Edited version of private advice

Authorisation Number: 1051933267983

Date of advice: 14 December 2021

Ruling

Subject:Dividend withholding tax

Question 1

Will Article 10(2) of the Convention between Australia and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1981] ATS 14, and the Protocol amending the Convention [2002] ATS 26 (the Canadian Convention) apply to reduce to 15% the withholding tax applying to unfranked dividends beneficially owned by the Investor that are paid by Company A to XY LP?

Answer

Yes

Question 2

If the answer to Question 1 is "Yes", will the Investor be entitled to apply in writing for a refund by the Commissioner under subsection 18-70(1) of Schedule 1 to the Taxation Administration Act 1953 (the TAA 1953) of dividend withholding tax amounts in excess of 15% withheld and remitted by Company A to the Commissioner on its portion of unfranked dividends paid by Company A to XY LP?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A

Company A is a company incorporated in Australia.

Company A is the head company of the Company A tax consolidated group (Company A TCG).

Company A was established to acquire, through its wholly owned subsidiary, the rights to harvest trees in Australia.

The Company A TCG also owns a timber mill located in Australia.

A member of the Company A TCG, Company B, owns shares in a Country Y subsidiary, which through its wholly owned subsidiaries owns a forest and milling facilities in Country Y.

XY LP

XY LP is a limited partnership formed in Territory XY.

XY LP is governed by the Amended & Restated Limited Partnership Agreement dated DD MM 20XX, which was subsequently amended on DD MM 20XX and DD MM 20XX (together, the Partnership Agreement).

XY LP is not an Australian resident and does not have any operations in Australia nor does it carry on business in Australia.

XY LP is not taxed in its own right under Territory XY's income tax law. It is treated as 'fiscally transparent' in Territory XY such that profits derived by XY LP are not taxed in Territory XY but rather are treated as profits of the investors in proportion to their interest in XY LP.

XY LP acquired X% of the ordinary shares in Company A on DD MM 20XX.

On DD MM 20XX, XY LP subscribed for additional shares in Company A. Since that date it has held X% of the shares in Company A.

On DD MM 20XX XY LP acquired subordinated loan notes (SLNs) issued by Company A, with a face value of $A X.

On DD MM 20XX, XY LP subscribed for an additional $A X of SLNs issued by Company A.

Dividends received by XY LP

Company A paid unfranked dividends to XY LP in the 20XX financial year

Dividend withholding tax (at the rate of 30%) of $A X was withheld by Company A and remitted to the ATO in its business activity statements.

The Investor Trust

The Investor is a trust that is resident of Canada for tax purposes.

The Investor Trust is a private irrevocable trust established for the sole purpose of receiving settlement payments from the Government of Canada and making distributions to its Canadian beneficiary organisations.

The beneficiaries of the Investor Trust are resident in Canada.

The Investor Trust has provided supporting documentation to show the residency of its beneficiaries.

The Investor Trust is one of the ultimate investors in Company A through XY LP.

The Investor does not carry on a business in Australia through a permanent establishment.

The Investor received distributions from XY LP.

The total distributions received partly comprise the Investor's portion of the net unfranked dividends from Company A in accordance with its percentage interest in XY LP. Of the dividends received by XY LP from Company A, certain cash was retained by XY LP to fund ongoing expenses.

The unfranked dividends received by Investor were net of withholding tax of 30%.

Under Canadian domestic law, XY LP is treated as a fiscally transparent entity such that Investor's proportion of profits derived by XY LP are taxable in Canada.

The Investor has not previously applied to Company A for a refund of the dividend withholding tax previously withheld by Company A.

Relevant legislative provisions

Convention between Australia and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1981] ATS 14

The Protocol amending the Convention [2002] ATS 26

Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 section 7

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1936 subsection 128B(1)

Income Tax Assessment Act 1936 subsection 128B(4)

Income Tax Assessment Act 1997 subsection 6-5(3)

International Tax Agreements Act 1953 subsection 4(1)

International Tax Agreements Act 1953 subsection 4(2)

Taxation Administration Act 1953 subsection 18-70(1) of Schedule 1

Reasons for decision

Question 1

Australian taxation for non-residents and the Canadian Convention

Non-resident taxpayers will, prima facie, be liable to pay income tax under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) or withholding tax under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) on Australian sourced income, unless an exemption or exclusion applies.

Australia has entered into treaties, commonly known as double tax agreements (DTA), with many countries to avoid the incidence of double taxation and fiscal evasion, including the Canadian Convention.

Article 1 of the Canadian Convention states that the Convention applies to persons who are residents of one or both of the Contracting States.

The Investor Trust is a resident of Canada for tax purposes and an indirect investor in Company A, an Australian incorporated company, through a limited partnership, XY LP, in which the Investor Trust is a partner.

Article 4(1) states that for the purposes of the Convention a person is a resident of a contracting state if a person is a resident of that State for the purposes of its tax.

The Investor Trust is a resident of Canada for tax purposes and therefore the Canadian Convention will apply to the Investor Trust and it will be treated as a resident of Canada for the purposes of applying the Convention.

Dividend withholding tax

Subsection 128B(1) of the ITAA 1936 states that (subject to excluding provisions) the operative provisions of the section apply to dividends paid to non-residents by Australian resident companies.

Subsection 128B(4) of the ITAA 1936 provides that a person who derives dividend income to which the section applies is liable to pay income tax upon that income at the rate declared by the Parliament.

Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 prescribes that the rate is 30%.

However, where a dividend is beneficially owned by a resident of a country which has a tax treaty with Australia, that treaty may set a different rate of withholding in circumstances where the treaty applies specifically to the circumstances of the recipient.

The primary legislation governing DTA's in Australia is the International Tax Agreements Act 1953 (Agreements Act). Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (with some limited exceptions).

Article 10(1) of the Canadian Convention states that dividends paid by a company which is a resident of one of the Contracting States for the purposes of its tax, being dividends to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State.

Article 10(2) of the Canadian Convention states that those dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident for the purposes of its tax, and according to the law of that State, but the tax charged shall not exceed either 5 percent (Article 10(2)(a)) or 15 percent (Article 10(2)(b)) of the gross amount of the dividends.

Dividends

Article 10(4) of the Canadian Convention defines dividends as income from shares, as well as other amounts which are subjected to the same taxation treatment as income from shares by the law of the State of which the company making the distribution is a resident for the purposes of its tax.

The effect of Article 10(4) is that the distributions paid by Company A to XY LP were dividends for the purposes of Article 10 of the Canadian Convention as they are income from the holding of shares in Company A.

Beneficial Owner

XY LP is a limited partnership formed in Territory XY. XY LP holds X% of the shares that have been issued by Company A. XY LP is not taxed under Territory XY's income tax law and is treated as a fiscally transparent entity in Territory XYs. All profits derived by XY LP are treated as profits of the partners themselves in proportion to their partnership interest in XY LP.

The term 'beneficial ownership' is not defined in the Canadian Convention; however, Article 3(3) provides that:

As regards the application of this Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State concerning the taxes to which the Convention applies, any meaning under the applicable tax law of that State prevailing over a meaning given to the term under other law of that State.

In general, when interpreting DTA's, the OECD Commentaries provide important guidance on interpretation and application of the OECD Model Tax Convention and can be considered, in interpreting tax treaties.

Paragraph 12.1 of the 2014 OECD Commentary on Article 10 (being the Article dealing with dividends) of the OECD Model Tax Convention states:

The term 'beneficial owner' is therefore not used in a narrow technical sense (such as the meaning that it has under the trust law of many common law countries), rather, it should be understood in its context, in particular in relation to the words 'paid to a resident', and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.

Therefore, The Investor Trust as a partner in XY LP, will be the beneficial owner of the dividends received from Company A for the purposes of the Canadian Convention.

Article 10 of the Canadian Convention

Article 10(2)(a) does not apply because The Investor Trust does not own shares representing 10% of the voting power of the company paying the dividends.

Article 10(3) does not apply because The Investor Trust does not carry on business in Australia through a permanent establishment.

In conclusion, the distributions paid by Company A are dividends for the purposes of Article 10 of the Canadian Convention and The Investor Trust is the beneficial owner of those dividends. Article 10(2)(b) of the Canadian Convention will apply, the percentage of withholding tax applicable to dividends received by The Investor Trust will be at the rate of 15%.

Question 2

Subdivision 18-B of Schedule 1 to the TAA 1953 contains the rules allowing certain amounts withheld or paid to the Commissioner under the pay as you go (PAYG) withholding provisions to be refunded to recipients.

Relevantly, subsection 18-70(1) of Schedule 1 of the TAA 1953 states:

An entity (the recipient) may apply in writing to the Commissioner for the refund of an amount if:

(a)          another entity (the payer):

(i)            withheld an amount purportedly under Division 12 from a payment made to, or received for, the recipient.....

(b)          either:

(i)            the amount was so withheld, or paid to the Commissioner, in error...

(c)          section 18-65 does not apply because the payer did not become aware of the matter mentioned in paragraph (b), or the recipient did not apply for a refund, as mentioned in subsection 18-65(1); and

(d)          if subparagraph (a)(i) applies - the payer has already paid the withheld amount to the Commissioner.

Paragraphs 18-70(1)(a) and 18-70(1)(b) of Schedule 1 to the TAA 1953

Company A has withheld and remitted to the Commissioner an amount equating to 30% of the unfranked dividend distribution paid to XY LP that are beneficially owned by The Investor Trust which has resulted in an overpayment of withholding tax. As Article 10(2)(b) applies to reduce the withholding tax rate to 15%, Company A have withheld and remitted a higher amount than necessary.

Law Administration Practice Statement PS LA 2011/11 - Refunds of certain pay as you go withholding amounts also details the obligations and rights of a payer, a recipient and the Commissioner where an amount has been withheld, in error, purportedly under the PAYG withholding system. It also provides information as to how a recipient may obtain a refund of incorrectly withheld amounts.

The term 'in error' is discussed in paragraph 7 of PS LA 2011/11 and states:

The word error has its ordinary, broad meaning and includes an error of fact and an error of law. An error of fact is one where an error is made by a decision maker about the existence of a particular fact. An error of law is a misinterpretation or misapplication of a principle of law, or the application of an inappropriate principle of law to an issue of fact.

Paragraph 8 of PS LA 2011/11 provides examples that illustrate where an amount would be considered to have been withheld in error. In particular, one example relevant to this case states: An incorrect (higher) withholding rate is used in calculating the amount withheld from a payment of an interest, unfranked dividend or royalty to a non-resident (for example, because they did not take account of the rate provided under an agreement or convention covered by the International Tax Agreements Act 1953). Subsequently an excess amount is withheld from these payments.

It is accepted that the amounts withheld by Company A have been withheld 'in error'.

Paragraph 18-70(1)(c) of Schedule 1 to the TAA 1953

Where an overpayment of withholding tax is made, the recipient of the income can obtain a refund from either the payer under section 18-65 of Schedule 1 to the TAA 1953 or from the Commissioner under section 18-70 of Schedule 1 to the TAA 1953, subject to the requirements of the relevant sections being satisfied and the relevant timeframes being met.

Subsection 18-65(1) of Schedule 1 of the TAA 1953 relevantly states:

An entity (the payer) must refund to another entity (the recipient) an amount if:

(a)          the payer:

(i)            withheld the amount purportedly under Division 12 from a payment made to, or received for, the recipient (whether the amount has been paid to the Commissioner or not).......

(b)          either:

(i)            the amount was so withheld, or paid to the Commissioner, in error....

(c)          either:

(i)            the payer becomes aware of the matter mentioned in paragraph (b); or

(ii)           the recipient applies to the payer for the refund;

before the end of the 'financial year in which the amount was so withheld or paid to the Commissioner;...

Subsection 18-65(4) of Schedule 1 of the TAA 1953 explains the timeframes for the payer when a request for refund is made:

The request must be made within 7 working days (of the payer) after the payer receives the application for the refund or after the payer otherwise becomes aware of the matter mentioned in paragraph (1)(b).

In this case, The Investor Trust had not previously sought a refund of the dividend withholding tax withheld by Company A. As such, the requirements of subsection 18-65(1) of Schedule 1 to the TAA 1953 have not been met. Therefore, paragraph 18-70(1)(c) of Schedule 1 to the TAA 1953 is satisfied.

Paragraph 18-70(1)(d) of Schedule 1 to the TAA 1953

Company A has remitted the relevant amount of withholding tax to the Commissioner. As such, this paragraph is satisfied.

Consequently, The Investor Trust will be entitled to apply for a refund by the Commissioner of any dividend withholding tax amounts withheld and remitted by Company A on its portions of unfranked dividends paid by Company A to XY LP.