ATO Interpretative Decision

ATO ID 2009/138

Income Tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
  Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

Issue

Can a trustee of a managed investment trust which makes a fund payment under Subdivision 12-H of Schedule 1 to the Taxation Administration Act 1953 (TAA) to a resident of Japan, reduce the withholding rate from 22.5% prescribed by that Subdivision to 15% because of Article 10 of Schedule 6 to the International Tax Agreements Act 1953 (Japanese Convention)?

Decision

No, the trustee of a managed investment trust cannot reduce the withholding rate from 22.5% to 15% because of Article 10 of the Japanese Convention because withholding at 22.5% does not conflict with Australia's obligations under the Japanese Convention.

Facts

MIT is a managed investment trust as defined in section 12-400 of Schedule 1 to the TAA in relation to its first income year starting on or after 1 July 2008.

MIT carries on a business consisting of investment in real property for the main purpose of deriving rent.

A resident of Japan (the investor) invests in MIT. The investor provides an address in Japan to the trustee of MIT, which the trustee keeps in its records.

The trustee of MIT makes a fund payment as defined in subsection 12-405(1) of Schedule 1 to the TAA to the investor in relation to the first income year starting on or after 1 July 2008. The distribution is made on or after 1 January 2009. The investor beneficially owns the distribution.

Reasons for Decision

Subdivision 12-H of Schedule 1 to the TAA governs the withholding obligations of the trustee of a managed investment trust that makes a distribution to outside of Australia.

Subsection 12-385(1) of Schedule 1 to the TAA provides that a trustee of a trust that is a managed investment trust in relation to an income year that makes a fund payment in relation to that income year to an entity covered by section 12-410 of Schedule 1 to the TAA must withhold an amount from the payment.

The trustee of MIT will have to withhold if the investor is an entity covered by section 12-410 of Schedule 1 to the TAA.

An entity (the recipient) is covered by subsection 12-410(1) of Schedule 1 to the TAA if, according to any record that is in the payer's possession, or is kept or maintained on the payer's behalf, the recipient has an address outside Australia; or if the payer is authorised to make the payment to a place outside Australia. The investor has provided an address in Japan to the trustee of MIT.

As the trustee of MIT is making a fund payment to the investor who is an entity covered by section 12-410 of Schedule 1 to the TAA, the trustee must withhold an amount from the payment.

The trustee must withhold 22.5% of the fund payment in relation to the first income year starting on or after 1 July 2008, if the address provided or place for payment of the recipient is in an information exchange country, pursuant to subsections 12-385(2) and 12-385(3) of Schedule 1 to the TAA.

An information exchange country is a country specified in the Taxation Administration Regulations 1976. Japan is listed in the Taxation Administration Regulations 1976 regulation 44E as an information exchange country. The fund payment is made in relation to MIT's first income year starting on or after 1 July 2008. Therefore the trustee is required to withhold at the rate of 22.5%.

In determining liability to Australian tax for residents of another country, it is necessary to consider not only the income tax laws, but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). Subsection 4(1) of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997) so that those Acts are read as one. Schedule 6 to the Agreements Act contains the Japanese Convention.

It is necessary to determine whether the Japanese Convention affects the rate of withholding by the trustee of MIT.

Article 10(7) of the Japanese Convention limits the right of Australia to tax the gross distributions of income, profits or gains made to Japanese residents that have a portfolio interest in Australian Real Estate Investment Trusts (REITs) to a rate of 15%.

For the purposes of Article 10(7) of the Japanese Convention, 'REIT' means a managed investment trust created or organised under the laws of Australia which carries on a business consisting of investment, directly or indirectly, in real property for the main purpose of deriving rent. MIT is, therefore, a REIT for the purposes of the Japanese Convention. The investor is a resident of Japan and beneficially owns the distribution made by MIT in relation to MIT's first income year starting on or after 1 July 2008.

The Japanese Convention applies to withholding tax on income derived on or after 1 January 2009.

Therefore, Australia's right to tax the investor's gross distribution of income, profits or gains on or after 1 January 2009 is limited to 15%.

Subsection 4(2) of the Agreements Act provides that the Agreements Act has effect notwithstanding any inconsistency contained in the ITAA 1936 (except for Part IVA of the ITAA 1936), the ITAA 1997 or an Act imposing Australian tax. In the present case, the withholding obligations of the trustee of MIT are imposed by the TAA, and not by the ITAA 1936 or the ITAA 1997. Further, the TAA is not an Act 'imposing' Australian tax; rather it is an Act that provides for the administration of certain Acts relating to taxation.

Therefore any inconsistency between the Agreements Act and the TAA is not subject to subsection 4(2) of the Agreements Act, because that subsection does not apply to the TAA.

It is nevertheless necessary to consider, as a matter of ordinary statutory interpretation, how each provision is construed when read in the context of the other.

The obligation on the trustee of a managed investment trust to withhold at 22.5% pursuant to Subdivision 12-H of Schedule 1 to the TAA does not determine the tax liability of the ultimate foreign beneficiary of a fund payment. Taxation is imposed on the ultimate foreign beneficiary of the fund payment by the Income Tax (Managed Investment Trust Transitional) Act 2008 and on the amount determined under Subdivision 840-M of the Income Tax (Transitional Provisions) Act 1997.

The ultimate foreign beneficiary of a fund payment is entitled to a refund of any amount withheld that is in excess of their liability calculated in accordance with Article 10(7) of the Japanese Convention.

It is therefore possible for the trustee of a managed investment trust to withhold at a rate of 22.5% without Australia breaching its obligation under the Japanese Convention to impose tax at a rate not exceeding 15%. Therefore, the requirement under Subdivision 12-H of Schedule 1 to the TAA does not conflict with the 15% tax rate limit on gross distributions by REITs.

Further, this interpretation aligns with the purposes of Subdivision 12-H of Schedule 1 to the TAA as it ensures withholding at a rate that covers the foreign residents' tax liability. Withholding at a lower rate may result in the foreign resident having a liability in excess of the amount withheld. This is because the 15% rate in the Japanese Convention applies to the gross distribution of income, profits or gains, some of which may be taxed at a lower rate (for example, interest income of foreign residents is taxed at 10%) or not taxed (for example, foreign source income), and therefore taxing the fund payment at 22.5% may still result in the effective rate of tax on the gross distribution being equal to or less than 15%.

Accordingly, the trustee of MIT cannot reduce the withholding rate from 22.5% prescribed by Subdivision 12-H of Schedule 1 to the TAA to 15% because of Article 10 of the Japanese Convention.

Year of income:  First income year starting on or after 1 July 2008

Legislative References:
Income Tax Assessment Act 1936
   Part IVA

Keywords
Distributions to non residents
Japan
Investment trusts
Trustees
Withholding taxes

Siebel/TDMS Reference Number:  1-1SDGI4W

Business Line:  Public Groups and International

Date of publication:  20 November 2009

ISSN: 1445-2782