Edited version of your written advice

Authorisation Number: 1051471302503

Date of advice: 10 January 2019

Ruling

Subject: Dividend withholding tax

Question

Is the organisation exempt from non-resident withholding tax on dividends paid by Australian resident companies?

Answer

No

This ruling applies for the following periods:

1 August 20XX to 31 July 20XX

1 August 20XX to 31 July 20XX

1 August 20XX to 31 July 20XX

1 August 20XX to 31 July 20XX

The scheme commences on:

1 August 20XX

Relevant facts and circumstances

The organisation is based in Country X.

The organisation is a statutory corporation. In particular:

● the organisation is established for ‘charitable purposes’,

● the operations of the organisation are not carried on for the private pecuniary profit of any individual, and

● the organisation has a ‘winding-down’ clause which provides that any surplus funds on termination of the entity will be disposed of to some other charitable organisation.

The organisation is a registered charity in Country X and exempt from tax in that country.

The organisation’s management, control and administration are conducted from Country X. However, the organisation does have a registered branch office in another country and holds rented premises in a third country.

The organisation receives dividend income as the beneficial owner of investments held in companies worldwide, including Australian resident companies.

The investment portfolio of the organisation consists of passive investments that are less than 10% of each company.

In most countries the organisation receives either an exemption or reduced rate of withholding tax on dividend income as a result of its charitable objectives and exempt tax status in its home country.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 128B

Income Tax Assessment Act 1936 paragraph 128B(3)(a)

Income Tax Assessment Act 1936 paragraph 128B(3)(ga)

Income Tax Assessment Act 1997 Division 50

Income Tax Assessment Act 1997 Section 50-5

Income Tax Assessment Act 1997 Section 50-50

Income Tax Regulations 1997 Regulation 50-50.01

Income Tax Regulations 1997 Regulation 50-50.02

International Agreements Act 1953 Section 3AAA

International Agreements Act 1953 Section 4

International Agreements Act 1953 Section 5

Reasons for decision

Section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) imposes withholding tax on certain payments of dividends, interest and royalties made by Australian residents to foreign resident entities.

However, paragraph 128B(3)(ga) exempts from the withholding provisions any part of a dividend paid that is a frank dividend.

Additionally, paragraph 128B(3)(a) provides that section 128B does not apply to certain income that is:

● exempt from income tax under certain specified provisions contained within Division 50 of the Income Tax Assessment Act 1997 (ITAA 1997), and

● exempt from income tax in the recipient’s home country.

To be exempt from income tax in Australia, a charitable organisation that is covered by any of the exemption items (for instance a registered charity, scientific institution or public educational institution (items 1.1, 1.3 or 1.4 of section 50-5 of the ITAA 1997 respectively)) contained in Division 50 must be registered as a charity with the Australian Charities and Not-for-profits Commission (ACNC) and meet the following additional criteria:

● have a physical presence in Australia and to that extent incurs its expenditure and pursues its objective principally in Australia, or

● is a deductible gift recipient, or

● is prescribed by law.

Because the organisation is not registered as a charity with the ACNC and does not satisfy any of the additional conditions (it has no physical presence in Australia, is not a deductible gift recipient and is not listed as a prescribed institution in the Regulation 50-50.01 or 20-20.02 of the Income Tax Regulations 1997), it will not be exempt from Australian income tax, even though it is exempt from tax in its home country.

In determining the organisation’s liability to Australian income tax it is also necessary to consider not only the Income Tax legislation but also any applicable double tax agreement between Australia and Country X.

Section 4 of the International Agreements Act 1953 (the Agreements Act) incorporates that Act with the ITAA 1936 and ITAA 1997 so that the Acts are read as one. The provisions of the Agreements Act have effect notwithstanding any inconsistencies that may exist in the income tax acts. The Double Taxation Convention between Australia and Country X (the Country X Convention) is listed in Section 3AAA of the Agreements Act as one of the Current Agreements. Section 5 gives this current agreement the force of law.

Article 10 of the Country X Convention provides that the rate of withholding for dividends received by a resident of Country X from an Australian resident company is 15% provided the Country X resident has less than 10% of the voting power in the Australian company paying the dividend. There is no provision within the Convention that would exempt the organisation’s Australian dividend income from taxation in Australia. Additionally, Article 11 of the Country X Convention provides for a maximum rate of withholding of 10% on payments of interest.

Therefore, in conclusion, the organisation is not exempt from dividend withholding tax in Australia. However, an amount of withholding tax at the rate of 15% is only required in relation to that portion of the dividends paid that are unfranked. There is no withholding tax on franked dividends paid by an Australian resident company.