House of Representatives

Explanatory Memorandum

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

Main features

The main features of the Income Tax (International Agreements) Amendment Bill 1984 are as follows:

Taxation of foreign beneficiaries of Australian business trusts (Clause 3)

The Bill will amend Australia's domestic taxation law to clarify the operation of Australia's comprehensive taxation agreements in relation to certain distributions to a trust beneficiary (or unit holder in the case of a unit trust) who is a resident of an agreement partner country. The distributions dealt with by the amendment are those that consist of business profits derived in Australia by a trustee of a trust or a unit trust. It has been argued in some quarters, but not accepted by the Commissioner of Taxation, that Australia would be unable to tax such distributions, since the trust does not represent a permanent establishment of the beneficiary in Australia.

Under the proposed amendment, a resident of a taxation agreement partner country who is entitled to a share of Australian source business profits derived by a trustee of a trust estate or unit trust from the carrying on of a business in Australia, is expressly to be taken as carrying on the business of the trustee. The effect of this will be that, in accordance with the "business profits" article of Australia's comprehensive taxation agreements, business income derived in Australia by a trust and distributed to a resident of an agreement partner country will be subject to tax in Australia. That result is in keeping with domestic tax policy and with what was clearly intended when Australia's comprehensive taxation agreements were negotiated.

The proposed amendment also includes a safeguarding measure to ensure the intended effect cannot be circumvented by the interposing of one or more trust estates between the business trust and the ultimate beneficiary.

This measure will apply to income entitlements arising after 19 August 1984.

Maltese agreement and Belgian protocol (Clauses 3 to 6 and 8)

Amendments proposed by this Bill will give the force of law in Australia to the comprehensive taxation agreement with Malta that was signed in Malta on 9 May 1984, and to the protocol that was signed in Canberra on 20 March 1984 to amend the existing comprehensive agreement with Belgium.

Comprehensive taxation agreements have two main purposes - the avoidance of double taxation of income by the country in which the income arises and by the country in which the person beneficially entitled to the income resides, and assistance in preventing tax evasion.

The protocol to the comprehensive taxation agreement with Belgium will amend the existing agreement - which was signed in 1977 - to fully preserve Australia's right to apply its revised transfer pricing provisions to Australian enterprises, and to specifically recognise the "branch profits tax" provided for in Australia's domestic law. The protocol will also amend the definition of the term "royalty" contained in the agreement to ensure that it includes amounts credited, as well as amounts paid. The term is also to expressly include consideration paid or credited for a forbearance by the owner of industrial property from granting rights to use that property.

The agreement between Australia and Malta covers all forms of income flowing between the two countries, and its provisions correspond in substantial practical effect with those in other modern taxation agreements which Australia has concluded. Under the agreement, certain types of income may be taxed in full in the country of source while other types of income may be taxed only by the country of residence of the recipient. A third category of income comprising dividends, interest and royalties may be taxed by both countries, with the country of source limiting its tax and the country of residence allowing credit against its tax on the income for the limited source country tax.

The main features of the agreement with Malta are as follows:

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Business profits are to be taxed only in the country of residence of the recipient unless they are derived by a resident of one country through a branch or other "permanent establishment" in the other country, in which case, that other country may tax the profits.

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Dividends, interest and royalties may be taxed in the country of source, but there are general limits on the tax that that country may charge on such income flowing to residents of the other country. These limits are 15 per cent for interest and 10 per cent for royalties. In the case of dividends, the Australian tax is limited to 15 per cent and, to reflect the Maltese system of taxing company profits and dividend distributions, the Maltese tax on dividends is normally not to exceed the company tax chargeable on the profits from which the dividends are paid.

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Income from real property is taxable in full in the country in which the property is situated.

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Profits from international operations of ships and aircraft will generally be taxed only in the country of residence of the operator.

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Income from independent personal services will generally be taxed only in the country of residence of the recipient.

However, the other country may also tax the income where it is attributable to activities performed from a fixed base of the recipient in the other country, where the recipient is present in that other country for a period or periods exceeding 183 days in aggregate in a year of income, or where the recipient derives, in a year of income, gross remuneration exceeding $A12,500, or its Maltese equivalent, from residents of that other country.

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Income from dependent personal services, that is, employees' remuneration, will generally be taxable in the country where the services are performed.

However, where the services are performed during a short visit to one country by a resident of the other country, and the remuneration is not an expense borne by a resident of, or a permanent establishment in, the country visited, the income will be exempt in the country visited provided it is subject to tax in the country of residence of the recipient.

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Government officials will generally be taxed only in their home country.

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Directors' fees are to be taxed in the country of residence of the paying company.

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Income derived by public entertainers from their activities as such is to be taxed by the country in which the activities are performed.

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Pensions and annuities will generally be taxed only in the country of residence of the recipient.

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Students resident in one country who are temporarily present in the other country solely for the purpose of their education will be exempt from tax in the country visited in respect of payments made from abroad for the purposes of their maintenance or education.

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Dual residents (i.e. residents of both Australia and Malta according to the domestic taxation laws of each country) are, in accordance with specified criteria, to be treated for the purpose of the agreement as being residents of only one country.

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Associated enterprises may be taxed on the basis of dealings at arm's length.

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Exchange of information and consultation between the taxation authorities of each country is authorised.

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Double taxation relief to be allowed by the country of residence where it taxes income taxed in the other country will be:

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In Australia, by allowance of a credit against Australian tax for Maltese tax on interest and royalties, where that tax is subject to a limit expressed in the agreement, and on dividends received by individuals. Dividends received by Australian companies from Malta are effectively freed from Australian tax by the inter-corporate dividend rebate, and all other categories of income received by Australian residents from, and taxed in, Malta are exempt from Australian tax by the operation of provisions in Australian tax law.

Australia will also grant, in respect of Maltese source dividends, interest or royalties, a "tax sparing" credit for Maltese tax forgone under agreed incentive legislation of that country.

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in Malta, generally by the allowance of a credit against Maltese tax for the Australian tax paid on income derived by residents of Malta from sources in Australia.

Notes on the clauses of the Bill are given below and these are followed by explanations of the articles of the protocol to the agreement with Belgium and the agreement with Malta.