Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. Phillip Lynch, M.P.)Notes on Clauses
INCOME TAX (INTERNATIONAL AGREEMENTS) AMENDMENT BILL 1976
Clause 1: Short title and citation.
This clause formally provides for the short title and citation of the Amending Act and of the Principal Act as amended.
Section 5(1A) of the Acts Interpretation Act 1901-1973 provides that unless the contrary intention appears every Act shall 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.
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 insert in section 3 definitions referring to the comprehensive agreements with the French Republic and the Kingdom of the Netherlands (which are being incorporated as schedules to the Principal Act by clause 8 of the Bill). Section 3 already contains a definition of the term "the French agreement", which refers to a limited double taxation agreement dealing only with the taxation of international airline profits. This definition will be amended by clause 3 to re-define the term as "the French airline profits agreement".
Paragraph (c) proposes an amendment to sub-section (7) of section 3 of the Principal Act. That is an interpretation provision under which, unless the contrary intention appears, the English text of the Japanese agreement is to be construed as if words in the singular include the plural and words in the plural include the singular. By paragraph (c) it is proposed to amend this provision to extend its application to the French agreement. This is not necessary in the case of the Netherlands agreement since provisions to this effect are included in article 3 of that agreement.
Clause 4: Airline profits agreement with France.
This clause will make a drafting amendment of section 9 of the Principal Act consequential on the amendment, effected by paragraph (a) of clause 3, of the defined term referring to the limited airline profits agreement.
Clause 5: Agreement with France.
Clause 6: Agreement with the Kingdom of the Netherlands.
These clauses propose the insertion in the Principal Act of two sections - sections 9A and 11A - which will respectively give the force of law in Australia to the agreements with France and the Netherlands, when these agreements enter into force. Each agreement will be given the force of law with effect from the times indicated in each agreement itself (see explanations of article 28 of the French agreement and article 29 of the Netherlands agreement).
By sub-section (1) of the proposed new section 9A the French 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 January 1973;
- (b)
- in respect of other income, for any year of income beginning on or after 1 July 1972.
By sub-section (1) of the proposed new section 11A the Netherlands 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 1975;
- (b)
- in respect of other income, for any year of income beginning on or after 1 July 1975.
Sub-section (2) of each of the new sections provides for the notification in the Gazette of the dates on which the agreements are to enter into force. The purpose of these provisions is to provide a readily available and authoritative source from which persons generally may ascertain the fact and date of entry into force of these agreements. Because of the manner in which, under the terms of the French and the Netherlands agreements, those agreements will enter into force, it is not possible to indicate the dates of entry into force in this Bill. (The agreements will enter into force when the respective governments exchange diplomatic notes signifying that everything has been done to give them the force of law in each country.)
Turning to sub-sections (3) and (4) of section 9A and sub-section (3) of section 11A, article 5 of the French agreement and article 6 of the Netherlands agreement provide, in part, that income from real property may be taxed in the Contracting State in which the real property is situated. They also specify that income from a lease of land and income from any other direct interest in or over land is to be regarded as income from real property, but neither article specifies where these elements of property are to be deemed to be situated. A similar position exists with article 12 of the French agreement concerning income from the alienation of a lease of land or other direct interest in or over land or of shares in a company the principal assets of which consist of such property. The purpose of the sub-sections is to ensure that the relevant income will be treated as having a source in the Contracting State in which is situated the land to which the abovementioned elements of property relate.
Sub-section (5) of section 9A arises out of paragraphs (6) and (7) of article 9 of the agreement with France and is to the effect that where a payment is made under those paragraphs by the French Government to an Australian individual shareholder in a French company equal to the French tax credit ("avoir fiscal"), or to an Australian company shareholder in a French company equal to the French "precompte" in respect of dividends received from a French company, the payments shall be deemed to be dividends and included in the assessable income of the Australian recipient in the year in which they are received. An explanation of the circumstances in which Australian residents are entitled to these payments is contained later in this memorandum in the notes relating to paragraphs (6) and (7) of article 9.
Sub-clause (2) of clause 5 of the Bill will empower the Commissioner to amend assessments for the purpose of giving effect to the agreement with France. It is necessary to give the Commissioner this power because, although the agreement will not enter into force until the Governments of Australia and France exchange notes through the diplomatic channel in accordance with article 28 of the agreement, its provisions will have effect - pursuant to sub-section (1) of the new section 9A - in relation to income in respect of which assessments have already been made. Sub-clause (2) of clause 6 has a similar purpose in relation to the Netherlands agreement.
Clause 7: Provisions relating to certain income derived from sources in the United Kingdom, Singapore, Japan, New Zealand, Germany, the Netherlands and France.
The primary purpose of this clause is to apply the credit system of relief of double taxation to interest and royalties that are derived by residents of Australia from the Netherlands and France in respect of which, under the respective agreements, the Netherlands or French 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 the United Kingdom, Singapore, Japan, New Zealand and the Federal Republic of Germany, where the double taxation agreements with those countries limit the foreign tax on the income.
Section 23(q) of the Income Tax Assessment Act provides an exemption from Australian tax for foreign-source income (other than dividends) of Australian residents that is taxed in the country of source. Section 12 of the Principal Act gives effect to a policy that this exemption 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 made inapplicable, the interest or royalties 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 7 will apply this policy to interest and royalties derived by Australian residents from France or the Netherlands after the commencement of the year of income to which the relevant agreement is first to apply.
Paragraph (a) of sub-clause 7(1) will effect a formal drafting amendment consequent on the addition to sub-section 12(1) of the Principal Act of two new paragraphs (ae) and (af).
Paragraph (b) will insert the two new paragraphs in section 12(1) of the Principal Act. This section sets out classes of income to which the exemption under section 23(q) of the Income Tax Assessment Act does not apply.
The new paragraph (ae) will ensure that interest or royalties derived from the Netherlands by a resident of Australia, the Netherlands tax on which is limited by the agreement to 10 per cent, will not be exempt from Australian tax. Paragraph (ae) will apply to income derived during income years commencing on or after 1 July 1975. With an exception mentioned in the next paragraph of these notes, paragraph (ae) will have no immediate practical effect, however, because the Netherlands ordinarily does not at present impose tax on outgoing interest and royalty payments. However, should Netherlands tax be imposed on such income in the future, the agreement would apply to limit the Netherlands' tax thereon to 10 per cent and Australia would allow a credit against the Australian tax thereon in respect of this amount.
In some circumstances the Netherlands, which, as mentioned, does not ordinarily levy tax on interest derived by residents of other countries, treats interest as a dividend and taxes it accordingly. The interest is, when derived by an Australian resident, to be subject under article 10 (the dividend article) to Netherlands tax of no more than 15 per cent and the reference in new paragraph (ae) of sub-section (1) to article 10 of the Netherlands agreement will mean that double taxation relief in respect of such interest will be given in Australia by the credit method.
The new paragraph (af) will serve a similar purpose as regards income from France. It will have effect for interest or royalties derived on or after 1 July 1972 where, under the agreement, French tax is limited to 10 per cent of the gross amount of the interest or royalties. The interest and royalties will thus be assessable income for the general purposes of the Income Tax Assessment Act and the agreement (article 23) will require a credit for the limited tax to be allowed against the Australian tax on the income.
Sub-clause (2) of clause 7 is designed to avoid any retrospective increase in overall tax liability that might result from the application of the credit method of relief to relevant interest and royalty income derived from France by Australian residents after the commencement of the 1972-73 income year but on or before the date of announcement of signature of the French agreement on 13 April 1976. When signature of the French agreement was announced it was indicated that the credit method of relief was to be applied to this income. The sub-clause provides, in effect, that any increase in the Australian tax payable in respect of the interest or royalties, resulting from the change from the exemption system to the credit system, is not to exceed the amount by which the French tax on the income is reduced by reason of the agreement.
Sub-clause (3) of clause 7 has a similar purpose to that of sub-clauses 5(2) and 6(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 France.
Clause 8: Schedules 10 and 11.
This clause adds the two new agreements as Schedules to the Principal Act.
This clause amends the Principal Act by making formal changes in the descriptions of the various Schedules to the Act.