redeemed subject to the provisions of the overseas Companies Acts. Otherwise, it is not redeemable in any other way.

The Holding Co Preference Share has no rights to the voting power, dividends and capital distributions of Holding Co, except those limited voting rights given under the Holding Co Articles. Broadly, those are limited to the application of the Holding Co Articles in relation to the Holding Co Preference Share itself.

The Holding Co Preference Share is primarily held for particular purposes.

The rights of Entity A are limited to those dealing with limited and particular matters.

The Holding Co Preference Share provides no financial or economic value to Entity A. Entity A has no ability to affect the position of rights of Group Holding Co as a shareholder of Holding Co.

The Group Co Preference Share

The Group Co Preference Share is a special rights redeemable preference share.

The Group Co Preference Share may only be issued to, held by, or transferred to a stated class of entities. The Group Co Preference Share is currently held by Entity A.

The Group Co Preference Share may be redeemed subject to the provisions of the overseas Companies Acts. Otherwise, it is not redeemable in any other way.

The Group Co Preference Share has no rights to the dividends and capital distributions of Group Co.

Assumptions

The dividends Aust Co proposes to declare and pay to Holding Co B are "dividends" within the meaning of that term in Article 10(4) of the overseas Convention.

Holding Co B will continue to own shares representing 80% or more of the voting power of Aust Co during the periods to which the ruling applies which covers a 12 month period ending on the date such a dividend is declared.

Relevant legislative provision

Convention between the Government of Australia and the Government of the overseas countries for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains.

Reasons for decision

Question 1

Does the Holding Co Preference Share or the Group Co Preference Share, each held by Entity A, prevent the satisfaction of Article 10(3)(b) of the Convention between the Government of Australia and the Government of the overseas countries for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains ('the overseas Convention')?

Summary

No. The Preference Shares do not prevent the satisfaction of Article 10(3)(b) of the overseas Convention.

Detailed reasoning

To the extent relevant for present purposes, Article 10(3)(b) of the overseas Convention provides that dividends shall not be taxed in Australia if the beneficial owner of the dividends is an overseas resident company that has owned shares representing 80 per cent or more of the voting power of the Australian resident company paying the dividends for a 12 month period ending on the date the dividend is declared, and the overseas resident company that is the beneficial owner of the dividends is owned directly or indirectly by one or more companies whose principal class of shares is listed on a recognised stock exchange specified in subparagraph (i) or (ii) of Article 3(1)(o) and regularly traded on one or more recognised stock exchanges (Article 10(3)(b) of the overseas Convention).

Pursuant to Article 10(8) of the overseas Convention, the ordinary shares of Holding Co and the ordinary shares of Group Co are each the principal class of shares in those companies for the purposes of Article 10(3) of the overseas Convention.

Group Co has been listed on and its principal class of shares regularly traded on a recognised stock exchange as defined at Article 3(1)(o) of the overseas Convention). Holding Co B is an overseas resident and the beneficial owner of all the dividends proposed by Aust Co. Holding Co B has owned and will continue to own shares representing 80 per cent or more of the voting power of Aust Co for the requisite a 12-month period. Aust Co is a member of the Group Co group. Accordingly, to satisfy Article 10(3)(b) of the overseas Convention, Holding Co B must be owned directly or indirectly by Group Co.

Holding Co B is directly 100% owned by Holding Co. Holding Co has ordinary shares 100% owned by Group Holding Co and the single Holding Co Preference Share owned by the Entity A. All of the shares in Group Holding Co are directly owned by Group Co.

Group Co has 2 classes of shares, being the ordinary shares with voting rights which are listed and regularly traded on a recognised stock exchange and the single Group Co Preference Share (with limited voting power) which is owned by the Entity A. The existence of a single Group Co Preference Share does not prevent Group Co from satisfying the requirement that it is a company whose principal class of shares is listed and regularly traded on a recognised stock exchange.

As there is not direct ownership of Holding Co B by Group Co, the substantive matter is whether the existence of the Holding Co Preference Share prevents Holding Co B being "owned indirectly" by Group Co for the purpose of Article 10(3)(b) of the overseas Convention.

Owned indirectly

The term "owned indirectly" is not defined in Article 3 or any other provision of the overseas Convention.

Article 3(3) of the overseas Convention relevantly provides that as regards the application of the overseas Convention by a Contracting State (for present purposes, Australia) any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the laws of that State for the purposes of the taxes to which the Convention applies, any meaning under the applicable tax laws of that State prevailing over a meaning given to the term under other laws of that State.

As the term "owned indirectly" is not defined in the overseas Convention, a careful scrutiny of both the context in which it appears and domestic law is required in interpreting that term.

There are no relevant statutory definitions of the term "owned indirectly" in the Income Tax Assessment Act 1997 (ITAA 1997) or the Income Tax Assessment Act 1936 (ITAA 1936).

The term 'owned' has been considered in a number of judgments. The general indicia for ownership of an asset were considered by the Full Federal Court in Bellinz Pty Ltd & Others v. Federal Commissioner of Taxation (1998) 84 FCR 154; 98 ATC 4634; (1998) 39 ATR 198. The joint judgment of Hill, Sundberg and Goldberg JJ followed Mason J in Forestry Commissioner of New South Wales v. Stefanetto (1976) 133 CLR 507 at 518, and held the meaning of owned 'must be ascertained in the light of the context in which the word is used'. Their Honours also quoted Halsbury's Laws of England 4th edition Vol 35 at paragraphs 1127 and 1128 which states:

Ownership consists of innumerable rights over property, for example the rights of exclusive enjoyment, of destruction, alteration and alienation, and of maintaining and recovering possession of the property from all other persons. Those rights are conceived not as separately existing, but as merged in one general right of ownership ... Ownership is nevertheless divisible to some extent ... prima facie an owner is entitled to possession or to recover possession of his goods against all the world.

The Full Federal Court relied on Union Trustee Co of Australia Ltd v. Federal Commissioner of Land Tax (1915) 20 CLR 526 at 530 for the proposition that the prima facie meaning of the word, subject to context, is the 'entire dominion of the thing said to be owned'.

In McDermott Industries (Aust) Pty Ltd v. Commissioner of Taxation [2005] FCAFC 67; (2005) 142 FCR 134; 2005 ATC 4398; 59 ATR 358 (McDermott), the Full Federal Court adopted the summarised principles stated in Lamesa for interpreting the words and phrases in Double Tax Agreements:

• Regard should be had to the "four corners of the actual text. The text must be given primacy in the interpretation process. The ordinary meaning of the words used are presumed to be "authentic representation of the parties' intention" …

• The courts must, however, in addition to having regard to the text, have regard as well to the context, object and purpose of the treaty provisions. The approach to interpretation involves a holistic approach.

• International agreements should be interpreted 'liberally' (as to which refer to the guidance at paragraphs 93-94 of Taxation Ruling TR2001/13 Income tax: Interpreting Australia's Double Tax Agreements).

• Treaties often fail to demonstrate the precision of domestic legislation and should thus not be applied with 'taut logical precision'.

In considering the context of the use of the term "owned indirectly" in the overseas Convention, it is appropriate to have regard to the range of materials open to consideration and the intention of the Convention parties.

Notwithstanding the scope of the meaning of the term 'owned', the context in which the term is used in Article 10(3) (and the overseas Convention more broadly) is in relation to intercorporate dividends a company pays to its shareholders being excluded from source country taxation. Accordingly, the term 'owned' in this particular context centres upon parties having rights to receive dividends.

In the present case, the Preference Shares have no rights to receive dividends. In addition, as evidenced in the Holding Co Articles, the Holding Co Preference Share can reasonably be understood as not providing financial or economic value or control to the Entity A in relation to dividends. Relevantly, Entity A has no ability to affect the position of rights held by Group Holding Co in Holding Co.

Consistent with the context stated above, the Commissioner considers that given the rights and obligations that attach to the Preference Shares, these shares can be ignored in determining whether Holding Co B's shares are owned indirectly by Group Co.

Accordingly, Holding Co B is not prevented, by the holding of the Holding Co Preference Share or the Group Co Preference Share by Entity A, from being owned indirectly by Group Co for the purposes of Article 10(3) of the overseas Convention.

Question 2

If the answer to Question 1 is yes, will the competent authority of Australia determine under Article 10(3)(c) of the overseas Convention that Holding Co B did not have as one of its principal purposes the obtaining of benefits under the overseas Convention?

Summary

It is not necessary to answer this question, given the answer to Question 1.