House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. John Howard, M.P.)

Notes on Clauses

Income Tax (International Agreements) Amendment Bill (No. 2) 1980

Clause 1: Short title, etc.

This clause formally provides for the short title of the amending Act and refers to the Income Tax (International Agreements) Act 1953 as the Principal Act.

Clause 2: Commencement

Under section 5(1A) of the Acts Interpretation Act 1901, unless the contrary intention appears, every Act is to come into operation on the twenty-eighth day after the day on which it receives the Royal Assent. By this clause the amending Act will come into operation on the day on which it receives the Royal Assent, thus enabling early implementation of the convention.

Clause 3: Interpretation

Section 3 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act. Paragraph (a) of clause 3 will effect a purely formal amendment of section 3 and paragraph (b) will ensure that the previous agreement with Canada will, to the extent that it continues to have any force, be an "agreement" to which the Act refers. Paragraphs (c) and (d) of clause 3 will insert section 3 definitions of the new convention with Canada (which by clause 6 is being incorporated as Schedule 3 to the Principal Act, in substitution for the previous Canadian agreement) and of the 1957 agreement with Canada which it replaces.

Clause 4: Convention with Canada

This clause provides for the force of law in Australia to be given to the new Canadian convention, and for the previous Canadian agreement to cease to have the force of law in Australia. Section 6A of the Principal Act (which gave the force of law to the previous Canadian agreement) is to be repealed by sub-clause (1) of clause 4 and a new section 6A inserted in its place. The new convention will be given the force of law with effect from the dates indicated in the agreement itself (see explanation of article 27).

By sub-section (1) of the proposed new section 6A the Canadian convention will, when the convention enters into force, have effect as regards Australian tax -

(a)

in respect of dividends and interest subject to withholding tax that are derived on or after 1 July 1975;

(b)

in respect of other income, for any year of income beginning on or after 1 July 1975.

Sub-section (2) of proposed new section 6A provides for the date on which the convention enters into force to be notified in the Gazette as soon as practicable thereafter. The purpose of this is to provide a readily available and authoritative source from which persons may ascertain the fact and date of entry into force of the convention. Because, under the terms of the convention, the convention will enter into force on the exchange of diplomatic notes advising that everything has been done to give the convention the force of law in Australia and in Canada, it is not possible to indicate in this Bill the date of entry into force.

Sub-section (3) of proposed new section 6A relates to paragraphs (2) and (3) of Article 27 of the new convention, which make provision for the previous Canadian agreement to continue to have the force of law in certain circumstances. Those circumstances are explained in the notes on Article 27.

Australia's double taxation agreements customarily provide that income which, under those agreements, Australia may tax in the hands of a resident of the other country, is to be deemed to have a source in Australia. No provision in such terms was included in the Canadian convention, but Article 22(2) of the convention indicates that Australia may legislate to give income derived by Canadian residents that, under the various articles of the convention, may be taxed in Australia, a source in Australia for purposes of Australia's domestic income tax law. Sub-section (4) of new section 6A will give effect to this arrangement.

Sub-clause (2) of clause 4 of the Bill will empower the Commissioner of Taxation to amend assessments for the purpose of giving effect to the new convention with Canada. It is necessary to give the Commissioner this power because, although the convention will not enter into force until an exchange of diplomatic notes has been made, its provisions will have effect - pursuant to proposed section 6A(1) - in relation to income in respect of which assessments may have already been made.

Clause 5: Provisions relating to certain income derived from sources in certain countries

The primary purpose of this clause is to apply the credit method of relief of double taxation to interest and royalties that are derived by residents of Australia from Canada and in respect of which, under the convention, Canadian tax is limited. Section 12 of the Principal Act, which is to be amended by this clause, already achieves a corresponding result for interest and royalties derived by residents of Australia from countries with which Australia has concluded comprehensive double taxation agreements which limit the foreign tax on such income.

Section 23(q) of the Income Tax Assessment Act 1936 confers relief from double taxation in the form of an exemption from Australian tax for foreign source income (other than dividends) of Australian residents that is taxed (not exempt from tax) in the country of source. Section 12 of the Principal Act gives effect to a policy that this exemption method of relief is not to apply to interest or royalties derived (either directly or through a trustee) from another country where the double taxation agreement with that country limits the tax it may charge. Once the exempting provision is, by section 12, made inapplicable, interest and royalties that are taxed in the other country become assessable income for the general purposes of the Income Tax Assessment Act, but the agreement in each case requires Australia to credit against its tax the limited tax of the other country. Sections 14 and 15 of the Principal Act govern the allowance of the credit.

Clause 5 will apply this policy to interest and royalties derived by Australian residents from Canada after the commencement of the year of income to which the convention is to apply. Article 23 is the relevant credit article in the convention. Paragraph (a) of clause 5(1) will effect a formal drafting amendment consequent upon the addition to section 12(1) of the Principal Act of new paragraph (aj).

Paragraph (b) of the sub-clause will insert the new paragraph in section 12(1) of the Principal Act. This section formally sets out classes of income to which the exemption under section 23(q) of the Income Tax Assessment Act is not to apply.

The new paragraph (aj) will ensure that interest or royalties derived from Canada by a resident of Australia, the Canadian tax on which is limited under the convention to 15 or 10 per cent, will not be exempt from Australian tax.

Paragraph (aj) will apply to income derived in years of income commencing on or after 1 July 1975. Where a Canadian trust estate derives income such as interest or royalties, Canada treats a non-resident beneficially entitled to a share of that income as having derived income from the trust estate rather than as having derived a share of the interest or royalties derived by the trust estate. Under Article 21(3) of the convention, Canada will limit its tax to 15 per cent of the gross amount of such income derived by a resident of Australia provided the income is subject to tax in Australia. The reference in new paragraph (aj) to paragraph (3) of Article 21 of the Canadian convention will thus mean that income derived by an Australian beneficiary that is attributable to interest or royalties derived by a Canadian trust estate will, like such income attributable to interest or royalties derived from trust estates in other countries with which Australia has double taxation agreements limiting the source country tax on interest and royalties, be taxed in Australia (and so subject to limited Canadian tax) with credit being allowed against the Australian tax for the limited Canadian tax on the income.

Sub-clause (2) of clause 5 is designed to avoid any retrospective increase in overall tax liability that might result from the application of the credit method of double taxation relief to interest or royalty income derived from Canada by Australian residents after the commencement of the 1975-76 income year, but on or before the date of announcement of signature of the convention on 21 May 1980. When signature of this convention was announced, it was indicated that the credit method of relief was to be applied to this income. This sub-clause will mean, in effect, that any increase in the Australian tax payable in respect of such interest or royalty income, resulting from the change from the exemption system to the credit system, is not to exceed the amount by which Canadian tax on the income is reduced by reason of the convention.

Sub-clause (3) of clause 5 has a similar purpose to that of clause 4(2) of the Bill. It will empower the Commissioner to amend assessments that have already issued, to apply the credit method of double taxation relief in accordance with sub-clauses (1) and (2) as regards interest and royalties from Canada.

Clause 6: Schedule 3

This clause will replace the present Schedule 3 to the Principal Act (a copy of the 1957 agreement with Canada) by a new Schedule 3 (a copy of the new convention with Canada).