Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon. John Howard, 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 agreement.
Clause 3: Interpretation
Section 3 of the Principal Act contains a number of definitions for the more convenient interpretation of the Act. Clause 3 will insert in section 3(1) a definition referring to the comprehensive agreement with Denmark (which by clause 6 of the Bill is being incorporated as Schedule 18 to the Principal Act).
Clause 4: Agreement with the Kingdom of Denmark
This clause proposes the insertion in the Principal Act of a new section, section 11H, which will give the force of law in Australia to the comprehensive double taxation agreement with Denmark. The agreement will be given the force of law with effect from the dates indicated in the agreement itself (see explanation of Article 27).
By proposed section 11H(1), the Danish 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 in the calendar year immediately following that in which the agreement enters into force;
- (b)
- in respect of other income, for any year of income commencing on or after 1 July in the calendar year immediately following that in which the agreement enters into force.
Sub-section (2) of proposed section 11H provides for the date on which the agreement 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 agreement. Because, under the terms of the agreement, the agreement will enter into force on the exchange of diplomatic notes advising that everything has been done to give the agreement the force of law in Australia and Denmark, it is not possible to indicate in this Bill the date of entry into force.
Sub-section (3) of proposed section 11H arises out of paragraph (7) of Article 10 of the agreement with Denmark. That paragraph is to the effect that an Australian resident individual who receives a dividend from a Danish resident company is to be entitled to the Danish tax credit (skattegodtgorelse) in respect of the dividend, on the same basis as a Danish resident individual. The paragraph also requires that any such tax credit to which an Australian resident individual may be entitled is to be treated as assessable income in Australia. Sub-section (3) will implement this broad rule.
By paragraph (a) of the proposed sub-section, the tax credit is to be included in the assessable income of the taxpayer of the year of income in which the dividend to which the tax credit relates is paid. By paragraph (b), that tax credit is to be added to the dividend. This treatment, which parallels the way in which the dividend and tax credit are aggregated for purposes of Danish tax, is necessary to ensure that credit for the Danish tax may properly be allowed against the Australia tax on the same income as that on which the Danish tax is based.
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 Denmark and in respect of which, under the agreement, the Danish tax is subject to limit. 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 Denmark as from the commencement of the first year of income to which the agreement is to apply. Article 23 is the relevant credit article in the agreement. However, as Denmark does not generally tax interest and royalties derived by residents of other countries, the "not exempt from tax" condition of section 23(q) of the Assessment Act is not met, and such income derived by Australian residents is, and will remain, fully taxable.
Paragraph (a) of clause 5 will effect a formal drafting amendment consequent upon the addition to section 12(1) of the Principal Act of new paragraph (an).
Paragraph (b) will insert new paragraph (an) 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 (an) will ensure that interest and royalties derived from Denmark by a resident of Australia, the Danish 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 (an) 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 agreement enters into force (i.e. the year after that in which notes are exchanged). As noted earlier, Denmark does not, at present, generally impose tax on outgoing interest and royalty payments. However, should Danish tax be imposed on such income in the future, the agreement would apply to limit the Danish tax to 10 per cent and Australia would allow a credit against the Australian tax on the interest or royalties in respect of this amount of Danish tax.
Clause 6: Schedule 18
This clause will add the agreement with Denmark as Schedule 18 to the Principal Act.