House of Representatives

Explanatory Memorandum

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

C. MAIN FEATURES OF THE NEW DTAs

Under the terms of the DTAs with Hungary and Kiribati:

Income from real property

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may be taxed in full by the country in which the property is situated. Income from real property includes natural resource royalties.

Business profits

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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.

Profits from international operations of:

(A) Ships

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may be taxed only in the country of residence of the operator in the case of the DTA with Hungary. Such profits may be taxed by both the country of residence of the operator and the other country (with the other country reducing its tax on those profits by one half) in the case of the DTA with Kiribati.

(B) Aircraft

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may be taxed only in the country of residence of the operator.

(C) Road Transport Vehicles

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may be taxed only in the country of residence of the operator in the case of the DTA with Hungary.

Dividends, interest and royalties

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may generally be taxed in both countries, but there are general limits on the tax that the source country may charge on dividends flowing to residents of the other country. These limits are, in the case of the DTA with Hungary, 15 per cent for dividends and 10 per cent for interest and royalties. In the case of the DTA with Kiribati, the limits are 20 per cent for dividends, 15 per cent for royalties and 10 per cent for interest.

Income, profits or gains from the alienation of property

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income, profits or gains from the alienation of real property may be taxed in full by the country in which the property is situated. Subject to that rule and other specific rules in relation to business assets and some shares, capital gains are to be taxed in accordance with the domestic law of each country.

Income from professional services and other similar activities

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will generally be taxed only in the country of residence of the recipient. However, remuneration derived by a resident of one country in respect of professional services rendered in the other country may, in certain circumstances, be taxed in the latter country if it is derived through a fixed base there of the person concerned.

Income from dependent personal services

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that is, employee's 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 subject to tax in the country of residence, the income will be generally exempt in the country visited.

Government officials remuneration

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will generally be taxed only in the country for which government services are rendered.

Directors' fees and similar payments

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may be taxed in the country of residence of the paying company.

Income derived by public entertainers

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may be taxed by the country in which the activities are performed.

Pensions and annuities

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(including government service pensions) may be taxed only in the country of residence of the recipient.

Income of visiting students and trainees

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will be exempt from tax in the country visited so far as concerns payments made from abroad for the purposes of their maintenance, education or training.

Income of visiting professors and teachers

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under the DTA with Hungary, remuneration derived during a visit to the other treaty party country of up to two years duration for the sole purpose of teaching or carrying out advance study or research at an educational institution will generally be taxed only in the country of residence of the recipient.

Profits of associated enterprises

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

Exchange of information and consultation

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the respective DTAs authorise the exchange of information and consultation between the relevant taxation authorities.

Dual residents

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i.e., for each agreement, persons (including companies) - who are residents of both Australia and the other country according to the domestic law of each country, are, in accordance with specified criteria, to be treated for the purposes of the agreement, as being residents of only one country.

Source rules

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are prescribed in each agreement to the effect that income, profits or gains derived by a resident of one country which, under the agreement may be taxed in the other country, shall be treated as being sourced in the latter country.

Double taxation relief for income taxable by both countries

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is to be provided by the country of residence under each agreement as follows:-

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in Australia, by allowance of a credit against Australian tax on income, profits or gains derived by a resident of Australia from sources in the other country. In the case of a dividend payment from a company resident in the other country to a related Australian resident company, the tax to be credited by Australia includes the "underlying" tax paid in respect of the profits out of which the dividend is paid.

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tax sparing credit relief is to be provided by Australia in relation to income derived by a resident of Australia from Kiribati which has benefited from certain development incentives provided by Kiribati. Australia will provide 'tax sparing' by granting a credit against the Australian tax payable in respect of that income for the Kiribati tax forgone under those development incentives as if that tax had been paid.

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in Hungary under the terms of that particular DTA, Hungary will generally allow an exemption from Hungarian tax on income or gains derived by a resident of Hungary from sources in Australia. With dividends, however, double tax relief will be provided by the allowance of a credit against Hungarian tax for the Australian tax paid.

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in Kiribati under the terms of that particular DTA, Kiribati will generally allow a credit against Kiribati tax for the Australian tax paid on income, profits or gains derived by residents of Kiribati from sources in Australia.