House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 3 The Protocol with New Zealand

Outline of chapter

3.1 Schedule 3 amends the International Tax Agreements Act 1953 . This chapter explains the rules that apply in the Protocol to amend the existing tax treaty with New Zealand - Agreement between the Government of Australia and the Government of New Zealand for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the Agreement).

Context of amendments

3.2 The extension of the wine equalisation tax rebate to New Zealand wine producers exporting to Australia made it desirable to amend the Agreement to cover administrative matters relating to the rebate and to other taxes generally. The Protocol achieves this by extending the scope of the exchange of information provisions to all federal taxes administered by the Commissioner of Taxation (Commissioner) and to all New Zealand taxes.

3.3 The Protocol also provides for trans-Tasman assistance in collection of taxes and includes an obligation that New Zealand will enter into negotiations to lower withholding taxes on dividends, interest and royalties, should New Zealand reduce these taxes in a future tax treaty with another country to levels below those in the existing Agreement. These amendments reflect the importance both Australia and New Zealand place on closer economic and administrative relations.

Summary of new law

3.4 The Protocol will:

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closely align the Exchange of information Article in the Agreement to the new Organisation for Economic Co-operation and Development (OECD) standard, including expanding the range of taxes in respect of which information may be exchanged to all Australian federal taxes administered by the Commissioner and all New Zealand taxes;

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insert a new Article into the Agreement providing for assistance in the collection of cross-border tax debts; and

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insert a new 'most favoured nation' provision into the Agreement which will ensure that Australia will have access to lower withholding taxes on dividends, interest and royalties should New Zealand reduce these taxes in a treaty with another country to levels below those in our current treaty.

Comparison of key features of new law and current law

Detailed explanation of new law

Article 1 of the Protocol

Amends Article 2 of the Agreement - Taxes covered

3.5 Article 1 of the Protocol expands the range of taxes covered for purposes of Exchange of information and Assistance in collection Articles by inserting a new paragraph 3 into Article 2 ( Taxes covered ) of the Agreement.

3.6 The new paragraph specifies the taxes to which Article 26 ( Exchange of information ) and Article 27 ( Assistance in collection of taxes ) will apply. The taxes to which these Articles apply are, in the case of Australia, all federal taxes administered by the Commissioner, and in the case of New Zealand, all taxes. [ Article 2, new paragraph 3 of the Agreement ]

Article 2 of the Protocol

Substitutes new Article 26 of the Agreement - Exchange of information

3.7 The Protocol will substitute a new Article 26 ( Exchange of information ) into the Agreement that closely aligns the information exchange provisions to the new OECD standard. The new Article differs from the previous approach in the following ways:

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The scope is expanded to a wider range of taxes.

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The new provision clarifies that the Commissioner is obliged to obtain information for New Zealand tax authorities regardless of whether Australia has a domestic tax interest in the information sought.

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Bank secrecy laws do not limit the exchange of information.

Foreseeably relevant information

3.8 New Article 26 authorises and limits the exchange of information by the two competent authorities to information foreseeably relevant to the administration or enforcement of the relevant taxes. The exchange of information is not restricted by Article 1 ( Persons covered ) of the Agreement, and may therefore cover persons who are not residents of Australia or New Zealand.

3.9 The standard of foreseeable relevance is intended to ensure that information may be exchanged to the widest possible extent. However, competent authorities are not entitled to request information from the other country which is unlikely to be relevant to the tax affairs of a taxpayer, or to the administration and enforcement of tax laws. [ New Article 26, paragraph 1 of the Agreement ]

3.10 The change in wording to a 'foreseeably relevant' standard reflects the wording in Article 26 of the 2005 OECD Model Tax Convention on Income and on Capital (OECD Model) and no difference in effect is intended.

Taxes to which this new Article applies

3.11 Under the former Article, the information that could be requested and exchanged between the two countries was limited to information in relation to taxes specified in paragraphs 1 and 2 of Article 2 ( Taxes covered ) of the Agreement. In the case of Australia these taxes are:

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the income tax;

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the resource rent tax (in respect of offshore projects relating to exploration for or exploitation of petroleum resources);

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the fringe benefits tax; and

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any identical or substantially similar taxes imposed under the federal law of Australia; and

in the case of New Zealand, taxes covered by paragraphs 1 and 2 are:

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the income tax;

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the fringe benefits tax; and

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any identical or substantially similar taxes imposed under the law of New Zealand.

3.12 Under the new provision, the range of taxes for which information may be requested and exchanged has been expanded. In the case of Australia, the Australian competent authority ^[1] can now request and obtain information concerning all federal taxes administered by the Commissioner from their counterpart in New Zealand. This means, for example, that information concerning indirect taxes (ie, the goods and services tax) may be requested and obtained from New Zealand.

3.13 Similarly, in the case of New Zealand, the New Zealand competent authority can now request and obtain information concerning taxes of every kind and description imposed under its tax laws, from the Australian competent authority.

Use of exchanged information

3.14 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed, are restricted consistent with the former Article and the approach taken in the OECD Model. Any information received by a country must be treated as secret in the same manner as information obtained under the domestic law of that country. [ New Article 26, paragraph 2 of the Agreement ]

No domestic tax interest required

3.15 When requested, a country is required to obtain information in the same manner as if it were administering its domestic tax system, notwithstanding that the country may not require the information for its own purposes. Australia would recognise this obligation to obtain relevant information for treaty partner countries, even in the absence of an explicit provision to this effect. [ New Article 26, paragraph 4 of the Agreement ]

Limitations

3.16 The country requested to provide information under this Article is not obliged to provide such information where:

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it would be required to carry out administrative procedures incompatible with its own law or the administrative practice, or those of the country requesting the information; or

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such information is not obtainable within the limitations imposed under its domestic law or in the normal course of administration by the competent authority in that country or the country requesting the information. Australia is not obliged, for example, to use police powers to obtain information requested by New Zealand, although information gathered in that way which is in the possession of the Commissioner may be exchanged.

[ New Article 26, subparagraphs 3(a ) and ( b ) of the Agreement ]

3.17 Also, in no case is the country receiving the request obliged to supply information under this Article that would:

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disclose any trade, business, industrial, commercial or professional secret or trade process; or

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be contrary to public policy.

[ New Article 26, subparagraph 3(c ) of the Agreement ]

Information held by banks, other financial institutions, nominees etc

3.18 This new paragraph ensures that paragraph 3 of this Article cannot be used to prevent the exchange of information held by banks, other financial institutions, nominees etc. The addition of this paragraph should not be interpreted as suggesting the previous treaty did not cover the exchange of such information. Inclusion of paragraph 5 merely clarifies Australia's current treaty practice, and reflects recent changes to Article 26 ( Exchange of information ) of the OECD Model. [ New Article 26, paragraph 5 of the Agreement ]

Article 3 of the Protocol

3.19 The Protocol inserts a new Article 27 ( Assistance in collection of taxes ) in the Agreement. As a consequence, Article 3 is required to renumber existing Articles 27 ( Diplomatic agents and consular officers ), 28 ( Entry into force ) and 29 ( Termination ) as Articles 28, 29 and 30 respectively.

Article 4 of the Protocol

Inserts new Article 27 of the Agreement - Assistance in collection of taxes

Assistance in collection of revenue claims

3.20 The new Article 27 ( Assistance in collection of taxes ) authorises and requires Australia and New Zealand to provide assistance to each other in the collection of revenue claims. This assistance is not to be restricted by the terms of Article 1 ( Personal scope ) of the Agreement. Assistance must therefore be provided as regards a revenue claim owed to either country by any person, whether or not a resident of Australia or New Zealand. The form of the assistance is set out in paragraphs 3 and 4 of Article 27 ( Assistance in collection of taxes ). [ New Article 27, paragraph 1 of the Agreement ]

3.21 The term revenue claim is defined for the purposes of this Article to mean an amount owed in respect of taxes referred to in Article 2 ( Taxes covered ) of the Agreement (as amended by Article 1 of the Protocol). A revenue claim may cover any New Zealand tax, or any Australian federal tax administered by the Commissioner, but only insofar as the imposition of such taxes is not contrary to this Agreement or any other instrument in force between Australia and New Zealand. It also applies to interest, administrative penalties and costs of collection or conservancy related to such amount. [ New Article 27, paragraph 2 of the Agreement ]

3.22 This Article will apply from the date agreed in an exchange of notes through the diplomatic channel. [ Article 6, paragraph 3 of the Protocol ]

3.23 Consistent with the intention noted in the OECD Model Commentary on the equivalent Article, requests for assistance in collection of revenue claims that arise before Article 4 of the Protocol enters into effect may be accepted, as long as such assistance is provided after the treaty has entered into force and the provisions of this Article have become effective.

Enforceable revenue claims

3.24 Assistance in collection will only be provided by Australia in relation to a revenue claim that is enforceable in New Zealand. Similarly, New Zealand is not required to provide assistance in collection in respect of an Australian revenue claim that is not enforceable in Australia. A revenue claim will be enforceable where the requesting country has the right, under its domestic law, to collect the revenue claim. Further, the revenue claim must be owed by a person who, at that time, under the law of that country, has no administrative or judicial rights to prevent its collection.

3.25 Paragraph 3 of this Article regulates the way in which the revenue claim of the requesting country is to be collected by the requested country. Other than in relation to time limits and priority (see paragraphs 3.29 to 3.32 ), the requested country is required to collect the revenue claim as though it were its own revenue claim. This obligation applies even if, at that time, the requested country has no need to undertake collection actions related to that taxpayer for its own tax purposes. [ New Article 27, paragraph 3 of the Agreement ]

3.26 Where a request from New Zealand concerns a tax that does not exist in Australia, Australia will follow the procedure applicable to a claim for a similar Australian tax or any other appropriate procedure if no similar tax exists.

Measures of conservancy

3.27 Paragraph 4 of this Article enables Australia or New Zealand to request the other country to take measures of conservancy even where it cannot yet ask for assistance in collection, such as where the revenue claim is not yet enforceable or when the debtor still has the right to prevent its collection. An example of a conservancy measure is the seizure or the freezing of assets before final judgment, to guarantee that the assets will still be available when collection can subsequently take place.

3.28 If requested to do so by New Zealand, Australia is required to take measures of conservancy in respect of the revenue claim in accordance with the provisions of Australian law as if the revenue claim were an Australian revenue claim. Although Australia does not have specific conservancy measures, the Commissioner may apply for a Mareva injunction, which would prevent the taxpayer and their associates from dealing with certain assets. [ New Article 27, paragraph 4 of the Agreement ]

Time limits

3.29 Paragraph 5 of this Article provides that the requested country's domestic law time limitations beyond which a revenue claim cannot be enforced or collected do not apply to a revenue claim in respect of which the other country has made a request for assistance in collection. Rather, the time limits of the requesting country apply. [ New Article 27, paragraph 5 of the Agreement ]

3.30 This paragraph follows the OECD Model provision, but has no practical effect at this time, since neither Australia nor New Zealand currently imposes a time limit on the collection of a revenue claim.

Priority of claims

3.31 Paragraph 5 of this Article also provides that the rules of Australia and New Zealand which give priority to tax debts over the claims of other creditors do not apply to a revenue claim of the other country. This restriction applies regardless of the fact that the requested country must generally treat the claim as its own revenue claim.

3.32 The words 'by reason of its nature as such' in paragraph 5 indicate that any time limits and priority rules to which the paragraph applies are only those that are specific to unpaid taxes. Consequently, paragraph 5 does not prevent the application of general rules concerning time limits or priority which would apply to all debts, such as rules giving priority to a claim by reason of that claim having arisen or having been registered before another one. [ New Article 27, paragraph 5 of the Agreement ]

Restriction on judicial and administrative proceedings

3.33 Paragraph 6 of this Article ensures that any legal or administrative objection concerning the existence, validity or the amount of a revenue claim of the requesting country is to be exclusively dealt with in that country. For example, no legal or administrative proceedings, such as a request for judicial review, may be initiated in Australia with respect to the existence, validity or amount of a New Zealand revenue claim. [ New Article 27, paragraph 6 of the Agreement ]

Change in circumstances

3.34 Paragraph 7 of this Article deals with the situation where the conditions in paragraph 3 or 4 are no longer satisfied after a request for assistance has been made, but before the revenue claim has been collected and remitted by the requested country. An example of such a situation would be where a request for assistance in collection has been made by New Zealand, but the revenue claim ceases to be enforceable in New Zealand prior to its collection by Australia.

3.35 Where the relevant conditions in paragraph 3 or 4 of this Article are no longer satisfied, paragraph 7 requires the competent authority of the requesting country to promptly notify the competent authority of the requested country of that fact.

3.36 Following such notification, the requested country has the option to ask the requesting country to either suspend or withdraw its request for assistance. If the request is suspended, the suspension applies until such time as the requesting country informs the other country that the conditions necessary for making a request as regards the revenue claim are again satisfied or that it withdraws its request. [ New Article 27, paragraph 7 of the Agreement ]

Limitations

3.37 Paragraph 8 of this Article contains certain limitations to the obligations imposed on the country which receives a request for assistance. The requested country is permitted to refuse the request for assistance where those limitations apply.

3.38 The first limitation is that the requested country is not required to exceed the bounds of its own domestic laws and administrative practice or those of the other country in fulfilling its obligations under this Article. [ New Article 27, subparagraph 8(a ) of the Agreement ]

3.39 However, subparagraph 8(a) of this Article does not prevent Australia from applying administrative measures to collect a New Zealand revenue claim, even though invoked solely to provide assistance in the collection of New Zealand taxes.

3.40 Subparagraph 8(b) limits the application of this Article where it would require the carrying out of measures that are contrary to public policy, such as where providing assistance may affect the vital interests of the country itself. [ New Article 27, subparagraph 8(b ) of the Agreement ]

3.41 The third limitation provides that neither country is obliged to satisfy a request for assistance if the other country has not pursued all reasonable measures of collection or conservancy that are available under its own laws or administrative practice. [ New Article 27, subparagraph 8(c ) of the Agreement ]

3.42 Under subparagraph 8(d) of this Article either country may reject a request for assistance on the basis of practical administrative considerations such as when the costs of recovering a revenue claim would exceed the amount of the revenue claim itself. [ New Article 27, subparagraph 8(d ) of the Agreement ]

3.43 The final limitation allows either country to refuse to provide assistance if it considers that the taxes with respect to which assistance is requested are imposed contrary to generally accepted taxation principles. [ New Article 27, subparagraph 8(e ) of the Agreement ]

Article 5 of the Protocol

Inserts a most favoured nation clause in to the Agreement

3.44 This Article provides most favoured nation status to Australia vis-à-vis New Zealand. Should New Zealand reduce withholding taxes on dividends, interest and royalties in a treaty with another country to levels below the rates prescribed in the Dividends, Interest and Royalties Articles of this Agreement, the Government of New Zealand will inform the Government of Australia without undue delay and will commence negotiations with a view to providing the same favourable treatment to Australia. [ Article 5 of the Protocol ]

3.45 This will assist in ensuring that Australian investors will not be at a competitive disadvantage vis-à-vis investors from other treaty countries in the event that New Zealand agrees to lower withholding tax rate limits in another treaty.

Article 6 of the Protocol

Date of entry into force

3.46 This Article provides for the entry into force of the Protocol. The Protocol will enter into force on the date of last notification by diplomatic note that the domestic requirements to give the Protocol the force of law in the respective countries have been completed. The Protocol forms an integral part of the Agreement. [ Article 6, paragraphs 1 and 2 of the Protocol ]

3.47 In Australia, enactment of the legislation giving the force of law to the tax treaty, along with tabling the treaty in Parliament, are prerequisites to the exchange of diplomatic notes.

Date of application for Australian taxes

3.48 The provisions of the Protocol will have effect from the date of entry into force of the Protocol. The extension of the exchange of information provisions to a broader range of taxes under the new Article 26 ( Exchange of information ) will apply to requests for exchange of information received on or after the date of entry into force of the Protocol. However, information that may be exchanged under such requests may relate to transactions that predate the entry into force of the Protocol.

Date of application for Article 27 (Assistance in the collection of taxes)

3.49 Notwithstanding that the Protocol enters into force on the date of last notification, Article 4 of the Protocol, which inserts a new Article 27 dealing with assistance in collection of taxes, will have effect only from the date agreed in a subsequent exchange of notes through the diplomatic channel. [ Article 6, paragraph 3 of the Protocol ]