Taxation Ruling

IT 2225

Income tax: non-resident private company - liability to undistributed profits tax. Effect of article 10(6) Australia/United States Double Tax Convention

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FOI status:

PREAMBLE

Advice was sought from this Office whether a United States company, which was a private company for Australian income tax purposes and which carried on business in Australia through a branch, is liable for additional tax under Division 7, Part III of the Income Tax Assessment Act 1936. There are three distinct questions involved :

(1)

Is there any liability to Division 7 tax at all in this situation?

(2)

Are dividends paid by the company out of ex-Australian profits taken into account in determining the section 105A sufficient distribution?

(3)

What is the effect of Article 10(6) of the 1982 Australia/United States Double Tax Convention?

RULING

2. Liability to additional tax under Division 7 is imposed by sub-section 104(1) of the Assessment Act where a private company has not made a sufficient distribution of its distributable income for a year within the prescribed period. Sub-section 104(2) excludes liability where a private company is a non-resident and does not carry on business in Australia by means of either a principal office or of a branch. The exception in sub-section (2) does not apply in the present case because the non-resident private company carries on business in Australia through a branch - it is liable, therefore to Division 7 tax.

3. By virtue of sub-section 105A(1) a private company is deemed to have made a sufficient distribution if it has, during the prescribed period, paid in dividends, other than special fund dividends and prescribed dividends, an amount not less than the excess of distributable income less the retention allowance. Dividends paid from ex-Australian profits by a non-resident private company operating in Australia through a branch are taken into account in determining whether the company has made a sufficient distribution.

4. Article 10(6) of the Australia/United States Double Tax Convention reserves the right of each country to impose a branch profits tax. Additionally, the Article provides that, in determining whether any Division 7 tax is payable by a U.S. resident private company operating an Australian branch, the Australian branch profits tax payable under section 128T of the Assessment Act is not to be taken into account in arriving at distributable income. Rather, where branch profits tax is payable, the company is to be deemed to have paid a dividend. The amount of the deemed dividend is ascertained by converting the branch profits tax payable by the company to an amount which represents a dividend upon which the 15% dividend withholding tax would be payable. By way of simple illustration, if branch profits tax payable by the company is $5, the company would be deemed to have paid a dividend of $33, i.e., 15% of $33 is equal to the $5 branch profits tax. The deemed dividend is taken into account in determining whether a company has made a sufficient distribution.

COMMISSIONER OF TAXATION
26 November 1985

References

ATO references:
NO 84/2532-9

Related Rulings/Determinations:

IT 2225W

Subject References:
NON-RESIDENT PRIVATE COMPANY
UNDISTRIBUTED PROFITS TAX
AUST/USA DOUBLE TAX AGREEMENT

Legislative References:
ITAA section 104
section 105A
INCOME TAX (INTERNATIONAL AGREEMENTS) ACT: SCHEDULE 2 ARTICLE 10(6)