House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

Notes on Clauses

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 agreements.

Clause 3: Interpretation

Section 3 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act. Paragraphs (a) and (b) of clause 3 will effect drafting amendments consequential on those proposed by pargraphs (c), (d) and (e) which will insert in sub- section 3(1) definitions referring to the comprehensive agreements with Ireland, Italy, Korea and Norway and the airline profits agreement with India. Those agreements are, by clause 14 of the Bill, being incorporated as Schedules 20, 21, 22, 23 and 19 respectively, to the Principal Act. Paragraph (f) of clause 3 inserts a definition of the previous United States convention (being the convention signed at Washington on 14 May 1953) which will be replaced by the revised convention to be given the force of law in Australia by this Bill.

Clause 4: Convention with United States of America

This clause proposes that section 6 of the Principal Act, which gave the force of law in Australia to the previous convention with the United States which was signed in 1953, be repealed and that a new section 6 be substituted to provide for the force of law in Australia to be given to the provisions of Articles 1 to 22 (inclusive) and Articles 24 to 29 (inclusive) of the revised convention with the United States with effect from the dates indicated in Article 28 of the convention. Article 23, entitled "non-discrimination", is, in effect, a government to government expression of intent in relation to the future enactment of taxation measures. It does not, and was not intended to, give rise to private justiciable rights and so is not being given the force of law.

By sub-section (1) of proposed new section 6, when the revised convention enters into force, the relevant provisions will have effect in relation to Australian tax -

(a)

in respect of dividends, interest or royalties derived on or after the first day of the second month following the month in which the convention enters into force; and

(b)

in respect of other income, for any year of income commencing on or after the first day of the second month following the month in which the convention enters into force. By reason of the reference, in Article 28(2)(b) of the convention, to the taxpayer's years of income, the commencement of the year of income referred to in this paragraph will, when a taxpayer has adopted a substituted accounting period, mean the commencement of that substituted year.

Sub-section (2) of proposed section 6 provides for the date on which the convention enters into force to be notified in the Gazette as soon as practicable thereafter. This will 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, it will enter into force upon the exchange of instruments of ratification, it is not possible to indicate in this Bill the date of entry into force.

Sub-section (3) of proposed section 6 ensures that, notwithstanding the repeal by this clause of the section which gave the force of law to the provisions of that convention, so far as they affect Australian tax, continue to have the force of law in relation to tax in respect of income derived before the dates from which the revised convention becomes effective.

Clause 5: Agreement with Singapore

This clause proposes an amendment to section 7 of the Principal Act, which provided for the force of law to be given to the agreement with Singapore. Sub-paragraph (a) of paragraph (3) of Article 18 of the Singapore agreement provides for the allowance of a special tax credit in respect of income which is subject to an exemption from or reduction of taxation under parts V and VI of the Economic Expansion Incentives (Relief from Income Tax) Act, 1967, of Singapore or subsequently enacted provisions which are agreed by each Government in Notes exchanged for this purpose to be of a substantially similar character. Sub-clause (1) proposes the insertion in section 7 of a new sub-section (3) providing for particulars of any provisions so agreed by the Governments to be of a substantially similar character to be published in the Gazette, while sub-clause (2) formally establishes that the amendment effected by sub- clause (1) does not apply retrospectively. No additional provisions have been agreed so far.

Clause 6: Airline profits agreement with Italy

The existing limited agreement with Italy relating to airline profits, which was given force of law by section 10 of the Principal Act, will, by this clause, now be referred to as the "Italian airline profits agreement", to clearly distinguish that agreement from the comprehensive convention with Italy being given the force of law by clause 7.

Clause 7: Convention with Italy

Sub-clause (1) of clause 7 will insert a new section - section 10A - in the Principal Act which will give the force of law in Australia to the comprehensive convention with Italy with effect from the dates indicated in Article 29 of the convention.

By sub-section (1) of proposed section 10A, the Italian convention, when it enters into force, will have effect as regards Australian tax -

(a)

in respect of dividends or interest subject to withholding tax that are derived on or after 1 July 1976; and

(b)

in respect of other income, for any year of income commencing on or after 1 July 1976.

Sub-section (2), which provides for the date of entry into force of the Italian convention to be notified in the Gazette as soon as practicable thereafter, corresponds with sub-section (2) of section 6 to be inserted by clause 4 - see notes on that clause.

Sub-clause (2) of clause 7 will empower the Commissioner to amend assessments for the purpose of giving effect to the Italian convention. It is necessary to give the Commissioner this power because, although the convention will not enter into force until instruments of ratification are exchanged, its provisions will have effect from dates as early as 1 July 1976 (refer section 10A) in relation to income in respect of which assessments will have already been made.

Clause 8: Agreement with Malaysia

This clause proposes an amendment to section 11F of the Principal Act, which provided for the force of law to be given to the Malaysian agreement, similar to that proposed by clause 5 in relation to the Singapore agreement. Sub-paragraph (a)(ii) of paragraph 5 of Article 23 of the Malaysian agreement provides for the allowance of a special tax credit in respect of income which has been either wholly or partly relieved from taxation under provisions of Malaysian law which are agreed by the Governments of Malaysia and Australia in an Exchange of Letters to be of a substantially similar character to the provisions contained in Schedule 7A of the Malaysian Income Tax Act 1967 or sections 21, 22, 26 or 30Q of the Investment Incentives Act 1968 of Malaysia. Sub-clause (1) proposes the insertion in section 11F of a new sub-section (5) providing for particulars of any provisions so agreed by the Governments to be of a substantially similar character to be published in the Gazette. Sub-clause (2) formally establishes that the amendment effected by sub-clause (1) does not apply retrospectively. No additional provisions have been agreed so far.

Clause 9: Airline profits agreement with the Republic of India, Agreement with Ireland, Convention with the Republic of Korea and Convention with the Kingdom of Norway

Sub-clause (1) of clause 9 proposes the insertion in the Principal Act of four sections - sections 11J, 11K, 11L and 11M - which, respectively, will give the force of law in Australia to the airline profits agreement with India and the comprehensive double taxation agreements with Ireland, Korea and Norway. Each agreement will be given the force of law with effect from the dates set out in the agreements (see explanations of Article 4 of the Indian agreement, Article 29 of the Irish agreement, Article 28 of the Korean convention and Article 29 of the Norwegian convention).

By proposed section 11J(1), the Indian airline profits agreement, when it enters into force, will have effect as regards Australian tax in relation to income derived from 1 April 1975.

By proposed section 11K(1), the Irish agreement will, when the agreement enters into force, have effect as regards Australian tax -

(a)

in respect of dividends or interest subject to withholding tax that are derived on or after 1 July in the calendar year immediately following that in which the agreement enters into force; and

(b)

in respect of other income, for any year of income beginning on or after 1 July in the calendar year immediately following that in which the agreement enters into force.

By proposed section 11L(1), the Korean convention will, when it enters into force, have effect as regards Australian tax -

(a)

in respect of dividends or interest subject to withholding tax derived on or after 1 January 1982; and

(b)

in respect of other income, for any year of income commencing on or after 1 July 1982.

By proposed section 11M(1), the Norwegian convention, when it enters into force, will have effect as regards Australian tax -

(a)

in respect of dividends or interest subject to withholding tax derived on or after 1 July 1982; and

(b)

in respect of other income, for any year of income beginning on or after 1 July 1982.

Like the corresponding provisions in relation to the United States and Italian conventions in clauses 4 and 7 (see notes on these clauses) sub-section (2) of each of the proposed sections 11J to 11M provides for the dates on which the relevant agreements enter into force to be notified in the Gazette as soon as practicable thereafter.

Sub-section (3) of the proposed section 11L will have a similar effect, in relation to the Korean convention, to the amendments proposed by clauses 5 and 8 in relation to the Singapore and Malaysian agreements. It provides for the publication in the Gazette of particulars of those provisions of the laws of Korea relating to Korean tax that are agreed in an exchange of letters between the Minister of Finance of Korea and the Treasurer of Australia to fall within the definition of the term "the relevant legislation" for the purposes of the allowance of a special tax credit under sub-paragraph (3)(a) of Article 24 where interest or royalty income derived by a resident of Australia from sources in Korea has been wholly or partly exempted from Korean tax.

Sub-section (4) of the proposed section 11L provides for publication in the Gazette of a notice specifying any date agreed by the Governments of both countries in letters exchanged in accordance with paragraph (5) of Article 24 of the Korean convention. That paragraph provides that the special tax credit provisions referred to in the notes on sub-section (3) shall not apply after 30 June 1987 unless the two Governments agree on a later date. It is this later date which is referred to in sub- section (4).

By sub-section (3) of the proposed section 11M, provision is made for publication in the Gazette of a notice specifying the date of confirmation of receipt of a note forwarded by the Norwegian Government through the diplomatic channel requesting the replacement of paragraph (2) of Article 25 (which relates to the method of eliminating double taxation by Norway) of the Norwegian convention with the provision set out in sub- paragraph (2)(b) of the protocol that forms part of the convention.

Sub-clauses (2), (3) and (4) of clause 9 will empower the Commissioner to amend assessments for the purpose of giving effect to the Indian airline profits agreement and to the Korean and Norwegian conventions. It is necessary to give the Commissioner this power because, although the agreements will not enter into force until exchanges of diplomatic notes have been made, their provisions will have effect - pursuant to proposed sub-sections 11J(1), 11L(1) and 11M(1) - in relation to income in respect of which assessments may have already been made.

Clause 10: 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 the United States, Ireland, Italy, Korea and Norway and in respect of which, under the agreements with those countries, the source country's rate of 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 and in which the rate of foreign tax on such income is limited.

Section 23(q) of the Income Tax Assessment Act 1936 confers relief from double taxation in the form of an exemption from Australian tax in respect of foreign source income (other than dividends) of Australian residents that is not exempt from income tax in the country where it is derived. 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 as a beneficiary in a trust estate, 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 country of source become assessable income for the general purposes of the Income Tax Assessment Act, but in each case the agreement 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.

By clause 10, this policy will apply, as was indicated when signature of the agreements concerned was announced, to interest and royalties derived by Australian residents from the United States, Ireland, Italy, Korea or Norway after the dates identified in the provisions being inserted by the clause. The relevant credit articles in the agreements are:

As Norway does not generally tax interest or royalties derived by residents of other countries, the "not exempt from tax" condition of section 23(q) is not met, and such interest and royalties derived by Australian residents are, and will remain, fully taxable by Australia. However, should Norwegian tax be imposed on such income in the future, the convention would apply to limit the Norwegian tax to 10 per cent and Australia would allow a credit against the Australian tax on the income in respect of this amount of Norwegian tax.

Paragraph (a) of clause 10(1) will affect a formal drafting amendment consequent upon the addition to section 12(1) of the Principal Act of five new paragraphs, (ao) to (as).

Paragraph (b) will insert the five new paragraphs 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 (ao) will ensure that interest and royalties derived by a resident of Australia from the United States, the United States tax on which is expressly limited to 10 per cent of the gross amount of the relevant income, will not be exempt from Australian tax. Paragraph (ao) will apply to such income derived on or after the first day of the second month following the month in which the convention enters into force.

The new paragraphs (ap), (aq), (ar) and (as) will serve similar purposes in relation to interest and royalties derived by a resident of Australia from Ireland, Italy, Korea and Norway respectively. Paragraph (ap) will have effect in relation to interest and royalties derived in income years commencing on or after 1 July in the calendar year immediately following that in which the Irish agreement enters into force where, under that agreement, Irish tax is limited to 10 per cent of the gross amount of the relevant income.

Paragraph (aq) will have effect in relation to interest and royalties derived in income years which commence on or after 1 July 1976 where, under the Italian convention, Italian tax is limited to 10 per cent of the gross amount of the relevant income.

Paragraph (ar) will have effect in relation to interest and royalties derived in income years which commence on or after 1 July 1982 where, under the Korean convention, Korean tax is limited to 15 per cent of the gross amount of the relevant income.

Paragraph (as) will have effect in relation to interest and royalties derived in income years which commence on or after 1 July 1982 where, under the Norwegian convention, Norwegian tax is limited to 10 per cent of the gross amount of the relevant income.

Sub-clauses (2), (3) and (4) of clause 10 are designed to avoid any retrospective increase in the overall tax liability of Australian residents that might result from the application of the credit method of double taxation relief in relation to interest and royalty income derived from Italy, Korea or Norway to which the new paragraphs (aq), (ar) and (as) of section 12 apply, but which was derived on or before the dates of signature and announcement of the conventions. These dates were: Italy, 14 December 1982; Korea, 12 July 1982; and Norway, 6 May 1982. The sub clauses will have the 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 the tax of the other country concerned on the income is reduced by reason of the conventions.

Sub-clauses (5), (6) and (7) of clause 10 empower the Commissioner to amend assessments that have already issued in order to apply the credit method of double taxation relief as regards interest and royalties derived from Italy, Korea and Norway respectively.

Clause 11: Repeal of section 19A

Section 19A of the Principal Act was introduced in 1963 to ensure that United States residents who came to Australia to perform certain defence-related contracts for the United States Government the income from which, it was agreed, would be taxed only by the United States, would not lose the benefit of the reduced rate of Australian tax, conferred by Article VII of the previous United States convention on dividends they received from Australian companies, merely by establishing a permanent establishment in Australia for the sole purpose of performing those contracts.

In accordance with Article VII of the previous United States convention, such a United States resident would, but for section 19A, have been liable to full Australian taxation on any dividends received from Australian companies even though the dividends were not connected with the permanent establishment in any way.

Under the revised United States convention, a United States resident who maintains a permanent establishment in Australia will receive the benefit of the reduced rate of Australian tax on such "unconnected" dividends. Dividends effectively connected with a permanent establishment, like interest and royalties so connected, will be taxed under the revised convention as they are under Australia's other double taxation agreements, by assessment at ordinary rates of tax. Provisions similar to those contained in section 19A of the Principal Act are, accordingly, unnecessary in relation to income to which the revised United States convention applies and sub-clause (1) of clause 11 will repeal that section.

Sub-clause (2) ensures that the provisions of section 19A will, however, continue to have effect in relation to tax in respect of income in relation to which the previous United States convention remains effective.

Clause 12: Collection of tax due to the United States of America

This clause will amend section 20 of the Principal Act which was inserted to enable Australia to give effect to its obligation under Article XVI of the previous United States convention to collect and remit United States tax, on behalf of the United States, where a person has obtained a benefit under that convention to which he was not entitled. Paragraph (5) of Article 25 of the revised United States convention places a similar obligation on Australia in relation to taxation benefits under that convention, and sub-clause (1) of clause 12 will amend sub-section (1) of section 20 by omitting the reference to Article XVI of the previous United States convention and substituting a reference to paragraph (5) of Article 25 of the revised convention.

Sub-clauses (2) and (3) will ensure that the existing provisions of section 20 continue to apply in relation to tax in respect of income in relation to which the previous convention remains effective.

Clause 13: Schedule 2

This clause will repeal Schedule 2 to the Principal Act (the previous United States convention) and substitute the schedule set out in Schedule 1 to this Bill (the new United States convention).

Clause 14: Addition of Schedules

This clause will add the agreements with India, Ireland, Italy, Korea and Norway as Schedules 19 to 23 respectively to the Principal Act.