House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Wayne Swan MP)

Chapter 2 - The Australia-New Zealand Convention

Outline of chapter

2.1 This Bill amends the International Tax Agreements Act 1953 (Agreements Act 1953). This chapter explains the rules that apply in the 2009 Convention between Australia and New Zealand for the Avoidance of Double Taxation with Respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion (the Convention).

Context of amendments

2.2 The Convention was signed in Paris on 26 June 2009.

2.3 Once in force, the Convention will replace the 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 that was signed in Melbourne on 27 January 1995, and the Protocol Amending the 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 that was signed in Melbourne on 15 November 2005 (together referred to as 'the existing New Zealand Agreement').

Summary of new law

Main features of the Convention

2.4 The main features of the Convention are as follows:

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Income from real property (including the profits of an enterprise from agriculture, forestry or fishing) may be taxed by the country in which the property is situated. Income from real property includes natural resource royalties [Article 6] .

•

Business profits (including income derived from professional services or other activities of an independent nature) are generally 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 prescribed permanent establishment in the other country, in which case that other country may tax the profits. These rules also apply to business trusts [Article 7] .

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Profits derived from the operation of ships and aircraft in international traffic are generally to be taxed only in the country of residence of the operator [Article 8] .

•

Profits of associated enterprises may be adjusted for tax purposes where transactions have been entered into on other than arm's length terms [Article 9] .

•

Dividends, interest and royalties may generally be taxed in both countries, but there are limits on the tax that the country in which the dividend, interest or royalty is sourced may charge on such income flowing to residents of the other country who are the beneficial owners of the income [Articles 10 to 12] .

•

In the case of dividends:

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no source country tax is payable on intercorporate dividends where the beneficial owner of those dividends is a company that holds, directly or indirectly, at least 80 per cent of the voting power, subject to certain conditions [Article 10, paragraph 3] ;

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no source country tax is payable on dividends where the beneficial owner of those dividends holds directly no more than 10 per cent of the voting power of the company paying the dividend, and the beneficial owner is a Contracting State, a political subdivision or a local authority thereof [Article 10, paragraph 4] ;

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a 5 per cent limitation applies to intercorporate dividends where the beneficial owner of those dividends is a company that holds directly at least 10 per cent of the voting power of the company paying the dividends [Article 10, subparagraph 2a)] ; and

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a 15 per cent limitation applies to all other dividends [Article 10, subparagraph 2b)] ;

•

Source country taxation on interest is limited to 10 per cent [Article 11, paragraph 2] . However, exemptions from source country taxation have been provided for interest paid to:

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certain government bodies and banks performing central banking functions [Article 11, subparagraph 3a)] ; and

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financial institutions that are unrelated and dealing wholly independently with the payer, subject to certain conditions [Article 11, subparagraph 3b)] .

•

The rate limit on source country taxation of royalties is 5 per cent [Article 12, paragraph 2] .

•

The definition of 'royalty' has been amended to include payments or credits in respect of the use of, or right to use, some or all of the radiofrequency spectrum specified in a spectrum licence and to exclude payments or credits in respect of the use of, or right to use, industrial, commercial or scientific equipment [Article 12, paragraph 3] .

•

Income, profits or gains from the alienation of real property may be taxed by the country in which the property is situated. Subject to that rule and other specific rules in relation to business assets and shares or other interests in land-rich entities (which may be taxed by the country in which the property is situated), all other capital gains will be taxable only in the country of residence [Article 13] .

•

Income from employment (that is, employees' remuneration) will generally be taxable in the country where the services are performed. However, where the services are performed during certain short visits to one country by a resident of the other country, the income will be exempt in the country visited [Article 14] .

•

Fringe benefits that would otherwise be subject to tax in both countries will be taxable only in the country which would have the primary taxing right in respect of salary or wages to which the benefit relates [Article 15] .

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Directors' remuneration may be taxed in the country in which the company of which the person is a director is a resident for tax purposes [Article 16] .

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Income derived by entertainers and sportspersons may generally be taxed by the country in which the activities are performed. However, income derived by sportspersons as a member of a recognised team playing in a league competition conducted in both countries shall be taxable under the normal business income or employment income rules [Article 17] .

•

Pensions (including government pensions) may be taxed only in the country of residence of the recipient. However, pensions arising in the other country will not be subject to tax in the residence country to the extent they would not be subject to tax in the other country if the recipient were a resident of that other country. Certain specified lump sums are only subject to tax in the country in which they arise [Article 18] .

•

Income from government service will generally be taxed only in the country that pays the remuneration. However, the remuneration will be taxed only in the other country where the services are rendered in that other country by a resident of that other country who is a national of that other country, or did not become a resident of that other country for the purpose of rendering the services [Article 19] .

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Payments made from abroad to visiting students or business apprentices for the purposes of their maintenance, education or training will be exempt from tax in the country visited [Article 20] .

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Other income (that is, income not dealt with by other Articles) may generally be taxed in both countries, with the country of residence of the recipient providing double tax relief [Article 21] .

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Source rules in the Convention prescribe, for domestic law and treaty purposes, that income, profits or gains derived by a resident of one country, which under the provisions of the treaty may be taxed in the other country, will be treated as having a source in that other country [Article 22] .

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Double taxation relief for income which, under the Convention, may be taxed by both countries, is required to be provided by the country of which the taxpayer is a resident under the terms of the Convention as follows:

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in Australia, by allowing a credit for the New Zealand tax against Australian tax payable on income derived by a resident of Australia from sources in New Zealand [Article 23, paragraph 1] ;

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in New Zealand, by allowing a credit for the Australian tax against New Zealand tax payable on income derived by a resident of New Zealand from sources in Australia [Article 23, paragraph 2] ; and

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in the case where an item of income is taxed in a country in the hands of an entity that is treated as 'fiscally transparent' by the other country, and also taxed in the hands of a resident of that other country as a participant in that entity, by that other country allowing a credit of the tax imposed by the first country [Article 23, paragraph 3] .

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In the case of Australia, effect will be given to the double tax relief obligations arising under the Convention by application of the general foreign income tax offset provisions of Australia's domestic law, or the relevant exemption provisions of that law where applicable.

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Rules in the Convention will protect nationals and businesses from tax discrimination in the other country and gives them private rights of appeal. However, Article 24 does not restrict either country from applying provisions designed to prevent avoidance or evasion of taxes (for Australia such measures include thin capitalisation, dividend stripping, transfer pricing and controlled foreign companies measures), rebates or credits for dividends paid by resident companies, research and development concessions, consolidation rules or capital gains deferral rules [Article 24] .

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The Convention provides for consultation between the two taxation authorities and a mechanism that allows for other forms of dispute resolution, including binding dispute resolution [Article 25] .

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The Convention provides for exchange of information between the two taxation authorities. It authorises and requires Australia to exchange information where the information relates to federal taxes administered by the Commissioner of Taxation (Commissioner) [Article 26] .

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The Convention ensures the integrity of the tax system by providing for the mutual assistance in the collection of tax debts. This would allow the Australian Taxation Office (ATO), in certain circumstances, to seek assistance from the New Zealand tax administration to collect Australian taxation debts in respect of all Australian federal taxes administered by the Commissioner, and vice versa [Article 27] .

Comparison of key features of new law and current law

Detailed explanation of new law

Article 1 - Persons Covered

Scope

2.5 This Article establishes the scope of the application of the Convention by providing for it to apply to 'persons' (defined to include individuals, trusts, partnerships, companies and any other body of persons) who are residents of one or both of the countries. It generally precludes extra-territorial application of the Convention. [Article 1]

2.6 The Convention also applies to third country residents in relation to Article 24 ( Non-Discrimination ) in its application to nationals of one of the treaty countries, Article 25 ( Mutual Agreement Procedure ) so far as the person is a national of one of the treaty countries, and in relation to the exchange of information under Article 26 ( Exchange of Information ) and the assistance in collection of tax debts under Article 27 ( Assistance in the Collection of Taxes ).

2.7 The application of the Convention to persons who are dual residents (that is, residents of both countries) is dealt with in Article 4 ( Resident ).

Application of the Convention to fiscally transparent entities

2.8 Paragraph 2 addresses special issues arising in relation to income that is derived by or through entities, such as certain partnerships and trusts, that are fiscally transparent with respect to that income; that is, where the participants in the entity are liable to tax on the income, rather than the entity itself. The provision is intended to apply where one or more fiscally transparent entities is interposed between the income and the participant who is ultimately liable to tax on the income.

2.9 As different countries frequently take different views as to when an entity is fiscally transparent, the risk of both double taxation and double non-taxation of income derived by or through such entities is increased. The intention of paragraph 2 is to ensure that treaty benefits are available to residents who are participants in these entities where income derived through such entities is allocated to those members for tax purposes. The provision also prevents the use of such entities to claim treaty benefits in respect of income arising in one country in circumstances where the person investing through such an entity is not a resident of, or is not liable to tax on the income in, the other country.

2.10 While this paragraph covers a broader range of transparent entities than partnerships, its application is intended to be consistent with the OECD conclusions on the application of the OECD Model Tax Convention on Income and on Capital (OECD Model) to partnerships. It is also intended to eliminate a number of technical problems which might have prevented participants in such entities from claiming treaty benefits, even though the income derived through such entities is allocated to them under the relevant tax laws such that they are subject to tax on that income. Further, the inclusion of the words 'with respect to that item of income' is included to ensure that this rule will apply appropriately to income derived through entities such as certain trusts, where some items of income may be allocated to the beneficiary or participant and taxed in that person's hands, while other items of income are taxed at the entity level.

2.11 The provision refers to a 'person' that is fiscally transparent. Partnerships and trusts are specifically included in the definition of 'person' in subparagraph j) of paragraph 1 of Article 3 ( General Definitions ), however other fiscally transparent entities may also be encompassed by the term as the definition is inclusive.

2.12 The paragraph also refers to income derived 'by or through' such a person. This is to take account of the fact that the same income may be regarded as derived by the entity in one country, while the other country considers that, notwithstanding that it is received by the entity, it is derived by the participants.

2.13 Paragraph 2 of Article 1 ( Persons Covered ) applies to all forms of income, including amounts taxable on a net profit basis or, in the case of Australia, as a capital gain.

2.14 In general, paragraph 2 relates to particular items of income of entities that are fiscally transparent under the laws of one or other country. Entities falling under this description in Australia and New Zealand include certain partnerships and trusts. In the case of Australia it includes partnerships subject to Division 5 of Part III of the Income Tax Assessment Act 1936 (ITAA 1936) (but not corporate limited partnerships subject to Division 5A of Part III), and trusts which are subject to Division 6 of Part III where the beneficiary of the trust is presently entitled to the income and assessable accordingly (but not a corporate unit trust or public trading trust subject to Division 6B or 6C of Part III). In the case of New Zealand, it includes partnerships, complying trusts and foreign trusts.

2.15 Under paragraph 2, an item of income derived by such entities will be considered to be derived by a resident of a country if a resident is treated under the taxation laws of that country as deriving the item of income. In particular, the paragraph ensures that treaty benefits will apply in three situations:

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where income (including profits or gains) is derived from sources in one country through an entity organised in the other country which is treated as fiscally transparent in that other country (that is, income derived through that entity is taxed in the hands of the beneficiaries, members or participants of the entity);

•

where income (including profits or gains) is derived from sources in one country through an entity that is organised in the other country and is treated as a taxable entity under the taxation laws of that country and fiscally transparent under the laws of the source country; and

•

where income (including profits or gains) is derived from sources in one country through a third country entity which is treated as fiscally transparent in the other country (that is, income derived through that entity is taxed in that other country in the hands of the beneficiaries, members or participants of the entity).

2.16 In the first situation above, treaty residents who participate in the entity will be eligible for treaty benefits in respect of items of income (including profits or gains) derived from the source country through that entity, to the extent that the other country treats the income as 'flowed-through' to those participants. Resident participants in the entity will be treated as having derived the income directly and may be entitled to treaty benefits. Treaty benefits in respect of such items of income (including profits or gains) will be granted where:

•

the beneficiaries, members or participants are residents of the other country; and

•

other conditions in the Convention (such as the specific anti-avoidance measures and limitation of relief) are satisfied.

2.17 Non-resident participants in the entity may not claim a benefit under the Convention in respect of such items of income, because they are not treaty residents for purposes of claiming benefits under this treaty. If, however, the country of which they are a resident for tax purposes has a tax treaty with the source country, they may be entitled to claim a benefit under that treaty.

2.18 It is irrelevant whether the source country sees the income, profits or gains as the income, profits or gains of the entity itself or of the beneficiaries, members or participants under the tax law of that country.

Example 2.1

In the above diagram, dividend income is paid to an Australian partnership from New Zealand. The Australian partnership includes Australian partners (Y and Z Co) who are residents of Australia for the purposes of the treaty. Under Australian law, the income is treated as the income of the partners.

As such, in this example, the dividend income paid to the partnership will be considered, for purposes of the treaty, to be derived by the Australian resident partners as they are assessable under Australian income tax law. Therefore the Australian partners would be eligible for the benefits of the Convention. To the extent that the Australian partners owned only a share of the income, then only the share of the income attributable to the Australian partners' interest would be eligible for the benefits of the Convention.

Treaty relief will not apply to income derived by any partners that are not residents of Australia for purposes of the Convention (in this example, X Co).

Eligibility for the treaty benefits will also be subject to the application of the respective anti-avoidance measures contained in the specific Article (in this example, paragraph 9 of Article 10 ( Dividends )).

2.19 An example of the second situation would be where dividend income is derived from sources in one country through an entity that is organised in the other country and is treated as a taxable entity under the tax law of that other country and fiscally transparent under the laws of the source country. In these circumstances, the Convention provides that the income will be treated as derived by the entity for purposes of determining whether treaty benefits apply. Treaty benefits will be granted where:

•

the entity is a resident of the other country; and

•

other conditions in the Convention (such as the specific anti-avoidance measures and limitation of relief) are satisfied.

2.20 The same outcome arises irrespective of whether the source country sees the income, profits or gains as the income, profits or gains of the entity itself or of the beneficiaries, members or participants under the tax law of that country.

Example 2.2

In the above diagram, dividend income arising in New Zealand is paid to an Australian Corporate Limited Partnership which is subject to Division 5A and is resident in Australia under that Division. The Australian Corporate Limited Partnership includes Australian partners (Y and Z Co) who are residents of Australia for the purposes of the treaty, and a third State resident partner (X Co). The Australian Corporate Limited Partnership is effectively treated as a company that is a resident of Australia for Australian tax purposes.

As such, in this example, the dividend income would be eligible for the benefits of the Convention. This will be the case, notwithstanding that one or more of the participants in the corporate limited partnership is not a resident of Australia and irrespective of whether New Zealand, under its domestic law, would tax the income in the hands of the Australian corporate limited partnership or in the hands of the partners. Even if New Zealand would treat the partnership as fiscally transparent under its domestic law, the income will be considered to be derived by an Australian resident for purposes of the Convention in accordance with paragraph 2 of Article 1 ( Persons Covered ), since the income is treated for purposes of Australian tax law as the income of a resident (that is, the Australian corporate limited partnership).

Eligibility for the treaty benefits will also be subject to the application of the respective anti-avoidance measures contained in the specific Article.

2.21 The third situation deals with cases where income is derived from sources in one country through a third country entity which is treated as fiscally transparent in the other country. In these circumstances, the Convention provides that the income will be treated as derived by the participants and eligible for such treaty benefits as would be granted to the beneficiary, member or participant. Treaty benefits in respect of such income will be granted where:

•

the beneficiary, member or participant is a resident of the other country; and

•

other conditions in the Convention (such as the specific anti-avoidance measures and limitation of relief) are satisfied.

2.22 This outcome will arise irrespective of whether the source country sees the income, profits or gains as the income, profits or gains of the beneficiary, member or participant under the tax law of that country. It is also irrelevant whether the entity is treated as fiscally transparent or not in the third country where it is organised.

Example 2.3

In the above diagram, a New Zealand entity pays royalty income to a United States Limited Liability Company. The United States Limited Liability Company includes Australian partners (X Co and Y) who are residents of Australia for the purposes of the treaty.

As the United States Limited Liability Company is treated as a partnership for US tax law purposes, it is also treated as a partnership for Australian tax law purposes under Australia's foreign hybrid rules.

In this example, the royalty income derived through the United States Limited Liability Company on which the Australian resident partners are assessable under Australian income tax law would be eligible for the benefits of the Convention.

Treaty relief under the Convention will not apply to income derived by any partners that are not residents of Australia for purposes of the Convention (in this example, Z Co).

Eligibility for the treaty benefits will also be subject to the application of the respective anti-avoidance measures contained in the specific Article (in this example, paragraph 7 of Article 12 ( Royalties )).

2.23 On the other hand, if a country regards the income as derived by an entity which it regards as a company, but not a resident, for tax purposes, then income derived from the other country will not be entitled to the benefits of the Convention, even if the shareholders of that company are residents of the first country.

Example 2.4

In the above diagram, a New Zealand resident pays interest income to a third State entity that is treated as a company for Australian tax purposes.

In this case, the interest income will not be eligible for the benefits of the Convention. In this example it would not matter if under the tax law of New Zealand, the third State entity were treated as fiscally transparent or as a company. If New Zealand also treats the third State legal entity as a company for its tax purposes, paragraph 2 of Article 1 ( Persons Covered ) would not apply but the outcome would still be the same; that is, no benefits under the Convention.

2.24 Income derived from a country through an entity organised in that country will not be eligible for treaty benefits if the income is treated as derived by that entity under the tax laws of the other country.

Example 2.5

In the above diagram, a New Zealand resident pays interest income to another New Zealand entity, NZ Co. Aus Co, an Australian resident shareholder holds shares in NZ Co. Australia treats NZ Co as a company for tax purposes and as the entity that derives the interest income.

In this example, the interest income would be ineligible for the benefits of the Convention. Australia does not treat the interest income as income of an Australian resident. Accordingly, paragraph 2 of Article 1 ( Persons Covered ) will not apply to treat the income as derived by an Australian resident for purposes of the Convention, even if New Zealand regards NZ Co as a fiscally transparent entity.

2.25 Where the two countries allocate the income to different resident persons (for example, where one country considers that the income is derived by a resident entity, while the other country considers that the same income is derived by a resident who is a participant in that entity), both countries may tax the income in accordance with this provision. Income derived from a country through an entity organised in that country will not be eligible for treaty benefits if the income is treated as derived by a resident entity under the tax laws of that country. In such case, the income would be regarded as domestic source income of a resident which, in accordance with normal treaty principles, would not be limited by the Convention. During negotiations, the two delegations noted that:

'It is understood that (this) paragraph shall not affect the taxation by a Contracting State of its residents.'

Example 2.6

The facts are the same as Example 2.5 except that New Zealand regards NZ Co as a company and resident there, while Australia regards NZ Co as a fiscally transparent partnership. In this case, New Zealand would not be required to extend source tax reductions on the interest income under Article 11 ( Interest ) of the Convention.

2.26 Where the same income is taxed in the hands of different persons under this provision, paragraph 3 of Article 23 ( Elimination of Double Taxation ) ensures that relief from double taxation is provided.

2.27 The examples above deal with entities that are wholly fiscally transparent or alternatively taxed as a taxable entity such as a company on all their income. As noted above, paragraph 2 of Article 1 applies on an item of income basis. This is illustrated by the following examples which are variations on some of the examples above.

Example 2.7

Royalty income arising in New Zealand is paid to an Australian resident trust. The Australian resident beneficiaries are presently entitled to half of the royalty income and are taxed in Australia under section 97 of the ITAA 1936. A non-resident of Australia is presently entitled to the other half of the royalty income. The trust also derives Australian source income to which no beneficiary is presently entitled and that income is taxed to the trustee under section 99A of that Act.

In this example, the royalty income paid to the trust on which the Australian resident beneficiaries are assessable under Australian income tax law would be eligible for the benefits of the Convention. As the Australian beneficiaries are only entitled to half of the income, only the half of that royalty income attributable to the Australian resident beneficiaries would be eligible for the benefits of the Convention.

Treaty relief will not apply to income derived by any beneficiaries that are not residents of Australia for purposes of the Convention.

Eligibility for the treaty benefits will also be subject to the application of any anti-avoidance measures contained in the specific income Article (in this example, paragraph 7 of Article 12 ( Royalties )).

The fact that the trustee is taxable in Australia on other items of income of the trust does not affect the fact that the trust is fiscally transparent with respect to the royalty income.

If the trustee is a resident of Australia, it is entitled to treaty benefits in relation to the income in respect of which the trustee is liable to tax under section 99A of the ITAA 1936 as a resident of Australia.

2.28 The same result is obtained even if New Zealand regarded the trust or trustee as taxable on the income rather than the beneficiaries.

2.29 Relief under the Convention will not apply to a beneficiary who is presently entitled to the royalty income but who is not an Australian resident for purposes of the Convention.

2.30 No treaty benefits are available under the Convention where the income is exempt from tax in New Zealand on the basis that it is derived by a transitional resident of New Zealand. [Article 4, paragraph 4]

2.31 Where dividends, interest or royalties arising in one country are derived through a trust and are taxed in the other country in the hands of the trustee, paragraph 4 of Article 3 ( General Definitions ) provides that such income will be deemed to be beneficially owned by a resident of the latter country. Accordingly, that income will be treated for the purposes of the Convention as income derived by a resident of that country, even if the source country would treat the trust as fiscally transparent.

Example 2.8

The facts are the same as Example 2.7 except that no beneficiary is presently entitled to the royalty income and the trustee is taxed on that income in Australia under section 99A of the ITAA 1936.

In this example, the royalty income would prima facie be eligible for treaty benefits. As the trustee is assessable on the income for Australian tax purposes, the trust is not fiscally transparent in Australia with respect to the royalty income.

Note however to the extent that the Australian tax paid by the trustee is subsequently refunded to a non-resident beneficiary, the income will not be regarded as beneficially owned by an Australian resident (see the explanation on paragraph 4 of Article 3 ( General Definitions ) in paragraphs 2.66 to 2.71).

Eligibility for the treaty benefits will be subject to the application of any anti-avoidance measures contained in the specific income Article (in this example, paragraph 7 of Article 12 ( Royalties )).

2.32 The same result is obtained even if New Zealand regarded the beneficiaries as taxable on the income rather than the trust or trustee.

2.33 In the case of Australian managed investment trusts, an exception to the discussion here is created by paragraph 7 of Article 4 ( Resident ) (see paragraphs 2.89 to 2.96).

Article 2 - Taxes Covered

2.34 This Article specifies the existing taxes of each country to which the Convention applies. These are, in the case of Australia, the Australian income tax, the petroleum resource rent tax and the fringe benefits tax.

2.35 The term 'income tax' includes Australian income tax imposed on capital gains.

2.36 Although Australia considers the petroleum resource rent tax to be encompassed by the term 'income tax', a specific reference to this has been included in the Convention to put beyond doubt that it is a tax covered.

2.37 As with the existing New Zealand Agreement, the Convention generally does not cover Australia's goods and services tax (GST), customs duties, state taxes and duties and estate tax and duties.

2.38 However, paragraph 7 of Article 24 ( Non-Discrimination ) provides that that Article applies to all federal and state taxes (but not local taxes). Similarly, paragraph 1 of Article 26 ( Exchange of Information ) and paragraph 2 of Article 27 ( Assistance in the Collection of Taxes ) provide that all federal taxes administered by the Commissioner are covered by those Articles. [Article 24, paragraph 7, Article 26, paragraph 1 and Article 27, paragraph 2]

2.39 For New Zealand, the Convention applies to income tax, including the fringe benefits tax. However, paragraph 7 of Article 24 ( Non-Discrimination ) provides that that Article applies to all New Zealand taxes apart from any taxes that may be imposed by local authorities. Similarly, paragraph 1 of Article 26 ( Exchange of Information ) and paragraph 2 of Article 27 ( Assistance in the Collection of Taxes ) provide that all taxes imposed under New Zealand's tax laws are covered by those Articles. [Article 24, paragraph 7, Article 26, paragraph 1, and Article 27, paragraph 2]

Identical or substantially similar taxes

2.40 The application of the Convention (including Articles 26 and 27) will be automatically extended to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, the existing taxes.

Notification of changes to the tax laws

2.41 The competent authorities (that is, the Commissioner in the case of Australia and the Commissioner of Inland Revenue in the case of New Zealand, or their authorised representatives) are required to notify each other in the event of a significant change in the taxation law of the respective countries, within a reasonable period of time after those changes. [Article 2, paragraph 2]

Article 3 - General Definitions

2.42 This Article provides general definitions and rules of interpretation applicable throughout the Convention. In particular, paragraph 1 defines a number of basic terms used in the Convention. The introduction to paragraph 1 makes clear that these definitions apply for all purposes of the Convention, unless the context requires otherwise.

Definition of Australia

2.43 As in Australia's other modern tax treaties, Australia is defined to include certain external territories and the continental shelf. The Convention also refers specifically to the 'exclusive economic zone'. Although the exclusive economic zone is considered to be covered by the definition used in Australia's other modern tax treaties, it is specifically included in the Convention for additional clarity. By reason of this definition, Australia preserves its taxing rights, for example, over mineral exploration and mining activities carried on by non-residents on the seabed and subsoil of the relevant continental shelf areas (under section 6AA of the ITAA 1936, certain sea installations and offshore areas are to be treated as part of Australia). [Article 3, subparagraph 1a)]

Definition of New Zealand

2.44 The definition is similar to that under the existing New Zealand Agreement. New Zealand covers the territory of New Zealand but does not include Tokelau. Unlike the definition in the existing New Zealand Agreement, no specific mention is made of the Cook Islands and Niue. These jurisdictions are self-governing states and are not covered by the definition of New Zealand. It includes any area beyond the territorial sea under New Zealand legislation and in accordance with international law as an area in which New Zealand may exercise sovereign rights with respect to natural resources. [Article 3, subparagraph 1b)]

Definitions of business and enterprise

2.45 The terms enterprise of a Contracting State and enterprise of the other Contracting State are defined as an enterprise carried on by residents of the respective countries. [Article 3, subparagraph 1g)]

2.46 The term enterprise is stated to apply to the carrying on of any business. The term business is defined to include the performance of professional services and other activities of an independent character. Both these definitions are identical to the definitions added to the OECD Model concurrently with the deletion of Article 14 ( Independent Personal Services ). The inclusion of the two definitions is intended to clarify that income from the performance of professional services or other activities of an independent character is dealt with under Article 7 ( Business Profits ) and not Article 21 ( Other Income ). [Article 3, subparagraphs 1c) and f)]

Definition of company

2.47 The definition of company in the Convention accords with the OECD Model, and means any body corporate or any entity which is treated as a body corporate for tax purposes.

2.48 The Australian tax law treats certain trusts (public unit trusts and public trading trusts) and corporate limited partnerships (limited liability partnerships) in the same way as companies for income tax purposes. These trusts and partnerships are included as companies for the purposes of the Convention. [Article 3, subparagraph 1d)]

Definition of competent authority

2.49 The competent authority is the person or institution specifically authorised to perform certain actions under the Convention. For instance, the competent authority is required to give certain notifications (for example, in paragraph 2 of Article 2 ( Taxes Covered ), the competent authorities are required to notify each other of any significant changes to the relevant tax laws of their respective countries) and perform certain tasks (for example, exchange tax information in accordance with Article 26 ( Exchange of Information )).

2.50 In the case of Australia, the competent authority is the Commissioner or an authorised representative of the Commissioner. In the case of New Zealand, the competent authority is the Commissioner of Inland Revenue or an authorised representative of the Commissioner. [Article 3, subparagraph 1e)]

Definition of international traffic

2.51 In the Convention, this term is of relevance for taxation of profits from shipping and air transport operations (Article 8 ( Shipping and Air Transport )), income, profits or gains from the alienation of ships and aircraft (paragraph 3 of Article 13 ( Alienation of Property )) and wages of crew (paragraph 3 of Article 14 ( Income from Employment )).

2.52 The definition of international traffic covers international transport by a ship or aircraft operated by an enterprise of one country, as well as domestic transport within that country. However, it does not include transport where the ship or aircraft is operated solely between places in the other country; that is, where the place of departure and the place of arrival of the ship or aircraft are both in that other country, irrespective of whether any part of the transport occurs in international waters or airspace. For example, a 'voyage to nowhere' which begins and ends in Sydney on a ship operated by a New Zealand enterprise would not come within the definition of 'international traffic', even if the ship travels through international waters in the course of the cruise. [Article 3, subparagraph 1h)]

Definition of national

2.53 The Convention defines national by reference to an individual's nationality or citizenship. A company, partnership or association will be a national if it is created or organised under the laws of Australia or New Zealand. For example, a company's nationality is determined by where it is incorporated. [Article 3, subparagraph 1i)]

2.54 The concept of nationality is used in subparagraph c) of paragraph 2 of Article 4 ( Resident ), subparagraph b) of paragraph 1 of Article 19 ( Government Service ) and Article 24 ( Non-Discrimination ).

Definition of person

2.55 The definition of person in the Convention generally accords with Australia's normal tax treaty practice and includes individuals, companies and any other body of persons. However, a specific reference to partnerships and trusts is included in the Convention. The intention is for the term 'person' to be given a broad meaning for the purposes of the Convention. During negotiations, the delegations noted that a reference to 'a trust' was included in the definition of the term 'person':

'...to ensure that trusts may be covered by a reference to 'a person that is fiscally transparent' in paragraph 2 of Article 1 ( Persons Covered ) and for purposes of paragraph 7 of Article 4 ( Resident ) which refers to a managed investment trust.'

[Article 3, subparagraph 1j)]

Definition of tax

2.56 For the purposes of the Convention, the term tax does not include any amount of penalty or interest imposed under the respective domestic tax law of the two countries. [Article 3, subparagraph 1k)]

2.57 In the case of a resident of Australia, any penalty or interest component of a liability determined under the domestic taxation law of New Zealand with respect to income that New Zealand is entitled to tax under the Convention would not be a creditable New Zealand tax for the purposes of paragraph 1 of Article 23 ( Elimination of Double Taxation ). This is in keeping with the meaning of 'foreign income tax' in subsection 770-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997). Accordingly, such a penalty or interest liability would be excluded from calculations when determining the Australian resident taxpayer's foreign income tax offset entitlement under paragraph 1 of Article 23 (pursuant to Division 770 of the ITAA 1997 - Foreign Income Tax Offsets).

Definition of recognised stock exchange

2.58 The term is used in relation to withholding tax limits in Article 10 ( Dividends ). No withholding tax will apply to a dividend paid from an Australian resident company to a New Zealand resident company which holds 80 per cent of the voting power of the paying company where its principal class of shares is listed and regularly traded on a recognised stock exchange.

2.59 The term recognised stock exchange is defined as:

•

the Australian Securities Exchange and any other Australian stock exchange recognised as such under Australian law;

•

the securities markets (other than the New Zealand debt market) operated by the New Zealand Exchange Limited; and

•

any other stock exchange agreed upon by the competent authorities under the Convention.

[Article 3, subparagraph 1l)]

Definition of managed investment trust

2.60 The term managed investment trust is defined as a trust that is a managed investment trust for the purposes of Australian tax. The definition is relevant to paragraph 7 of Article 4 ( Resident ), which in certain circumstances treats, for the purposes of the Convention, a managed investment trust as an individual resident of Australia and as the beneficial owner of the income it receives. [Article 3, subparagraph 1m)]

2.61 Section 12-400 of Schedule 1 to the Taxation Administration Act 1953 defines the term 'managed investment trust'. In general terms, a trust is a managed investment trust in relation to an income year if, at the time of the first fund payment is made:

•

the trustee is an Australian resident, or the central management and control of the trust is in Australia;

•

the trust satisfies certain requirements under the Corporations Act 2001 relating to the management of investments; and

•

the trust is either listed on an approved stock exchange in Australia, or is widely held.

Definition of natural resources

2.62 The term natural resources is defined for the purposes of Articles 5 ( Permanent Establishment ) and 6 ( Income from Real Property ) as meaning naturally occurring deposits or sources of materials and substances, such as minerals, oils, gas and water. It also includes forests and fish. During negotiations, the delegations noted that:

'It is understood that the term 'naturally-occurring' in (paragraph 2) refers to both forests and fish.'

[Article 3, paragraph 2]

Terms not specifically defined

2.63 Where a term is not specifically defined within the Convention, that term (unless used in a context that requires otherwise) is to be taken to have the same interpretative meaning as it has under the domestic taxation law of the country applying the Convention at the time of its application. In that case, the meaning of the term under the taxation law of the country will have precedence over the meaning it may have under other domestic laws.

2.64 The same term may have a differing meaning and a varied scope within different Acts relating to specific taxation measures. For example, GST definitions are sometimes broader than income tax definitions. The definition more specific to the type of tax should be applied in such cases. For example, where the matter subject to interpretation is an income tax matter, but definitions exist in either the ITAA 1936 or the ITAA 1997 and the A New Tax System (Goods and Services Tax) Act 1999 , the income tax definition would be the relevant definition to be applied.

2.65 If a term is not defined in the Convention, but has an internationally understood meaning in tax treaties and a meaning under the domestic law, the context would normally require that the international meaning be applied. [Article 3, paragraph 3]

Dividends, interest or royalties derived by or through trusts

2.66 For the purposes of Articles 10 ( Dividends ), 11 ( Interest ) and 12 ( Royalties ), dividends, interest or royalties arising in a country and derived by or through a trust are deemed to be beneficially owned by a resident of the other country where such income is subject to tax in that other country in the hands of a trustee of that trust.

2.67 This provision accords with New Zealand treaty practice and has a similar effect to paragraph 2 of Article 3 of the existing New Zealand Agreement. It ensures that the trustee is treated as the beneficial owner of dividends, interest or royalties for the purposes of obtaining benefits under the respective Articles, but only where those dividends, interest or royalties are subject to tax in the hands of the trustee. [Article 3, paragraph 4]

2.68 Where tax paid by a trustee is credited against the tax payable by a beneficiary who is not a resident of Australia in accordance with section 98A of the ITAA 1936, the trustee will not be regarded as subject to tax on that income.

2.69 Furthermore, the trustee will not be regarded as subject to tax on income derived through the trust where the tax is refunded. In the course of negotiations, the two delegations noted that:

'It is understood that a trustee is not regarded as being subject to tax to the extent that the trustee pays tax that is subsequently refunded to a non-resident beneficiary.'

2.70 For example, where a trust derives foreign income to which no beneficiary is presently entitled, the trustee is assessable on that income if the trust is an Australian resident trust. The later distribution of the income to a beneficiary may allow the beneficiary to claim a refund of the tax paid by the trustee under section 99D of the ITAA 1936 if the income is attributable to a period in which the beneficiary was not an Australian resident. In such cases, the trustee will not be regarded as subject to tax for the purposes of paragraph 4 of Article 3. It follows that, where the income comprises dividends, interest or royalties arising in New Zealand, New Zealand will not be limited by Articles 10, 11 and 12 of the Convention.

2.71 Where dividends, interest or royalties arising in one country are taxed in the hands of a beneficiary who is a resident of the other country, it is intended that the beneficiary would generally be treated as the beneficial owner of the income.

Article 4 - Resident

Residential status

2.72 This Article sets out the basis upon which the residential status of a person is to be determined for the purposes of the Convention. Residential status in one or other country is a necessary condition for the provision of relief under the Convention. For both Australia and New Zealand, 'resident' status is determined by reference to the person's liability to tax as a resident under the laws of the respective country.

2.73 The term 'liable to tax as a resident' is intended to capture those persons who are subject to comprehensive taxation under a country's domestic taxation laws. A person may be regarded as liable to tax as a resident even where the country does not in fact impose tax. For example, under Australian law charitable institutions are exempt from income tax but only if they meet the requirements for exemption. Such institutions are liable to tax for the purposes of the Article and, therefore, are 'residents' under the Convention.

2.74 The second sentence of paragraph 1 of the Article deals with a person who may be considered to be a resident of a country according to its domestic laws but is only liable to taxation on income from sources in that country, such as foreign diplomatic and consular staff. In the Australian context, this also means, for example, that Norfolk Island residents, who are generally subject to Australian tax on Australian source income only, are not residents of Australia for the purposes of the Convention. Accordingly, New Zealand will not have to forgo tax in accordance with the Convention on income derived by residents of Norfolk Island from sources in New Zealand (which will not be subject to Australian tax). [Article 4, paragraph 1]

Residency of governments

2.75 Article 4 follows the OECD Model in specifically providing that the State, or a political subdivision, or local authority of the State, are residents for the purposes of the Convention. This means that the Australian Government, the state governments and local councils of Australia will be residents for the purpose of the Convention. This does not necessarily mean that income, profits or gains derived by these bodies from sources in New Zealand will be subject to tax in New Zealand as sovereign immunity principles may apply. [Article 4, paragraph 1]

Dual residents

2.76 A set of tie-breaker rules is included for determining how residency is to be allocated to one or other of the countries for the purposes of the Convention if a taxpayer, whether an individual, a company or other taxable unit, qualifies as a dual resident; that is, as a resident of both countries in accordance with paragraph 1 of the Article.

2.77 Notwithstanding that the Convention deems certain dual residents to be a resident only of one country for treaty purposes, a dual resident remains a resident for the purposes of Australian domestic tax law. Accordingly, that person remains liable to tax in Australia as a resident, insofar as the Convention allows.

Individuals

2.78 The tie-breaker rules for individuals apply certain tests, in a descending hierarchy, for determining the residential status (for the purposes of the Convention) of an individual who is liable to tax as a resident of both countries under each country's domestic law. These rules, in order of application, are:

•

if the individual has a permanent home available to that individual in only one of the countries, the person is deemed to be a resident solely of that country for the purposes of the Convention;

•

if the individual has a permanent home available in both countries or in neither, then the person's residential status takes into account the person's personal or economic relations with Australia and New Zealand, and the person is deemed for the purposes of the Convention to be a resident only of the country with which the person has the closer personal and economic relations (centre of vital interests);

•

if the individual's centre of vital interests cannot be determined, the individual shall be deemed to be a resident of the country in which that individual has an habitual abode; or

•

if the individual has an habitual abode in both Australia and New Zealand or in neither, the individual shall be deemed to be a resident of the country of which they are a national.

[Article 4, paragraph 2]

2.79 In the course of negotiations, the two delegations noted that:

'It is understood that, although the Convention does not provide for mutual agreement as the final tie-breaker step for individuals, it remains open to the competent authorities to enter into mutual agreement procedure discussions under Article 25 ( Mutual Agreement Procedure ) in dual resident individual cases.'

Other persons

2.80 Where a person that is not an individual (such as a company) is a resident of both countries in accordance with paragraph 1, the person will be deemed to be a resident of the country in which its place of effective management is situated.

2.81 In cases where the country in which the place of effective management is situated cannot be determined, or the place of effective management is situated neither in Australia or New Zealand, the competent authorities are to endeavour to determine by mutual agreement under Article 25 ( Mutual Agreement Procedure ) the country of which the person shall be deemed to be a resident for the purposes of the Convention.

2.82 In doing so, the competent authorities are to have regard to the person's places of management, the place where it is incorporated or otherwise constituted and any other relevant factors, such as those listed in paragraph 24 of the 2008 OECD Commentary to the OECD Model (OECD Model Commentary) on Article 4. In the absence of agreement between the competent authorities, such a person shall not be entitled to any relief or exemption from tax provided by the Convention.

2.83 Such persons are not denied all of the benefits of the Convention, only relief or exemption from tax. This means that Articles such as Article 24 ( Non-Discrimination ) and 25 ( Mutual Agreement Procedure ) still apply to them. [Article 4, paragraph 3]

Residency of participants in dual listed company arrangements

2.84 Paragraph 5 of the Article provides a specific rule for companies who are participants in 'dual listed company arrangements' and residents of both Australia and New Zealand. Instead of the tie-breaker rule in paragraph 3 of the Article applying, the company will be deemed to be the resident of the country in which it is incorporated provided that it has its primary stock exchange listing in that country. [Article 4, paragraph 5]

2.85 The term dual listed company arrangement is defined exhaustively to refer to an arrangement consisting of two publicly listed companies which, while retaining their status as separate legal entities, seek to broadly operate as one company. While the companies retain separate shareholdings and stock exchange listings the arrangement provides for alignment of the strategic directions of the two companies involved and the economic interests of their respective shareholders. The treaty sets out various, cumulative criteria by which such an arrangement can be identified.

2.86 The criteria are:

•

the appointment of common (or almost identical) boards of directors;

•

unified management;

•

provision for the payment of equalised distributions as determined by an equalisation ratio (though this ratio may change over time) and applying to distributions on winding up of either company to this contractual arrangement;

•

voting in effect as a single electorate on substantial issues; and

•

cross-guarantees or similar financial arrangements to support each company's material ongoing financial obligations under the dual listing arrangement.

2.87 The first criterion does not apply to dual listed company (DLC) arrangements where the effect of relevant regulatory requirements would otherwise prevent this. For example, provisions regulating an Australian industry require that at least two-thirds of the directors of an enterprise operating in that industry be Australian citizens. If a company covered by those provisions sought to enter into a DLC arrangement with a New Zealand company that under New Zealand law was required to maintain a similar number of New Zealand citizens as directors, the two companies could not have common boards of directors. This would prevent them from being able to access this tie-breaker test. The intention is that they not be prohibited from doing so because other regulatory requirements prevent it.

2.88 The final criterion does not apply to DLC arrangements where the companies which are a party to the arrangement are prevented from providing such guarantees or financial support under a regulatory framework applicable to one or both companies; for example, if providing such cross-guarantees would breach the Australian Prudential Regulation Authority's capital adequacy standards for approved deposit institutions. [Article 4, paragraph 6]

Managed investment trusts

2.89 The Convention also specifically provides that, notwithstanding any other provisions of the Convention, trusts that are managed investment trusts for Australian tax purposes and that receive income (including profits and gains) arising in New Zealand, shall be treated, for purposes of applying the Convention to that income, as an individual resident of Australia and as the beneficial owner of the income it receives, but only to the extent that residents of Australia are the owners of the beneficial interests in the managed investment trust.

2.90 However, if:

•

the managed investment trust has its principle class of units listed on the Australian Securities Exchange, or any other Australian stock exchange recognised as such under Australian law; and is regularly traded on one or more recognised stock exchanges; or

•

at least 80 per cent of the value of beneficial interests in the managed investment trust is owned by Australian residents,

the managed investment trust shall be treated as an individual resident of Australia and as the beneficial owner of all the income it receives. [Article 4, paragraph 7]

2.91 Paragraph 7 of Article 4 is designed to facilitate the claiming of treaty benefits for New Zealand investments held by MITs. The definition of MIT for this purpose is contained in subparagraph m) of paragraph 1 of Article 3 ( General Definitions ) and is discussed in paragraph 2.60. Generally under that definition a managed investment trust will be directly or indirectly widely held.

2.92 It is often practically difficult for the many investors in widely held MITs to individually claim treaty benefits in the source country. This provision is designed to overcome that practical difficulty.

2.93 The provision achieves this by treating the MIT as an individual resident in Australia and the beneficial owner of the income for purposes of applying the Convention to income received by the MIT, where the MIT meets certain specified conditions. This allows the MIT to claim treaty benefits directly under Articles 6 to 21 of the Convention. As it is almost invariably the investors in the MIT rather than the MIT who are taxed on that income on a fiscally transparent basis, in the absence of this provision it would be those investors who would normally have to claim treaty benefits under paragraph 2 of Article 1 ( Persons Covered ). This provision is thus an exception to this extent to the general operation of paragraph 2 of Article 1 ( Persons Covered ).

2.94 Paragraph 7 of Article 4 ( Resident ) is designed to ensure that the provision does not give rise to treaty shopping by third country investors. The provision achieves this result in two different ways. If the MIT is listed and regularly traded on one or more recognised stock exchanges as defined in sub-subparagraph l)(i) of paragraph 1 of Article 3 ( General Definitions ) or at least 80 per cent by value of the beneficial interests in the MIT are owned by residents of Australia, it is treated as entitled to treaty benefits with respect to all of its income arising in New Zealand. If neither of these tests is satisfied, the MIT is entitled to treaty benefits only to the extent to which residents of Australia are the owners of the beneficial interests in the MIT.

2.95 For these purposes, unitholders that are residents of Australia for treaty purposes and are liable to tax in Australia on income received by a MIT would be regarded as residents of Australia that are owners of the beneficial interests in the MIT. Thus, Australian resident individuals and companies that own units in the MIT that are not held on trust will be treated as owners of the beneficial interests in the MIT where the income received by them is allocated to them for tax purposes. This will also be the case for unitholders in the MIT that are life companies or superannuation entities to which the MIT income is allocated for tax purposes, where such entities are liable to tax in Australia on their worldwide income. Where units in one MIT are held by another MIT (investor MIT), the investor MIT will be regarded as an Australian resident that is the owner of the beneficial interests in the first MIT where the investor MIT satisfies the requirements of paragraph 7 to be treated as an individual resident in Australia with respect to all the income it receives.

2.96 Paragraph 7 of Article 4 ( Resident ) is not intended to prevent either country from taxing income derived by its own residents through a MIT. During negotiations, the delegations noted that:

'It is understood that ... paragraph 7 of Article 4 ( Resident ) shall not affect the taxation by a Contracting State of its residents.'

[Article 4, paragraph 7]

Limitation of relief

2.97 The Convention also provides that where an individual is a transitional resident of New Zealand and is, for that reason, exempt from tax in New Zealand on certain income, profits or gains in New Zealand, then Australia will not be required to provide any relief specified in the Convention in respect of such income, profits or gains.

2.98 'Transitional resident' is a term under New Zealand law, and is intended to equate to temporary residence. [Article 4, paragraph 4]

2.99 This provision only applies to transitional residents of New Zealand. It is not intended that similar limitations on treaty benefits apply to temporary residents of Australia.

Article 5 - Permanent Establishment

Role and definition

2.100 The application of various provisions of the Convention (principally Article 7 ( Business Profits )) is dependent upon whether a person who is a resident of one country carries on business through a permanent establishment in the other country, and if so, whether income derived by that person is attributable to, or assets of that person are effectively connected with, that permanent establishment.

2.101 The definition of the term 'permanent establishment' in this Article corresponds generally with definitions of the term in Australia's more recent tax treaties, although the definition in the Convention also includes a provision dealing specifically with services. The term also fully encompasses the concept of 'fixed base', which is used in the existing New Zealand Agreement in a separate Article dealing with independent personal services. As such services will now be dealt with under Article 7 ( Business Profits ), it is intended that places that constitute a fixed base for purposes of the existing New Zealand Agreement would come within the meaning of permanent establishment for the purposes of the Convention.

Meaning of permanent establishment

2.102 The primary meaning of permanent establishment is expressed as being a fixed place of business through which the business of an enterprise is wholly or partly carried on. To be a permanent establishment within the primary meaning of that term, the following requirements must be met:

•

there must be a place of business;

•

the place of business must be fixed (both in terms of physical location and in terms of time); and

•

the business of the enterprise must be carried on through this fixed place.

[Article 5, paragraph 1]

2.103 Other paragraphs of this Article elaborate on the meaning of the term by giving examples (by no means intended to be exhaustive) of what may constitute a permanent establishment - for example:

•

an office;

•

a factory;

•

a place of extraction of natural resources; or

•

an agricultural, pastoral or forestry property.

2.104 As paragraph 2 of this Article is subordinate to paragraph 1, the examples listed will only constitute a permanent establishment if the primary definition in paragraph 1 is satisfied. [Article 5, paragraph 2]

Building site or construction or installation project

2.105 A building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months. In the course of negotiations, the two delegations noted:

'The delegations agreed that a permanent establishment will exist where building sites or projects last for more than six months regardless of whether or not the paragraph 1 test has been satisfied. Sites or projects that last for less than six months can never constitute a permanent establishment.'

2.106 The phrase 'building site or a construction, installation or assembly project' includes not only places used for the construction of buildings but also for the construction of roads, bridges or canals, the renovation (involving more than mere maintenance or redecoration) of buildings, roads, bridges or canals, the laying of pipelines and excavating and dredging. Planning and supervision are considered part of the building site if carried out by the construction contractor. However, planning and supervision carried out by another unassociated enterprise will not be taken into account in determining whether the construction contractor has a permanent establishment in Australia. [Article 5, paragraph 3]

Agricultural, pastoral or forestry property

2.107 Most of Australia's tax treaties include as a permanent establishment an agricultural, pastoral or forestry property. This reflects Australia's usual practice of providing for taxation of profits from the exploitation of Australian land for the purposes of primary production under Article 7 ( Business Profits ).

2.108 However, under the Convention, profits from agriculture, forestry or fishing are dealt with under Article 6 ( Income from Real Property ). This is reflected in the phrase 'including profits of an enterprise from agriculture, forestry or fishing' in paragraph 1 of that Article.

2.109 Nevertheless, a fixed place of business that is used for primary production purposes, such as a farm or forestry property, will constitute a permanent establishment. This has significance for Articles where the concept of permanent establishment is relevant, for example, in determining the right of a country to tax income (that is, income from employment under Article 14) or the country in which income arises (for example, interest).

Deemed permanent establishment

Performance of services

2.110 Where an enterprise performs services through an individual who is present in a country for a period exceeding 183 days in any 12-month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during this period are derived from those services, it will be deemed to have in that country a permanent establishment through which those activities are performed (unless the activities are of a type described in paragraph 7 of this Article and are of a preparatory or auxiliary nature). This provision will generally apply in the case of self-employed persons or other small business enterprises where the profits of the business are mainly derived from the activities of one person. [Article 5, sub-subparagraph 4a )( i)]

2.111 Services are also deemed to be carried on through a permanent establishment in a country where an enterprise performs services in that country for a period exceeding 183 days in any 12-month period, and those services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that country (unless the activities are of a type described in paragraph 7 of this Article and are of a preparatory or auxiliary nature). [Article 5, sub-subparagraph 4a )( ii)]

2.112 For these purposes, an enterprise performs services mainly through the activities of the entrepreneur or persons who are in a paid employment relationship with the enterprise (personnel). These personnel include employees and other persons receiving instructions from the enterprise (for example, dependent agents).

2.113 Paragraph 5 of the Article provides further rules in respect of services performed for the same project or connected projects (those described in paragraph 2.111). Services performed by an individual on behalf of one enterprise shall not be considered to be performed by another enterprise through that individual unless that other enterprise supervises, directs or controls the manner in which these services are performed by the individual.

Example 2.9

Esky Co, an Australian resident, offers technical support and advice to its clients over the telephone. It has outsourced this function to Chilly Bin Co, a New Zealand resident. Chilly Bin Co operates a call centre which provides similar support for a number of companies as well as Esky Co. For a period of twelve months, the employees of Chilly Bin Co provide technical support to various clients of Esky Co.

Since the employees of Chilly Bin Co are not under the supervision, direction or control of Esky Co, Esky Co is not considered to be performing services in New Zealand through those employees for the purposes of sub-subparagraph a)(ii) of paragraph 4 of Article 5.

2.114 Further, in calculating whether the 183 day period has been exceeded for the purposes of sub-subparagraph a)(ii) of paragraph 4 of Article 5, paragraph 5 excludes services performed through an individual who is present and performing such services in a country for any period not more than five days. However, they will not be so excluded if those services are performed by that individual on a regular or frequent basis.

Example 2.10

Sushi Co, an Australian resident, provides training services to apprentice sushi chefs. Itto, an employee of Sushi Co, travels to New Zealand and remains there training New Zealand apprentices for 180 days. Due to an unexpected number of apprentices signing up for training, Bruce, another employee of Sushi Co, travels to New Zealand and spends four days assisting Itto. This is the only trip to New Zealand that Bruce makes.

As Bruce is present and performing services for less than five days, his four days in New Zealand are disregarded when determining whether Sushi Co has a permanent establishment in New Zealand.

However, if Bruce were to return to New Zealand for such purposes once a month, the days that he is present and performing the services would be counted in determining whether Sushi Co has a permanent establishment in New Zealand, notwithstanding that each visit may be for less than five days.

[Article 5, paragraph 5]

Natural resource activities

2.115 Where an enterprise carries on activities (including the operation of substantial equipment) in the exploration for, or exploitation of, natural resources or standing timber within a country for a period exceeding 90 days in any 12-month period, it will be deemed to have in that country a permanent establishment through which those activities are performed (unless the activities are of a type described in paragraph 7 of this Article and are of a preparatory or auxiliary nature). Any time during which the substantial equipment was used for such purposes in that country is also counted for the purpose of computing the number of days in this paragraph. [Article 5, subparagraph 4b)]

Substantial equipment

2.116 If an enterprise operates substantial equipment in a country for one or more periods which exceed, in the aggregate, 183 days in any 12-month period, the activity will be deemed to be performed through a permanent establishment (unless the activities are of a type described in paragraph 7 of this Article and are of a preparatory or auxiliary nature). Any time during that 12-month period when the substantial equipment is used in the exploitation of or exploration for natural resources or standing timber in that country is also counted for the purpose of computing the number of days in this paragraph. [Article 5, subparagraph 4c)]

2.117 Subparagraphs b) and c) of paragraph 4 together reflect Australia's reservation to the OECD Model concerning the use of substantial equipment. Australia's experience is that the permanent establishment provision in the OECD Model may be inadequate to deal with high value mobile activities involving the use of such equipment.

2.118 The words 'operation' and 'operates' have been included to clarify that only active use of substantial equipment assets will be captured by subparagraphs b) and c) of paragraph 4. This means that an enterprise that merely leases substantial equipment to another person for that other person's own use in a country, would not be deemed to have a permanent establishment in that country under these provisions.

2.119 For example, if a New Zealand enterprise itself operates a mobile crane at an Australian port for more than 183 days in a 12-month period, the New Zealand enterprise would be deemed to have a permanent establishment in Australia under subparagraph c) of paragraph 4. If, however, that New Zealand enterprise merely leases the mobile crane to another person and that other person operates the crane at an Australian port for its own purposes, the New Zealand enterprise would not be deemed to have a permanent establishment in Australia under subparagraph c) of paragraph 4. However, if that other person operates the substantial equipment for or on behalf of the enterprise, the enterprise would be considered to operate the equipment in the country.

2.120 The meaning of the term 'substantial' depends on the relevant facts and circumstances of each individual case. Factors such as the size, quantity or value of the equipment, or the role of the equipment in income producing activities, are relevant in determining whether the equipment is substantial. However, some examples of substantial equipment would include:

•

industrial earthmoving equipment or construction equipment used in road building, dam building or powerhouse construction;

•

manufacturing or processing equipment used in a factory; or

•

oil or drilling rigs, platforms and other structures used in the petroleum, gas or mining industry.

Anti-avoidance provision

2.121 Given that Article 5 of the Convention contains certain timeframes, an anti-avoidance rule is included to ensure that where associated enterprises carry on connected activities, the periods will be aggregated in determining whether an enterprise has a permanent establishment in the country in which the activities are being carried on. Activities will be regarded as connected where, for example, different stages of a single project are carried out by different subsidiaries within a group of companies or where the nature of the work carried on by the associated enterprises in respect of such project is the same.

2.122 This provision is an anti-avoidance measure aimed at counteracting contract splitting for the purposes of avoiding the application of the permanent establishment rules.

2.123 The OECD Model Commentary recognises that time thresholds in Article 5 may give rise to abuses and notes that countries concerned with this issue may adopt solutions in bilateral negotiations to prevent such abuse.

2.124 The Convention provides that an enterprise shall be deemed to be associated with another enterprise if one enterprise participates directly or indirectly in the management, control or capital of the other enterprise or the same persons participate directly or indirectly in the management, control or capital of the enterprises. It also provides that a period of concurrent activities by such associated enterprises is only counted as one period for aggregation purposes. [Article 5, paragraph 5]

Example 2.11

In the above diagram, each of the subsidiaries may conduct similar connected activities, for example, supervisory activities at a single building site. In determining whether the six-month time threshold has been met, the time spent undertaking those activities by each of the enterprises would be aggregated. However, any period during which more than one of the subsidiaries were carrying on activities concurrently would be counted only once. Where the time threshold is met, each of the subsidiaries would be deemed to have a permanent establishment through which its activities with respect to the project are conducted. Only the profits derived by each subsidiary from its own activities would be attributed to each company's permanent establishment.

Preparatory and auxiliary activities

2.125 Certain activities do not generally give rise to a permanent establishment (for example, the use of facilities solely for storage, display or delivery).

2.126 These activities are ordinarily of a preparatory or auxiliary character and are unlikely to give rise to substantial profits. The necessary economic link between the activities of the enterprise and the country in which the activities are carried on does not exist in these circumstances.

2.127 Unlike the OECD Model, which provides that the listed activities are deemed not to constitute a permanent establishment, the Convention provides that the activities will be deemed not to constitute a permanent establishment only if the activities are, in relation to the enterprise, of a preparatory or auxiliary character. This is to prevent the situation where enterprises structure their business so that most of their activities fall within the exceptions with a view to avoiding taxation in that country. It also means that where the listed activities are not preparatory or auxiliary in relation to the enterprise, but instead constitute core business activities of the enterprise, the enterprise will not be excluded from having a permanent establishment if it satisfies the primary meaning in paragraph 1. [Article 5, paragraph 7]

Dependent agents

2.128 An enterprise of one country is deemed to have a permanent establishment in the other country if a person acts on its behalf in that other country where that person has and habitually exercises an authority to conclude contracts on behalf of the enterprise. Such people are referred to as dependent agents.

2.129 However, activities of a dependent agent will not give rise to a permanent establishment where that agent's activities are limited to the preparatory and auxiliary activities mentioned in paragraph 7. Agents of independent status (such as brokers or commission agents) to whom paragraph 9 of Article 5 applies are also excluded. [Article 5, paragraph 8]

Manufacturing or processing on behalf of others

2.130 Consistent with Australia's reservation to the OECD Model, where a person acts on behalf of another in manufacturing or processing the other's goods, this will give rise to a deemed permanent establishment. An example is the situation where a mineral plant refines minerals for a foreign enterprise at cost, so that the plant operations produce no Australian profits. Title to the refined product remains with the mining consortium and profits on sale are realised mainly outside of Australia.

2.131 The refining activities performed for the enterprise through such a plant are deemed to be carried on through a permanent establishment of the enterprise because the manufacturing or processing activity (which gives the processed minerals much of their value) is conducted in Australia on behalf of the enterprise. Accordingly, Australia should have taxing rights over the business profits attributable to the processing activity carried on in Australia. Subparagraph b) of paragraph 8 prevents an enterprise which carries on substantial manufacturing or processing activities in a country through an intermediary from escaping tax in that country.

2.132 The inclusion of this subparagraph is insisted upon by Australia in its tax treaties and is consistent with Australia's policy of retaining taxing rights over profits from manufacturing or processing on behalf of others including, importantly, in the exploitation of Australia's mineral resources. [Article 5, subparagraph 8b)]

Independent agents

2.133 Business carried on through an independent agent will not, of itself, give rise to a permanent establishment, provided that the independent agent is acting in the ordinary course of that agent's business as such an agent. [Article 5, paragraph 9]

Subsidiary companies

2.134 Generally, a subsidiary company will not be a permanent establishment of its parent company. A subsidiary, being a separate legal entity, would not usually be carrying on the business of the parent company but rather its own business activities. However, a subsidiary company gives rise to a permanent establishment if the subsidiary permits the parent company to operate from its premises such that the tests in paragraph 1 of Article 5 are met, or the subsidiary acts as an agent such that a dependent agent permanent establishment is constituted. [Article 5, paragraph 10]

Other Articles

2.135 The principles set out in this Article are also to be applied in determining whether a permanent establishment exists in a third country or whether an enterprise of a third country has a permanent establishment in Australia (or New Zealand) when applying the source rule contained in:

•

paragraph 7 of Article 11 ( Interest ); and

•

paragraph 5 of Article 12 ( Royalties ).

[Article 5, paragraph 11]

Article 6 - Income from Real Property

Where income from real property is taxable

2.136 This Article provides that the income of a resident of one country, from real property situated in the other country, may be taxed by that other country. Thus, income from real property in Australia will be subject to Australian tax laws.

2.137 Generally, Australia's tax treaties exclude profits of an enterprise from agriculture, forestry or fishing from the operation of this Article. Such profits are generally dealt with under Article 7 ( Business Profits ) of Australian treaties. However, under the Convention, the allocation of taxing rights over such profits is determined by Article 6 ( Income from Real Property ). Accordingly, profits from the relevant activities may be taxed in Australia where the real property is situated in Australia, irrespective of whether the enterprise has a permanent establishment in Australia. [Article 6, paragraph 1]

2.138 In the case of agriculture and forestry activities, an enterprise would in any event generally have a permanent establishment in the country in which the property is situated. Inclusion of profits from fishing within the scope of this Article reflects New Zealand's reservation to Article 6 of the OECD Model.

Definition

2.139 Real property is primarily defined as having the meaning which it has under the domestic law of the country where the property is situated and also extends to:

•

any natural resources, property accessory to real property, rights to which the general law respecting real property applies, and rights to standing timber;

•

a lease of land and any other interest in or over land (including exploration and exploitations rights over natural resources); and

•

royalties and other payments relating to the exploration for or exploitation of natural resources.

Ships, boats and aircraft are excluded from the definition of 'real property', therefore this Article does not cover income from their use. [Article 6, paragraph 2]

2.140 The term 'natural resources' used in the definition of 'real property' is defined in paragraph 2 of Article 3 ( General Definitions ). The inclusion of rights to standing timber in the definition reflects New Zealand's strong policy preference. The outcome of including this reference in the definition is broadly consistent with the existing treaty, which deems an enterprise to have a permanent establishment where it performs any operations for the felling, removal or other exploitation of standing timber.

Deemed situs

2.141 Under Australian law the place where an interest in land, natural resources or standing timber, such as a lease, is situated (situs) is not necessarily where the underlying property is situated. Paragraph 3 puts the situation of the interest or right beyond doubt by deeming the situs to be where the underlying real property over which the lease or right is granted, is situated or where any exploration may take place. [Article 6, paragraph 3]

Form of exploitation of real property

2.142 Paragraph 4 makes it clear that the general rule in paragraph 1 applies irrespective of the form of exploitation of the real property. The Article applies to income derived from the direct use, letting or use in any other form of real property. [Article 6, paragraph 4]

Real property of an enterprise

2.143 Paragraphs 1, 3 and 4 of Article 6 are extended to income derived from the use or exploitation of real property of an enterprise.

2.144 Accordingly, this Article provides that the country in which the real property is situated may impose tax on the income derived from that property by an enterprise of the other country, irrespective of whether or not that income is attributable to a permanent establishment of such an enterprise situated in the first-mentioned country.

2.145 However, paragraph 5 of this Article specifically provides that the profits of the enterprise shall be determined in accordance with the rules in paragraphs 2 and 3 of Article 7 ( Business Profits ) and taxed as if they were attributable to a permanent establishment. This clarifies that, notwithstanding that the profits are dealt with under Article 6, and not Article 7 as is usually the case under Australian treaties, such profits will be taxed on a net basis. [Article 6, paragraph 5]

Article 7 - Business Profits

2.146 This Article is concerned with the taxation by one country of business profits derived by an enterprise that is a resident of the other country.

2.147 The taxing of these profits depends on whether they are attributable to the carrying on of a business through a permanent establishment in that country. If a resident of one country carries on business through a permanent establishment (as defined in Article 5 ( Permanent Establishment )) in the other country, the country in which the permanent establishment is situated may tax the profits of the enterprise that are attributable to that permanent establishment. [Article 7, paragraph 1]

2.148 If an enterprise which is a resident of one country derives business profits in the other country that are not attributable to a permanent establishment in that other country, the general principle of this Article is that the enterprise will not be liable to tax in the other country on such profits (except where paragraph 7 of this Article applies - see the explanation in paragraphs 2.156 and 2.157).

Determination of business profits

2.149 Profits of a permanent establishment are to be determined for the purposes of this Article on the basis of arm's length dealings. The provisions in the Convention correspond to international practice and comparable provisions in Australia's other tax treaties. [Article 7, paragraphs 2 and 3]

2.150 No deductions are allowed in respect of expenses which would not be deductible if the permanent establishment were an independent enterprise which incurred the expense. [Article 7, paragraph 3]

Application of domestic law

2.151 The domestic law of the country in which the permanent establishment is situated (for example, Australia's Division 13 of Part III of the ITAA 1936) may be applied to determine the tax liability of a person, consistently with the principles stated in this Article. This is of particular relevance where, due to inadequate information, the correct amount of profits attributable on the arm's length principle basis to a permanent establishment cannot be determined, or can only be ascertained with extreme difficulty. This is especially important where there is no data available or the available data is not of sufficient quality to rely on the traditional transaction methods for the attribution of the arm's length profits.

2.152 Paragraph 4 explicitly recognises the right of each country to apply its domestic law in these circumstances. This is consistent with Australia's reservation to Article 7 ( Business Profits ) of the OECD Model. [Article 7, paragraph 4]

Profits dealt with under other Articles

2.153 Where income or gains are specifically dealt with under other Articles of the Convention, the effect of those particular Articles is not overridden by this Article.

2.154 This provision lays down the general rule of interpretation that categories of income or gains which are the subject of other Articles of the Convention (for example, Article 8 ( Shipping and Air Transport ), Article 10 ( Dividends ), Article 11 ( Interest ), Article 12 ( Royalties ) and Article 13 ( Alienation of Property )) are to be treated in accordance with the terms of those Articles. However, under certain articles, for example paragraph 7 of Article 10 ( Dividends ), where the asset in respect of which the income is paid is effectively connected with a permanent establishment that income will be dealt with under Article 7 ( Business Profits ). [Article 7, paragraph 5]

Insurance with non-residents

2.155 Each country has the right to continue to apply any provisions in its domestic law relating to the taxation of income from insurance with non-resident insurers. An effect of this paragraph is to preserve, in the case of Australia, the application of Division 15 of Part III of the ITAA 1936 ( Insurance with Non-residents ). This is consistent with Australia's reservation to Article 7 ( Business Profits ) of the OECD Model. In the course of negotiations, the two delegations noted:

'With respect to taxation of income from insurance, it is understood that the term 'insurance' includes reinsurance.'

[Article 7, paragraph 6]

Trust beneficiaries

2.156 The principles of this Article will apply to profits which are derived by a resident of one of the countries (directly or through one or more interposed trusts) as a beneficiary of a trust, except where the trust is treated as a company for tax purposes. [Article 7, paragraph 7]

2.157 In accordance with this Article, Australia has the right to tax a share of business profits, originally derived by a trustee of a trust estate (other than a trust that is treated as a company for tax purposes) from the carrying on of a business through a permanent establishment in Australia, to which a resident of New Zealand is beneficially entitled under the trust. Paragraph 7 of this Article ensures that such business profits will be subject to tax in Australia where the trustee of the relevant trust has, or would have if it were a resident of New Zealand, a permanent establishment in Australia in relation to that business. The principles of this paragraph will also apply where relevant to other Articles of the Convention, such as Article 13 ( Alienation of Property ) in its application to income, profits or gains arising from the alienation of the assets of a permanent establishment or the permanent establishment itself.

Time limitation

2.158 The Convention specifies a time limit for the adjustment of profits attributable to a permanent establishment of the enterprise. A country may not make an adjustment to the profits for a year of income where a period of seven years has expired from the date on which the enterprise completed the filing requirements for that year of income in that country. However, the time limit does not apply in the case of fraud, gross negligence, wilful default, or where an audit into the profits of an enterprise was initiated by that country within the seven-year period. [Article 7, paragraph 8]

2.159 The Article does not impose a time limit on conclusion of the audit into the profits of the enterprise.

Article 8 - Shipping and Air Transport

Profits from international traffic

2.160 The main effect of this Article is that the right to tax profits from the operation of ships or aircraft in international traffic, including a share of profits attributable to participation in a pool service or other profit sharing arrangement, is generally reserved to the country in which the operator is a resident for tax purposes. [Article 8, paragraphs 1 and 3]

2.161 The profits covered consist in the first place of the profits directly obtained by the enterprise from the transportation of passengers or cargo by ships or aircraft (whether owned, leased or otherwise at the disposal of the enterprise) that it operates in international traffic. However, as international transport has evolved, shipping and air transport enterprises invariably carry on a large variety of activities to facilitate or support their international operations. Consistent with the OECD Model Commentary on Article 8 ( Shipping, Inland Waterways Transport and Air Transport ), paragraph 1 also covers profits from activities directly connected with such operations as well as profits from activities which are not directly connected with the operation of the enterprise's ships or aircraft in international traffic but which are ancillary to such operation. An example of such ancillary profits would be profits derived by a ship operator in the business of transport who undertakes a one-off bareboat lease of one of their ships.

2.162 Transport activities will also include profits from the use, maintenance and rental of containers (including trailers and related equipment) used in the transport of goods, where directly connected or ancillary to the operation of ships or aircraft in international traffic. [Article 8, paragraph 4]

2.163 The definition of 'international traffic' refers only to transport and accordingly limits the scope of paragraph 1 of Article 8 to transport activities. Profits from the operation of ships or aircraft for non-transport activities are treated under Article 7 ( Business Profits ) of the Convention in the same way as profits derived from the use of other types of substantial equipment, such as mining equipment and trucks. [Article 3, subparagraph 1h)]

Profits from internal traffic

2.164 Under the existing New Zealand Agreement, profits of an enterprise of one country from the operation of ships and aircraft could, to the extent that they related to operations that were confined solely to places in the other country, be taxed in the other country. This included all operations of ships and aircraft, including non-transport activities such as dredging, surveying and crop dusting.

2.165 In contrast, this Article confines the source taxing rights to profits arising from transport activities of ships or aircraft in that country, including where passengers or cargo are transported between places in that country by a ship or aircraft that is engaged in an international voyage or that is leased on a full basis for purposes of providing the domestic transport. In the course of negotiations, the two delegations noted:

'It is understood that the term 'leasing on a full basis' means that the leased ship or aircraft is provided to the lessee on a fully equipped, crewed and supplied basis.'

[Article 8, paragraph 2]

2.166 There is no specified limit on the amount of tax that can be charged on profits from the operation of ships and aircraft in internal traffic. However, for Australian tax purposes, Division 12 of Part III of the ITAA 1936, deems 5 per cent of the amount paid in respect of the transport of passengers, livestock, mail or goods shipped in Australia to be the taxable income of a ship operator who has their principal place of business outside of Australia.

Example 2.12

A ship operated by a New Zealand enterprise, in the course of an international voyage from Wellington to Melbourne, makes a stop in Hobart to pick up cargo. Profits derived from the transport of the goods loaded in Hobart and discharged in Melbourne would be profits from the carriage of goods shipped in and discharged at a place in Australia under paragraph 2 of Article 8. Australia would therefore have the right to tax the profits relating to such transport. Five per cent of the amount paid in respect of the transport of those goods would be deemed to be taxable income of the operator for Australian tax purposes pursuant to Division 12 of Part III of the ITAA 1936.

Example 2.13

A New Zealand enterprise operates sightseeing flights over the Southern Ocean. Passengers board the aircraft in Hobart and disembark at the same airport later on the same day. The profits from the carriage of the passengers shipped in and discharged at a place in Australia would be covered by paragraph 2 of Article 8, notwithstanding that the aircraft passes through international airspace. Australia would therefore have the right to tax the profits relating to the carriage of these passengers.

Article 9 - Associated Enterprises

Reallocation of profits

2.167 This Article deals with associated enterprises (such as parent and subsidiary companies and companies under common control). It authorises the reallocation of profits between related enterprises in Australia and New Zealand on an arm's length basis where the commercial or financial arrangements between the enterprises differ from those that might be expected to operate between unrelated enterprises dealing wholly independently with one another.

2.168 This Article would not generally authorise the rewriting of accounts of associated enterprises where it can be satisfactorily demonstrated that the transactions between such enterprises have taken place on normal, open market commercial terms. The term 'might be expected to operate' in paragraph 1 is included to conform to Australia's treaty practice and allows adjustments where it is not possible to determine the conditions that 'would have been made or occurred' between the associated enterprises.

2.169 The broad scheme of the Australia's domestic law provisions relating to international profit shifting arrangements under which profits are shifted out of Australia, whether by transfer pricing or other means, is to impose arm's length standards in relation to international dealings. Where the Commissioner cannot ascertain the arm's length consideration, it is deemed to be such an amount as the Commissioner determines.

2.170 Each country has the right to apply its domestic law relating to the determination of the tax liability of a person (for example, Australia's Division 13 of Part III of the ITAA 1936) to enterprises, including in cases where the available information is inadequate, provided that such provisions are applied, so far as it is practicable to do so, consistently with the principles of the Article. This is of particular relevance where there is no data available or the available data is not of sufficient quality to rely on the traditional transaction methods for the attribution of arm's length profits. This reflects Australia's reservation to Article 9 ( Associated Enterprises ) of the OECD Model. [Article 9, paragraph 2]

Correlative adjustments

2.171 Where a reallocation of profits is made (either under this Article or, by virtue of paragraph 2, under domestic law) so that the profits of an enterprise of one country are adjusted upwards, economic double taxation (that is, taxation of the same income in the hands of different persons) would arise if the profits so reallocated continued to be subject to tax in the hands of an associated enterprise in the other country. To avoid this result, the other country is required to make an appropriate compensatory adjustment to the amount of tax charged on the profits involved to relieve any such double taxation.

2.172 It would generally be necessary for the affected enterprise to apply to the competent authority of the country not initiating the reallocation of profits for an appropriate compensatory adjustment to reflect the reallocation of profits made by the other treaty partner country. If necessary, the competent authorities of Australia and New Zealand will consult with each other to determine the appropriate adjustment. [Article 9, paragraph 3]

Time limitation

2.173 The treaty specifies a time limit for the adjustment of the profits of the enterprise under paragraph 1 or 2 of this Article. A country may not make an adjustment of the profits for a year of income where a period of seven years has expired from the date on which the enterprise completed the filing requirements for that year of income in that country. However, the time limit does not apply in the case of fraud, gross negligence, wilful default, or where an audit into the profits of an enterprise was initiated by that country within the seven-year period. [Article 9, paragraph 4]

2.174 The Article does not impose a time limit on conclusion of the audit into the profits of the enterprise.

Article 10 - Dividends

2.175 This Article allocates taxing rights in respect of dividends flowing between Australia and New Zealand. The Article provides that:

•

certain cross-border intercorporate dividends will be either exempt from source taxation or subject to a maximum 5 per cent rate of tax in that country;

•

a maximum 15 per cent rate of source country tax may be applied on all other dividends;

•

dividends beneficially owned by a State, or political subdivision or a local authority will be exempt from source taxation where they hold directly no more than 10 per cent of the voting power of the company paying the dividends;

•

dividends paid in respect of a holding which is effectively connected with a permanent establishment are to be dealt with under Article 7 ( Business Profits ); and

•

the extra-territorial application by either country of taxing rights over dividend income is not permitted.

2.176 However, no such relief is available in cases that have been designed with a main purpose of taking advantage of this Article.

Permissible rate of source country taxation

Exemption for certain cross-border intercorporate dividends

2.177 No tax will be payable in the source country on dividends paid to a company that is the beneficial owner of those dividends and is resident in the other country where:

•

the recipient company holds, directly or indirectly, 80 per cent or more of the voting power of the company paying the dividends; and

•

satisfies a 12-month holding requirement at the time of the declaration of the dividend in relation to the shares in respect of which the dividend is payable.

[Article 10, paragraph 3]

2.178 To qualify for the exemption, the company that is the beneficial owner of the dividends must either be:

•

a company that has its principal class of shares;

-

listed on specified Australian or New Zealand stock exchanges; and

-

regularly traded on one or more recognised stock exchanges (as defined under Article 3 ( General Definitions ) of the Convention);

•

a company that is owned either directly or indirectly by one or more such companies;

•

a company that is owned either directly or indirectly by one or more third country resident companies that would be entitled to equivalent benefits; or

•

granted benefits with respect to those dividends by agreement of the competent authorities under subparagraph c) of paragraph 3 of the Article.

[Article 10, paragraph 3]

2.179 For the purposes of the above tests, a recognised stock exchange includes:

•

in Australia's case, the Australian Securities Exchange or any other Australian stock exchange recognised under Australian domestic law; and

•

in New Zealand's case, the securities markets (other than the New Zealand Debt Market) operated by the New Zealand Exchange Limited.

2.180 Provision has been made to allow the competent authorities to reach agreement that other stock exchanges constitute a recognised stock exchange for the purpose of the Convention. [Article 3, sub-subparagraph 1l )( iii)]

Equivalent benefits

2.181 Under subparagraph b) of paragraph 3 of this Article, an exemption applies to dividends:

•

paid by a company in a country (the paying company) to a company in the other country (the receiving company); and

•

where the receiving company is itself wholly-owned by one or more companies (the owning companies) that are either themselves listed on a recognised stock exchange or would be entitled to equivalent benefits under another treaty between country of which the receiving company is a resident and the country of which the paying company is a resident had the owning companies owned the holding in the paying company directly.

2.182 The exemption would apply to dividends paid by an Australian company to a New Zealand company that is itself owned by one or more companies entitled to equivalent benefits under another tax treaty between the country of which that company (or those companies) were a resident and Australia. Similarly, dividends paid by a New Zealand company to an Australian company that is itself owned by one or more companies entitled to equivalent benefits under another tax treaty between the country of which that company (or those companies) were a resident and New Zealand, would also be exempt.

Example 2.14

Milford Co is an unlisted New Zealand company which owns all the shares in Dubbo Co, an Australian company, and has done so for more than 12 months. Assume Milford Co is the beneficial owner of the dividends paid by Dubbo Co.

Kent Co, a company resident in the United Kingdom, is listed on a stock exchange that is a 'recognised stock exchange' within the meaning of Article 3 of the 2003 Australia-United Kingdom Convention, and wholly owns Milford Co.

If Kent Co had owned the shares held by Milford in Dubbo Co directly, then an exemption would apply to the dividends paid on those shares under subparagraph a) of paragraph 3 of Article 10 of the 2003 Australia-United Kingdom Convention. In such case Kent Co is considered to be entitled to equivalent benefits to those provided under paragraph 3. Accordingly, the Australian dividend paid to Milford Co will be exempt under sub-subparagraph b)(ii) of paragraph 3.

Example 2.15

Assume Milford Co is now owned by a second New Zealand resident company, Winton Co, and a Japan resident company, Osaka Co. Winton Co is listed on a stock exchange that is a 'recognised stock exchange' within the meaning of Article 3 of the Convention. Osaka Co is listed on a stock exchange that is a 'recognised stock exchange' within the meaning of Article 23 of the 2008 Australia-Japan Convention. Each company owns 50 per cent of the shares in Milford Co.

Milford Co owns all the shares in Dubbo Co, an Australian company, and has done so for more than 12 months. Assume Milford Co is the beneficial owner of the dividends paid by Dubbo Co.

If Winton Co had owned the shares held by Milford Co directly, then an exemption would apply to the dividends paid on those shares under subparagraph a) of paragraph 3 of Article 10 of the Convention. If Osaka Co had owned the shares held by Milford Co directly, then an exemption would apply to the dividends paid on those shares under subparagraph a) of paragraph 3 of Article 10 of the 2008 Australia-Japan Convention.

In both cases, Winton Co and Osaka Co are considered to be entitled to equivalent benefits to those provided under paragraph 3. Accordingly, the Australian dividend paid to Milford Co will be exempt under sub-subparagraph b)(ii) of paragraph 3.

Example 2.16

Rotorua Co is an unlisted New Zealand company which owns all the shares in Broome Co, an Australian company, and has done so for more than 12 months. Assume Rotorua Co is the beneficial owner of dividends paid by Broome Co.

Rotorua Co is owned by a second New Zealand resident company, Taupo Co, and Oculum Co, a company that is a resident of a treaty partner country. Taupo Co and Oculum Co each own 50 per cent of the shares in Rotorua Co.

Taupo Co is listed on a stock exchange that is a 'recognised stock exchange' within the meaning of Article 3 of the Convention. If Taupo Co had owned the shares held by Rotorua Co directly, then an exemption would apply to the dividends paid on those shares under subparagraph a) of paragraph 3 of Article 10 of the Convention.

Under the tax treaty between Australia and Oculum Co's country of residence, a withholding tax rate of 15 per cent applies for all dividends. If Oculum Co had owned the shares held by Rotorua Co directly, the dividends would have been subject to dividend withholding tax of 15 per cent.

The requirements of sub-subparagraph b)(ii) of paragraph 3 are not met because one of the companies owning Rotorua Co (that is, Oculum Co) is not entitled to equivalent benefits. Accordingly, that provision will not apply to exempt the Australian dividends paid to Rotorua Co from dividend withholding tax.

Competent authority determination

2.183 Dividends which are beneficially owned by a company that does not meet the conditions in subparagraph a) or b) of paragraph 3 of the Article will also be exempt from tax in the source country if the competent authority determines that the receiving company was established, acquired or maintained for reasons other than obtaining benefits under the Convention. Before concluding that the company is not entitled to benefits under this subparagraph (for example, because the arrangements had a principal purpose of obtaining such benefits), the competent authority is required to consult with the competent authority of that company's country of residence. [Article 10, subparagraph 3c)]

Exemption for dividends derived by Governments

2.184 Dividends which are beneficially owned by a State, or political subdivision or a local authority (including a government investment fund) will be exempt from tax in the source country if they hold no more than 10 per cent of the voting power in the company paying the dividends. This exemption complements that provided in respect of interest derived by States, their political subdivisions and local authorities (including government investment funds) under Article 11 ( Interest ). In the course of negotiations, the two delegations agreed:

'...that dividends and interest will be regarded as being derived by a Contracting State, political subdivision, local authority or government investment fund where the investment is made by the Government and the funds are and remain government monies.

The delegations also agreed that this would include dividends and interest paid to, in the case of New Zealand, the New Zealand Superannuation Fund, the Government Superannuation Fund, and in the case of Australia, the Future Fund, the Building Australia Fund, the Education Fund and the Health and Hospital Fund, as well as any similar fund the purpose of which is to pre-fund future government liabilities.'

[Article 10, paragraph 4]

Five per cent rate limit on source country tax of certain cross-border intercorporate dividends

2.185 This Article allows both Australia and New Zealand to tax other dividends flowing between them but limits the rate of tax that the country of source may impose on dividends paid by companies that are resident of that country under its domestic law to companies resident in the other country who are the beneficial owners of the dividends. [Article 10, paragraphs 1 and 2]

2.186 A rate limit of 5 per cent will apply for dividends paid in respect of company shareholdings that do not qualify for the intercorporate dividend exemption under paragraph 3 of this Article, but constitute a direct voting interest of at least 10 per cent. [Article 10, subparagraph 2a)]

Fifteen per cent rate limit for all other dividends

2.187 All other cases, the Convention provides that the source country may tax dividends that are beneficially owned by residents of the other country, but will limit its tax to 15 per cent of the gross amount of the dividend. In the case of Australia, this will mean that the rate of withholding tax imposed on unfranked dividends will be retained at the level of the existing New Zealand Agreement; that is, 15 per cent. [Article 10, subparagraph 2b)]

2.188 Although the provisions in Article 10 would allow Australia to impose withholding tax on both franked and unfranked dividends in the specified circumstances, the dividend withholding tax exemption provided by Australia under its domestic law for franked dividends paid to non-residents will continue to apply.

Dividends effectively treated as business profits

2.189 Limitations on the tax of the country in which the dividend is sourced do not apply to dividends derived by a resident of the other country who has a permanent establishment in the source country from which the dividends are derived, if the holding giving rise to the dividends is effectively connected with that permanent establishment.

2.190 Where the holding is so effectively connected, the dividends are to be treated as business profits and therefore subject to the full rate of tax applicable in the country in which the dividend is sourced in accordance with the provisions of Article 7 ( Business Profits ).

2.191 Franked and unfranked dividends paid by an Australian company will be included in the assessable income of a non-resident company or individual where the dividends are attributable to a permanent establishment of that non-resident situated in Australia. Expenses incurred in deriving the dividend income are allowable as a deduction from that income when calculating the taxable income of the non-resident. Further, a non-resident company or individual may be entitled to tax offsets in respect of any franked dividends under Australia's domestic law. [Article 10, paragraph 6]

Extra-territorial application precluded

2.192 The extra-territorial application by either country of taxing rights over dividend income is precluded. Broadly, one country (the first country) will not tax dividends paid by a company resident solely in the other country, unless:

•

the person deriving the dividends is a resident of the first country; or

•

the shareholding giving rise to the dividends is effectively connected with a permanent establishment in the first country.

Example 2.17

In the diagram above, paragraph 7 would, but for the exception, preclude New Zealand from taxing the dividend paid by Australian resident company 2 to Australian resident company 1 out of profits derived from New Zealand sources. However, as the dividends relate to the Australian shareholder's permanent establishment in New Zealand with which the holding is effectively connected, New Zealand may tax the dividends.

Dividends paid by dual resident companies

2.193 The restrictions of paragraph 7 do not apply when the company is, for tax purposes, a resident of both Australia and New Zealand under the respective laws of the two countries. In such cases the dividends paid by the dual resident company out of profits arising in one of the countries may be taxed in the country in which those profits arise in accordance with domestic law of that country. However, where the dividends are beneficially owned by a resident of the other country, the limits provided for in paragraphs 2 and 3 apply as if the company were a resident solely of the country in which the profits out of which the dividends are paid arise. [Article 10, paragraph 8]

2.194 This provision does not limit taxation in the country of which the dual resident company is deemed to be a resident for treaty purposes in accordance with paragraph 4 of Article 4 ( Resident ) in the case of dividends paid by the company out of profits from sources outside that country. Paragraphs 2 and 3 will apply where those dividends are beneficially owned by a resident of the other country.

Definition of dividends

2.195 The term dividends in this Article means income from:

•

shares or other rights which participate in profits and are not debt-claims; and

•

income or other distributions which are subject to the same taxation treatment as income from shares in the country of which the distributing company is resident for the purposes of its tax.

2.196 The phrase 'for the purposes of its tax', which appears in paragraph 5 of Article 10, refers to the case where a person is a resident of a country under its domestic tax law, even if the person is deemed to be a resident only of the other country for the purposes of the Convention by virtue of paragraph 2, 3 or 5 of Article 4 ( Resident ). [Article 10, paragraph 5]

2.197 In the case of Australia, the definition is consistent with subsection 3(2A) of the Agreements Act 1953 which clarifies that a reference to income from shares, or to income from other rights participating in profits, does not include a reference to a return on a debt interest as defined in Subdivision 974-B of the ITAA 1997. In the course of negotiations, the two delegations noted:

'It was also agreed that the treaty definition of dividends would not limit Australia's ability to apply subsection 3(2A) of the International Tax Agreements Act 1953 , thus ensuring Australia's debt/equity rules continue to apply as intended.'

Limitation of benefits

2.198 The source country rate limits and exemptions available under this Article will not apply where an assignment of dividends, or a creation or assignment of shares or other rights in respect of which dividends are paid, has been made with the main objective, or one of the main objectives, of accessing the relief otherwise available under this Article. [Article 10, paragraph 9]

Article 11 - Interest

2.199 This Article allocates taxing rights in respect of interest flows between Australia and New Zealand. Article 11 provides that:

•

an exemption from source country tax applies to certain cross-border interest flows to:

-

government bodies or central banks; and

-

financial institutions in certain circumstances;

•

a maximum 10 per cent rate of source country tax may be applied on all other interest income;

•

interest paid on a debt-claim which is effectively connected with a permanent establishment shall be subject to Article 7 ( Business Profits );

•

interest payments are deemed to have an Australian source (and may therefore be taxed in Australia) where:

-

the interest is paid by an Australian resident to a New Zealand resident; or

-

the interest is paid by a non-resident to a New Zealand resident and it is an expense of the payer in carrying on business in Australia through a permanent establishment; and

•

relief will be restricted to the gross amount of interest which would be expected to be paid on an arm's length dealing between independent parties.

2.200 However, no such relief is available in cases that have been designed with the main purpose of taking advantage of this Article.

2.201 The phrase 'for the purposes of its tax', which appears in paragraph 7 of Article 11, refers to the case where a person is a resident of a country under its domestic tax law, even if the person is deemed to be a resident only of the other country for purposes of the Convention by virtue of paragraph 2, 3 or 4 of Article 4 ( Resident ).

Permissible rate of source country taxation

Ten per cent rate limit

2.202 This Article provides for interest income to be taxed by both countries but requires the country in which the interest arises to generally limit its tax to 10 per cent of the gross amount of the interest where a resident of the other country is the beneficial owner of the interest. [Article 11, paragraphs 1 and 2]

Exemptions for interest paid to government bodies and central banks

2.203 The exemption for interest paid to the government of a country will apply to interest derived by the Australian or New Zealand governments, or the government of any political subdivision or local authority (including government investment funds) in either Australia or New Zealand. As discussed in relation to dividends in paragraph 2.184, this ensures that interest derived by Australia's Future Fund (and other Funds) from sources in New Zealand is exempt from New Zealand tax.

2.204 The exemption also applies to banks performing central banking functions in Australia and New Zealand. [Article 11, subparagraph 3a)]

Exemptions for interest paid to financial institutions

2.205 The exemption for interest paid to financial institutions recognises that the agreed 10 per cent rate on gross interest can be excessive given their cost of funds. The exemption will also broadly align the treatment of interest paid to New Zealand financial institutions with the Australian domestic law exemption for interest paid on widely distributed arm's length corporate debenture issues (section 128F of the ITAA 1936). [Article 11, subparagraph 3b)]

2.206 The term financial institution means a bank or other enterprise substantially deriving its profits by raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on the business of providing finance. This does not include a corporate treasury or a member of a group that performs the financing services of the group. [Article 11, subparagraph 3b)]

2.207 In the case of interest arising in New Zealand, the exemption for interest paid to financial institutions will not apply if it is paid to a person who has not paid New Zealand's AIL in respect of the interest. In such cases, the 10 per cent rate limit will apply. [Article 11, subparagraph 4a)]

2.208 Under New Zealand's AIL scheme, eligible borrowers who pay interest to non-resident lenders may elect to pay the AIL instead of having to deduct non-resident withholding tax. The AIL is payable at the rate of 2 per cent of the gross interest. For the purposes of this Article, the term approved issuer levy includes any identical or substantially similar charge payable by the payer of the interest arising in New Zealand enacted after the date of the Convention in place of the AIL. However, the exemption will apply if:

•

New Zealand no longer has an AIL;

•

if the payer of the interest is not eligible to elect to pay the AIL; or

•

if the rate of the AIL exceeds 2 per cent of the gross amount of the interest.

2.209 This will ensure that Australian financial institutions will be able to benefit from the exemption in cases where the AIL does not apply to the interest, or where changes are made to remove the AIL scheme or increase its rate. [Article 11, subparagraph 4a)]

2.210 Further, the Convention contains a 'most favoured nation' clause in respect of interest derived by financial institutions. In the event New Zealand agrees under a future tax treaty with any other country to provide more favourable treatment of such interest, New Zealand is required to inform Australia and enter into negotiations with a view to providing the same treatment.

2.211 This 'most favoured nation' clause will ensure that Australian financial institutions deriving interest income in New Zealand receive no less favourable treatment than financial institutions benefiting from lower rates of withholding for interest under one of New Zealand's other tax treaties. Thus for example, if New Zealand agreed in a future treaty with another country to grant an interest withholding tax exemption for financial institutions, without a requirement that AIL be paid, or agreed to a withholding tax rate lower than 10 per cent in the event AIL was not paid, New Zealand would be obliged to negotiate with Australia to provide similar outcomes for Australian financial institutions. [Article 29, paragraph 2]

2.212 The exemption is not available for interest paid as part of an arrangement involving back-to-back loans or other arrangement that is economically equivalent and structured to have a similar effect. The denial of the exemption for these back-to-back loan type arrangements is directed at preventing related party and other debt from being structured through financial institutions to gain access to a withholding tax exemption. The exemption will only be denied for interest paid on the component of a loan that is considered to be back-to-back. In such cases, the 10 per cent rate limit will apply. [Article 11, subparagraph 4b)]

2.213 An example of a back-to-back arrangement would include, for instance, a transaction or series of transactions structured in such a way that:

•

a New Zealand financial institution receives or is credited with an item of interest arising in Australia; and

•

the financial institution pays or credits, directly or indirectly, all or substantially all of that interest (at any time or in any form, including commensurate benefits) to another person who, if it received the interest directly from Australia, would not be entitled to similar benefits with respect to that interest.

2.214 However, a back-to-back arrangement would generally not include a loan guarantee provided by a related party to a New Zealand financial institution.

Definition of interest

2.215 The term interest is defined for the purposes of this Article to include:

•

income from debt-claims of every kind;

•

interest from government securities;

•

interest from bonds and debentures;

•

premiums and prizes attaching to such securities, bonds or debentures; and

•

income which is subjected to the same taxation treatment as income from money lent by the law of the country in which the income arises.

However, it does not include any income which is treated as a dividend under Article 10 ( Dividends ). [Article 11, paragraph 5]

Interest effectively treated as business profits

2.216 Interest derived by a resident of one country which is paid in respect of a debt-claim which is effectively connected with a permanent establishment of that person in the other country, will form part of the business profits of that permanent establishment and be subject to the provisions of Article 7 ( Business Profits ). Accordingly, the rate limitation of 10 per cent and the exemption for financial institutions (subparagraph b) of paragraph 3 of this Article) do not apply to such interest in the country in which the interest is sourced. [Article 11, paragraph 6]

Deemed source rules

2.217 The source rules which determine where interest arises for the purposes of this Article are set out in paragraph 7. They operate to allow Australia to tax interest paid by a resident of Australia to a resident of New Zealand who is the beneficial owner of that interest. Australia may also tax interest paid by a non-resident, being interest which is beneficially owned by a New Zealand resident, if it is an expense incurred by the payer of the interest in carrying on a business in Australia through a permanent establishment.

2.218 However, consistent with Australia's interest withholding tax provisions, an Australian source is not deemed in respect of interest that is an expense incurred by an Australian resident in carrying on a business through a permanent establishment outside both Australia and New Zealand (that is, the permanent establishment is in a third country). In that case, the interest is deemed to arise in the country in which the permanent establishment is situated. [Article 11, paragraph 7]

2.219 In determining whether a permanent establishment exists in a third country, the principles set out in Article 5 ( Permanent Establishment ) apply. [Article 5, paragraph 11]

Related persons

2.220 This Article includes a general safeguard against payments of excessive interest where a special relationship exists between the persons associated with a loan transaction - by restricting the amount on which the 10 per cent source country tax rate limitation applies to an amount of interest which might have been expected to have been agreed upon if the parties to the loan agreement were dealing with one another at arm's length. Any excess part of the interest remains taxable according to the domestic law of each country but subject to the other Articles of the Convention. [Article 11, paragraph 8]

2.221 Examples of cases where a special relationship might exist include payments to a person (either individual or legal):

•

who controls the payer (whether directly or indirectly);

•

who is controlled by the payer; or

•

who is subordinate to a group having common interests with the payer.

A special relationship also covers relationships of blood or marriage and, in general, any community of interests.

Limitation of benefits

2.222 The source country rate limits and exemptions available under this Article will not apply where an assignment of the interest, or a creation or assignment of the debt-claim or other rights in respect of which the interest is paid, has been made with the main objective, or one of the main objectives, of accessing the relief otherwise available under this Article. [Article 11, paragraph 9]

Article 12 - Royalties

2.223 This Article allocates taxing rights in respect of royalties paid or credited between Australia and New Zealand. The Article provides that:

•

a maximum 5 per cent rate of source country tax may be levied on the gross amount of the royalties;

•

royalties paid in respect of a right or property which is effectively connected with a permanent establishment are subject to Article 7 ( Business Profits );

•

equipment royalties are not included within the definition of 'royalties' and are subject to either Article 7 ( Business Profits ) or Article 8 ( Shipping and Air Transport );

•

royalties include payments for spectrum licences;

•

royalties are deemed to have an Australian source (and may therefore be taxed in Australia) where:

-

the royalties are paid to a New Zealand resident by a person who is a resident of Australia for purposes of Australian tax; or

-

the royalties are paid by a non-resident to a New Zealand resident and are an expense of the payer in carrying on business through a permanent establishment in Australia; and

•

relief will be restricted to the gross amount of royalties which would be expected to be paid on an arm's length dealing between independent parties.

2.224 However, no such relief is available in cases that have been designed with a main purpose of taking advantage of this Article.

2.225 The phrase 'for the purposes of its tax', which appears in paragraph 7 of Article 12, refers to the case where a person is a resident of a country under its domestic tax law, even if the person is deemed to be a resident only of the other country for the purposes of the Convention by virtue of paragraph 2, 3 or 5 of Article 4 ( Resident ).

Permissible rate of source country taxation

2.226 This Article in general allows both countries to tax royalty flows but limits the tax of the country of source to 5 per cent of the gross amount of royalties beneficially owned by residents of the other country. [Article 12, paragraphs 1 and 2]

2.227 In the absence of a tax treaty, Australia taxes royalties paid to non-residents at 30 per cent of the gross royalty.

2.228 The 5 per cent rate limitation does not apply to natural resource royalties, which, in accordance with Article 6 ( Income from Real Property ), remain taxable in the country of source without limitation of the tax that may be imposed.

Definition of royalties

2.229 The definition of royalties in this Article reflects most elements of the definition in Australia's domestic income tax law. Royalties include payments for the supply of information concerning technical, industrial, commercial or scientific experience but not payments for services rendered, except as provided for in subparagraph c) of paragraph 3. In the Convention, the definition adopts the OECD Model approach in referring to 'information concerning technical, industrial, commercial or scientific experience', rather than the more usual reference in Australian treaties to 'knowledge or experience'. However, both expressions refer to what is commonly known as 'know-how', and no difference in meaning is intended. In the course of negotiations, the two delegations noted:

'It is understood that the term 'technical, industrial, commercial or scientific experience' includes knowledge or information of such kind.'

[Article 12, paragraph 3]

2.230 The definition also includes payments for the use of intellectual property stored on various media and used in connection with television, radio or other broadcasting (for example, satellite, cable and Internet broadcasting). [Article 12, paragraph 3]

2.231 Payments for the use of, or the right to use industrial, commercial or scientific equipment, do not appear in the definition under the Convention. Such amounts will either be treated as business profits under Article 7 ( Business Profits ) or as profits from transport operations (for certain leases of ships, aircraft and containers) under Article 8 ( Shipping and Air Transport ). The exclusion of payments for the use of equipment from the Royalties Article reflects common international tax treaty practice and recognises that source country taxation on a gross basis may be excessive given low profit margins.

Payments for the supply of know-how versus payments for services rendered

2.232 The OECD Model Commentary deals with the need to distinguish these two types of payments in paragraph 11.3 of the Commentary on Article 12 ( Royalties ). The Commentary cites the following criteria as relevant for the purpose of making the distinction:

•

Contracts for the supply of know-how concern information of the kind described in paragraph 11 of the Commentary that already exists, or concern the supply of that type of information after its development or creation and include specific provisions concerning the confidentiality of that information.

•

In the case of contracts for the provision of services, the supplier undertakes to perform services which may require the use, by that supplier, of special knowledge, skill and expertise but not the transfer of such special knowledge, skill or expertise to the other party.

•

In most cases involving the supply of know-how, there would generally be very little more which needs to be done by the supplier under the contract other than to supply existing information or reproduce existing material. On the other hand, a contract for the performance of services would, in the majority of cases, involve a much greater level of expenditure by the supplier in order to perform their contractual obligations. For instance, the supplier, depending on the nature of the services to be rendered, may have to incur salaries and wages for employees engaged in researching, designing, testing, drawing and other associated activities or payments to sub-contractors for the performance of similar services.

2.233 Payments for design, engineering or construction of plant or building, feasibility studies, component design and engineering services may generally be regarded as being in respect of a contract for services, unless there is some provision in the contract for imparting techniques and skills to the buyer.

2.234 In cases where both know-how and services are supplied under the same contract, if the contract does not separately provide for payments in respect of know-how and services, an apportionment of the two elements of the contract may be appropriate.

2.235 Payments for services rendered are to be treated under Article 7 ( Business Profits ).

Image or sound reproduction or transmission

2.236 The 'royalties' definition includes payments made for the use of, or the right to use, motion picture films. It also covers payments for the use of, or the right to use, images or sounds, however reproduced or transmitted, for use in connection with broadcasting. Such images or sounds may be reproduced on any form of media, such as film, tape, CD or DVD, or transmitted electronically, such as by satellite, cable or Internet. Where the images or sounds are for use in connection with any form of broadcasting, such as television, radio or web-casting, the payments will constitute a royalty. [Article 12, subparagraph 3d)]

Spectrum licences

2.237 Under the Convention, payments made for the use of, or right to use, the radiofrequency spectrum specified in a spectrum licence are treated as royalties. This provision preserves Australia's ability to tax payments that arise in Australia for the use in Australia of any part of the radiofrequency spectrum specified in an Australian spectrum licence. In the course of negotiations, the two delegations noted:

'It is understood that 'spectrum licence of a Contracting State' in subparagraph e) of paragraph 3 refers to any licence in respect of the radiofrequency spectrum of that State and is not limited to spectrum licences that are issued by the Government of a Contracting State.'

[Article 12, subparagraph 3e)]

Forbearance

2.238 Consistent with Australian tax treaty practice and international standards (see paragraph 8.5 of the OECD Model Commentary on Article 12), subparagraph f) of paragraph 3 expressly treats as a royalty, amounts paid or credited in respect of forbearance to grant to third persons, rights to use property covered by this Article. This is designed to address arrangements along the lines of those contained in Aktiebolaget Volvo v Federal Commissioner of Taxation (1978) 8 ATR 747; 78 ATC 4316, where instead of amounts being payable for the exclusive right to use the property they were made for the undertaking that the right to use the property will not be granted to anyone else. This provision ensures that such payments are subject to tax as a royalty payment under the terms of the Royalties Article. [Article 12, subparagraph 3f)]

Other royalties effectively treated as business profits

2.239 As in the case of dividend or interest income, it is specified that the withholding tax rate limitation does not apply to royalties paid in respect of property or rights which are effectively connected with a permanent establishment in the country in which the income is sourced. Such income is subject to the full rate of tax applicable in the country in which the royalty is sourced in accordance with the provisions of Article 7 ( Business Profits ). [Article 12, paragraph 4]

Deemed source rules

2.240 The source rules which determine where royalties arise for the purposes of this Article effectively correspond, in the case of Australia, with the deemed source rule contained in section 6C (source of royalty income derived by a non-resident) of the ITAA 1936 for royalties paid to non-residents of Australia. They broadly mirror the source rule for interest income contained in paragraph 7 of Article 11 ( Interest ) and operate to allow Australia to tax royalties paid by a resident of Australia to a resident of New Zealand who is the beneficial owner of those royalties. Australia may also tax royalties paid by a non-resident, being royalties which are beneficially owned by a New Zealand resident, if the royalties are an expense incurred by the payer in carrying on a business in Australia through a permanent establishment.

2.241 Consistent with Australia's royalty withholding tax provisions, royalty payments that are an expense incurred by an Australian resident in carrying on a business through a permanent establishment outside both Australia and New Zealand (that is, the permanent establishment is in a third State) will not be subject to tax in Australia. Those royalties are deemed to be sourced in the country in which the permanent establishment is situated. [Article 12, paragraph 5]

2.242 In determining whether a permanent establishment exists in a third country, the principles set out in Article 5 ( Permanent Establishment ) apply. [Article 5, paragraph 11]

Related persons

2.243 Where a special relationship exists between the payer and the beneficial owner of the royalties, the 5 per cent source country tax rate limitation will apply only to the extent that the royalties are not excessive. Any excess part of the royalty remains taxable according to the domestic law of each country but subject to the other Articles of the Convention.

2.244 Examples of special relationships have been provided in respect of the corresponding paragraph in Article 11. [Article 12, paragraph 6]

Limitation of benefits

2.245 The source country rate limit available under this Article will not apply where the assignment of the royalties, or the creation or assignment of the property or right in respect of which the royalty is paid, has been made or performed with the main objective, or one of the main objectives, of accessing the relief otherwise available under this Article. The competent authority of the source country is required to consult with the other country's competent authority if it intends to deny the benefits of this Article under paragraph 7. [Article 12, paragraph 7]

Article 13 - Alienation of Property

Taxing rights

2.246 This Article allocates between the respective countries taxing rights in relation to income, profits or gains arising from the alienation of real property and other items of property.

2.247 The reference to 'income, profits or gains' in this Article is designed to put beyond doubt that a gain from the alienation of property, which in Australia may be income or a profit under ordinary concepts, will be taxed in accordance with this Article, rather than Article 7 ( Business Profits ), together with relevant capital gains.

Real property

2.248 Income, profits or gains from the alienation of real property may be taxed by the country in which the property is situated. [Article 13, paragraph 1]

2.249 For the purpose of this Article, the term 'real property' has the same meaning as it has under paragraph 2 of Article 6. Where the property is situated is clarified under paragraph 3 of Article 6 ( Income from Real Property ).

Permanent establishment

2.250 Paragraph 2 deals with income, profits or gains arising from the alienation of property (other than real property covered by paragraph 1) forming part of the business assets of a permanent establishment of an enterprise. It also applies where the permanent establishment itself (alone or with the whole enterprise) is alienated. Such income, profits or gains may be taxed in the country in which the permanent establishment is situated. This corresponds to the rules for taxation of business profits contained in Article 7 ( Business Profits ). [Article 13, paragraph 2]

Disposal of ships or aircraft

2.251 Income, profits or gains derived by a resident of a country from the disposal of ships or aircraft operated by that resident in international traffic, or of associated property (other than real property covered by paragraph 1), are taxable only in that country. This rule corresponds to the operation of Article 8 ( Shipping and Air Transport ) in relation to profits from the international operation of ships or aircraft. [Article 13, paragraph 3]

2.252 For the purposes of this Article, the term 'international traffic' does not include any transportation which commences at a place in a country and returns to another place in that country, after travelling through international airspace or waters (for example, so-called 'voyages to nowhere' by cruise ships). [Article 3, subparagraph 1h)]

Shares and other interests in land-rich entities

2.253 Paragraph 4 applies to situations involving the alienation of shares or other comparable interests that derive more than 50 per cent of their value directly or indirectly from real property situated in the other country. Income, profits or gains from the alienation of such shares or comparable interests may be taxed in the country in which the real property is situated. Paragraph 4 complements paragraph 1 of this Article and is designed to cover arrangements involving the effective alienation of incorporated real property, or like arrangements.

2.254 This provision ensures that capital gains on a foreign resident's indirect, as well as direct, interests in certain targeted assets are taxable by Australia. Such treatment applies whether the real property is held directly or indirectly through a chain of interposed entities. [Article 13, paragraph 4]

Capital gains

2.255 This Article contains a sweep-up provision which reserves the right to tax any capital gains from the alienation of other types of property to the country of which the person deriving the gains is a resident. These would include, for example, capital gains from the disposal of shares or other interests in an entity (other than a land-rich entity or a company to which paragraph 4 applies). Such gains derived by Australian residents will be taxable only in Australia, regardless of where the property is situated, and will not be taxed in New Zealand. The liability of the Australian resident to taxation on such capital gains will be determined in accordance with Australia's domestic law. [Article 13, paragraph 5]

Departing residents

2.256 The purpose of paragraph 6 is to prevent double taxation of capital gains of departing residents. Under section 104-160 of the ITAA 1997, a person who ceases to be a resident of Australia will generally trigger a tax liability on unrealised gains from assets held, other than taxable Australian property (as defined in section 855-15 of the ITAA 1997). Under subsections 104-165(2) and (3) of the ITAA 1997, the departing Australian resident may elect to either pay the Australian tax at the time of departure or to defer tax on the unrealised gain until the actual disposal of the asset. A former Australian resident who has been taxed on the unrealised gains upon departure from Australia, and who becomes a New Zealand resident, may elect to be treated for New Zealand taxation purposes as having, immediately before ceasing to be a resident of Australia, alienated and reacquired the property for an amount equal to its fair market value at that time. [Article 13, paragraph 6]

Example 2.18

An Australian resident, Kylie, owns a house in Bali which was purchased in the year 2002 for $200,000 (this is the cost base of the asset as Kylie has not incurred any further expenditure which should be taken into account in determining the cost base of the asset). At the time Kylie ceases to be an Australian resident, the market value of the house is $300,000. Kylie will therefore have an Australian capital gain of $100,000. Kylie pays the tax on this unrealised gain rather than electing to defer payment of the tax.

Kylie later sells the house for $400,000 while a resident of New Zealand. Paragraph 5 will allow Kylie to elect to be treated for New Zealand tax purposes as if she had acquired the property for $300,000 at the time that she ceased to be an Australian resident. This will mean that New Zealand is precluded from taxing Kylie on the gain that accrued on the house during the period of Kylie's residence in Australia.

[Article 13, paragraph 6]

Australian residents - residence during a six year period prior to alienation of property

2.257 Under Australia's CGT regime, ceasing to be an Australian resident can trigger a CGT event (CGT Event I1). However, an individual can elect to disregard any capital gain or capital loss from CGT assets covered by this event. Where this election is made the relevant assets of the individual are deemed to be taxable Australian property and accordingly are subject to tax in Australia when the individual disposes of the asset or again becomes an Australian resident.

2.258 In the absence of paragraph 7, the Article would not allow Australia to tax the gain that arises from the subsequent disposal of the asset, as the person would no longer be an Australian resident. As New Zealand does not have a comprehensive CGT regime, there may be cases where ceasing to be an Australian resident will result in no tax being payable on gains from CGT Events arising from the disposal of taxable Australian property in either Australia or New Zealand.

2.259 Paragraph 7 protects Australia's taxing rights in respect of income, profits or gains from the alienation of any property of a person who is, or has been, a resident of Australia during the year in which the property is alienated or during the six years immediately preceding that year. [Article 13, paragraph 7]

Double tax relief

2.260 In the event that the operation of this Article should result in an item of income or gain being subjected to tax in both States, the country of which the person deriving the income or gain is a resident (as determined in accordance with Article 4 ( Resident )) would be obliged by Article 23 ( Elimination of Double Taxation ) to provide double tax relief for the tax imposed by the other country.

Article 14 - Income from Employment

Basis of taxation

2.261 This Article generally provides the basis upon which the remuneration of visiting employees is to be taxed. However, this Article does not apply in respect of income dealt with separately in:

•

Article 15 ( Fringe Benefits );

•

Article 16 ( Directors' Fees );

•

Article 17 ( Entertainers and Sportspersons );

•

Article 18 ( Pensions ); and

•

Article 19 ( Government Service ).

2.262 Generally, salaries, wages and similar remuneration derived by a resident of one country from an employment exercised in the other country may be taxed in that other country. However, subject to specified conditions, there is a conventional provision for exemption from tax in the country being visited where visits of only a short-term nature are involved. [Article 14, paragraphs 1 and 2]

Short-term visit exemption

2.263 The conditions for this exemption are that:

•

the period of the visit or visits does not exceed, in the aggregate, 183 days in any 12-month period commencing or ending in the year of income of the visited country;

•

the remuneration is paid by, or on behalf of, an employer who is not a resident of the visited country, or is borne by or deductible in determining the profits attributable to a permanent establishment which the employer has in the 'home' country; and

•

the remuneration is not borne by a permanent establishment which the employer has in the country being visited.

2.264 Where all of these conditions are met, the remuneration so derived will be liable to tax only in the country of residence of the recipient. [Article 14, paragraph 2]

2.265 This Article differs from those in Australia's recent treaties by extending the short-term visit exemption to cases where the remuneration is borne or deductible in determining the profits attributable to a permanent establishment which the employer has in that country. This will reduce compliance costs for residents of one country who are employed by a local branch of an enterprise of the other country by ensuring that their remuneration derived during short visits to that other country is not taxed in that other country. [Article 14, subparagraph 2b)]

Example 2.19

Tasman Bank is an Australian resident company with a branch in Wellington. Jason, a New Zealand resident, is an employee of Tasman Bank who works in the Wellington branch. The branch constitutes a permanent establishment of Tasman Bank situated in New Zealand. Jason's salary is deductible in determining the profits to be attributable to that permanent establishment.

During the year of income, Jason travels to Australia to participate in a two-week training course being held in Tasman Bank's head office and to attend a one-week banking conference in Melbourne. As Jason's salary is borne by Tasman Bank's permanent establishment in Wellington, and the other conditions of paragraph 2 are met, the income will be taxed only in New Zealand.

Secondments

2.266 Paragraph 4 of this Article provides a specific rule in respect of secondments. Where an employee who is a resident of one country derives remuneration in respect of a secondment to the other country, that remuneration will be taxable only in the first country provided that the employee is present in the other country for not more than 90 days in any 12-month period. [Article 14, paragraph 4]

2.267 The term secondment to the other Contracting State is defined in paragraph 5 of this Article. It means an arrangement under which an employee of an enterprise in one country temporarily performs employment services in the other country for either:

•

a permanent establishment of the enterprise in the other country; or

•

an associated enterprise (as determined by subparagraph c) of paragraph 6 of Article 5 ( Permanent Establishment ),

where such employment services are of a similar nature to those ordinarily performed by that employee for their usual employer. However, it does not include arrangements that have as one of their main purposes the obtaining of benefits under this rule. [Article 14, paragraph 5]

Example 2.20

Emily and Alicia are Australian residents employed by an Australian company, PR PR Co, in the media relations area situated in Hobart. Emily is seconded to the company's Christchurch branch to assist the branch staff in developing a media strategy with respect to their upcoming product launch, and is present in New Zealand for 45 days. Alicia undertakes a 30-day secondment to provide similar assistance to the company's wholly-owned subsidiary, NZ PR PR Co, in Auckland.

Both Emily and Alicia's activities fall within the definition of 'secondment to another State', and they are both present in New Zealand for less than 90 days. Accordingly, Australia retains taxing rights over both their salaries.

Where the short-term visit exemption doesn't apply

2.268 Where a short-term visit exemption is not applicable, remuneration derived by a resident of Australia from employment in New Zealand may be taxed in New Zealand. However, this Article does not allocate sole taxing rights to New Zealand in that situation.

2.269 Accordingly, Australia would also be entitled to tax that remuneration, in accordance with the general rule of the ITAA 1997 that a resident of Australia remains subject to tax on worldwide income. However, in accordance with Article 23 ( Elimination of Double Taxation ) Australia would be required in this situation to relieve any resulting double taxation.

Employment on a ship or aircraft

2.270 Under the existing New Zealand Agreement, income derived by crew members from employment exercised aboard a ship or aircraft operated in international traffic may be taxed in the country of which the carrier is a resident.

2.271 In contrast, under paragraph 3 of this Article in the Convention, income derived by crew members from employment exercised aboard a ship or aircraft operated in international traffic will be taxable only in the country of which the crew member is a resident. Thus, for example, an Australian resident pilot employed by a New Zealand airline would be taxable only in Australia on his or her remuneration in respect of services rendered on international flights. This is expected to reduce the compliance costs faced by crew members, as they will only have to file returns and pay tax on this income in their country of residence. [Article 14, paragraph 3]

Article 15 - Fringe Benefits

2.272 This Article deals with fringe benefits which, in the absence of the Article, would be taxable in both Australia and New Zealand. Under this Article, the country that would have the primary taxing right if the benefit were ordinary employment income will have the sole taxing right in relation to the fringe benefit. This would generally be determined in accordance with Article 14 ( Income from Employment ) or Article 19 ( Government Service ). [Article 15, paragraph 1]

Definition of primary taxing right

2.273 This Article provides that the primary taxing right lies with the country that may, in accordance with the Convention, impose tax on the employment remuneration, being tax in respect of which the other country is required to provide relief under Article 23 ( Elimination of Double Taxation ). [Article 15, subparagraph 2b)]

Example 2.21

Xavier, a New Zealand resident employee of a New Zealand company is sent to work in Australia. He is present in Australia for more than 183 days, and receives both employment income and fringe benefits. Under paragraph 1 of Article 14 ( Income from Employment ), Australia has the right to tax the employment income. New Zealand may also tax but, under Article 23 ( Elimination of Double Taxation ), would be obliged to give credit for the Australian tax paid on the fringe benefit if it was ordinary employment income. Therefore, Australia has the primary right to tax in these circumstances.

Operation of the provision in respect of fringe benefits tax law

2.274 Both Australia and New Zealand impose taxation on certain 'fringe' or employee benefits. In Australia, the relevant law is the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). Under the FBTAA 1986, an employer who provides a fringe benefit to an employee or to an associate of an employee (which includes a family member) may have a fringe benefits tax liability. Such a liability is separate from income tax and is calculated on the grossed-up taxable value of the fringe benefits provided. New Zealand's fringe benefits tax regime operates in a similar fashion, but it is calculated on the grossed-up taxable value at the employee's notional marginal tax rate.

2.275 There may be circumstances in both countries where a resident of one country working in the other country would be liable to tax in both countries on the fringe benefit. Regardless of whether the benefit is taxed under the ordinary income tax law or under a separate enactment (as is currently the case in Australia), or whether the tax is liable to be paid by the employer or the employee, this Article will ensure that the fringe benefit will be taxed in only one of the countries.

Definition of fringe benefit

2.276 The term fringe benefit is defined as including a benefit provided to an employee or to an associate of an employee by:

•

an employer;

•

an associate of an employer; or

•

a person under an arrangement between that person and the employer, associate of an employer or another person in respect of the employment of that employee.

2.277 They include accommodation allowances or housing benefits but do not include a benefit arising from the acquisition of an option over shares under an employee share scheme. For example, a fringe benefit is provided when an employer allows an employee to use a work motor vehicle for private purposes, gives an employee a subsidised loan, or pays an employee's private health insurance costs. Benefits arising from employee share option schemes are excluded from the treaty definition of fringe benefit. Such option benefits are treated as remuneration from employment for the purposes of Article 14 ( Income from Employment ). [Article 15, subparagraph 2a)]

Article 16 - Directors' Fees

2.278 This Article relates to remuneration received by a resident of one country in the person's capacity as a member of a board of directors of a company which is a resident of the other country. To avoid difficulties in such cases of ascertaining which country a director's services are performed, and consequently where the remuneration is to be taxed, the Article provides that directors' fees may be taxed in the country of residence of the company.

Article 17 - Entertainers and Sportspersons

Personal activities

2.279 Income derived by visiting entertainers and sportspersons from their personal activities as such may be taxed in the country in which the activities are exercised, irrespective of the duration of the visit. The term 'entertainer' is intended to have a broad meaning and would include, for example, actors and musicians as well as other performers whose activities have an entertainment character, such as comedians, talk show hosts, participants in chess tournaments or racing drivers. The application of this Article extends to income generated from promotional and associated kinds of activities engaged in by the entertainer or sportsperson while present in the visited country. [Article 17, paragraph 1]

Safeguard

2.280 Income in respect of personal activities exercised by an entertainer or sportsperson, where derived by another person (for example, a separate enterprise which formally enters into the contractual arrangements relating to the provision of the entertainer's or sportsperson's services), may be taxed in the country in which the entertainer or sportsperson performs, whether or not that other person has a permanent establishment in that country. [Article 17, paragraph 2]

Exception for members of teams playing in league competitions

2.281 Income derived in respect of personal activities exercised by sportspersons as members of recognised teams regularly playing in a league competition organised and conducted in both States, but not in respect of performance as a member of a national representative team of either country, is excluded from the operation of paragraphs 1 and 2. In such cases, the provisions of Article 7 ( Business Profits ) or Article 14 ( Income from Employment ) are to apply. Accordingly, New Zealand residents will generally be exempt from Australian tax in respect of income in respect of their activities as members of such teams. However, if the income is attributable to a permanent establishment that the sportsperson has in Australia, or if the conditions of paragraph 2 of Article 14 ( Income from Employment ) are not met in relation to the team member's salary or wages, Australia may tax that income.

2.282 The phrase 'league competition organised and conducted in both States' is intended to cover all sports where an association of clubs arranges matches between club teams of approximately similar standard from both countries and the matches are played in both countries. This would include for example, club-level rugby, netball, basketball and soccer competitions which take place in both countries. Unlike the equivalent provision in the existing New Zealand Agreement, paragraph 3 will also apply to league competitions that involve clubs from a third country, such as the Super 14 rugby competition. [Article 17, paragraph 3]

Article 18 - Pensions

General scope

2.283 Pensions (including government service pensions) and other similar periodic remuneration are generally taxable only by the country of which the recipient is a resident. In the course of negotiations, the two delegations noted that:

'The term 'pensions and other similar periodic remuneration' is understood to include superannuation annuities, life annuities, periodic workers compensation and periodic accident compensation but would not include financial products in the form of annuities as these are more appropriately covered under the Interest Article.'

2.284 The application of this Article extends to pensions and annuity payments made to dependants, for example, a widow, widower or children of the person in respect of whom the pension or annuity entitlement accrued where, upon that person's death, such entitlement has passed to that person's dependants. [Article 17, paragraph 1]

Exemption for cross-border pensions

2.285 Paragraph 1 of this Article provides that pensions and other similar remuneration:

•

arising in one country and paid to a resident in the other country,

will not be subject to tax by the residence country to the extent that the income:

•

would have not been subject to tax in the first country if the recipient was a resident of that country.

2.286 In the course of negotiations, the delegations noted:

'With respect to the second sentence of paragraph 1 of Article 18 ( Pensions ), it is understood that the term 'to the extent that such income would not be subject to tax in the other State if the recipient were a resident of that other State' includes instances where amounts would ordinarily not be included in assessable income under the domestic law of that other State if such amounts are ordinarily payable to residents of that other State and, in the case of payments arising in Australia, includes the deductible amount based on the undeducted purchase price of a pension or annuity, the tax free components of a superannuation benefit and any superannuation benefit amounts to which a nil rate of tax would apply (such as the amount of the taxable component of the element taxed in a superannuation fund which falls below the low rate cap and to which a zero per cent tax rate applies). It does not include instances where no tax is payable on the amount in that other State merely because the individual's total taxable income falls below the general tax free threshold for resident individuals.'

2.287 The term 'to the extent that such income would not be subject to tax in the other State if the recipient were a resident of that other State' would capture pensions and other similar remuneration that are treated under Australian law as:

•

not part of assessable income;

•

exempt income;

•

'non-assessable non-exempt income'; or

•

assessable income but in respect of which there is a tax offset that results in the rate of income tax applying to that amount equal to 0 per cent.

For example:

•

the deductible amount of the undeducted purchase price of a pension annuity or annuity that is subject to section 27H of the ITAA 1936 is not included as part of assessable income;

•

the superannuation benefit payable to a member who is over 60 years of age is non-assessable non-exempt income under section 301-10 of the ITAA 1997;

•

the tax-free component of an employment termination payment is non-assessable non-exempt income; and

•

the taxable component of the superannuation benefit payable to a member who has reached their preservation age but is below 60 years of age, where a tax offset applies to the element taxed in the fund up to the low rate cap amount such that the tax rate on that element does not exceed 0 per cent under section 301-20 of the ITAA 1997.

2.288 The second sentence in paragraph 1 therefore ensures that the income is not taxed in both countries. This exemption in both countries, however, does not apply to payments of portable New Zealand superannuation, portable veteran's pensions or equivalent portable payments arising in New Zealand.

2.289 Portable New Zealand superannuation is superannuation paid by the New Zealand Government to recipients living overseas. Similarly, portable veteran's pensions are paid by the New Zealand Government to recipients living overseas. 'Equivalent portable payments arising in New Zealand' is intended to cover similar payments made by the New Zealand Government to recipients living overseas.

2.290 Portable New Zealand superannuation or portable veteran's pension are exempt from tax under New Zealand's domestic legislation in order to ensure that the country of residence has sole taxation rights to a person's pension income. The reason why the Article does not apply to payments of portable New Zealand superannuation or portable veteran's pension is to ensure that Australia does not lose the ability to tax such payments. [Article 18, paragraph 1]

Example 2.22

Nicholas is a resident of New Zealand in receipt of a pension which is exempt from New Zealand tax under its domestic law. The pension is not of a type specified in the second sentence in paragraph 2 of Article 18. Nicholas decides to permanently relocate to Australia and becomes a resident of Australia for tax purposes. He continues to receive his New Zealand pension.

As the pension would not have been subject to New Zealand tax if Nicholas had remained a New Zealand resident, the pension will also not be subject to Australian tax now that Nicholas is a resident of Australia.

Lump sum payments

2.291 The term 'pension' refers to periodic payments and does not include lump sum payments. Lump sums arising under a 'retirement benefit scheme', or in consequence of retirement, invalidity, disability or death, in one country and payable to a resident of the other country will be taxable only in the country in which they arise.

2.292 In the course of negotiations, the delegations noted:

'It is understood that the term 'retirement benefits scheme' means an arrangement in which the individual participates in order to secure retirement benefits. In the case of payments arising in Australia a retirement benefit scheme includes a superannuation fund and a retirement savings account and in the case of New Zealand includes any superannuation scheme. It was also agreed that in the case of Australia, a payment by the Commissioner under the Superannuation (Unclaimed Money and Lost Members) Act 1999 shall be treated as a lump sum paid under a retirement benefit scheme.'

[Article 18, paragraph 2]

Pensions and lump sums not subject to tax still counted for certain purposes

2.293 While certain pensions and lump sums are not subject to tax in a country as a result of the Convention, this does not prevent them from being taken into account when determining entitlements to assistance or obligations in that country. In the course of negotiations, the delegations noted:

'It is understood that pensions and lump sums that are not subject to tax may still be taken into account for the purpose of calculating a person's income-targeted assistance and obligations such as Working for Families Tax Credits, child support and student loans.'

Where pensions and lump sums arise

2.294 To avoid uncertainty as to where pensions, other similar periodic remuneration and lump sums may be regarded as 'arising' for purposes of this Article, the two delegations, in the course of negotiations, reached the following understanding:

'It is understood that pensions, other similar periodic remuneration and lump sums referred to in Article 18 ( Pensions ) will arise where the fund is established or, in the case of such income paid by the Government of a Contracting State, in that State.'

Alimony payments

2.295 Alimony and other maintenance payments are taxable only in the country of which the payer is a resident. The purpose of this paragraph is to remove any possibility of double taxation of such payments arising by reason of the treatment accorded such payments under the respective domestic law of the two countries. In the case of Australia, those payments will generally remain exempt from Australian tax in the hands of the recipient and are non-deductible to the payer. [Article 18, paragraph 3]

Article 19 - Government Service

Salary and wage income

2.296 Salary and wage type income, other than government service pensions, paid to an individual for services rendered to a government (including a political subdivision or local authority) of one of the countries, is to be taxed only in that country. However, such remuneration will be taxable only in the other country if the services are rendered in that other country; and

•

the recipient is a resident of, and a national of, that other country; or

•

the recipient is a resident of that other country and did not become a resident of that other country solely for the purpose of rendering the services (for example, if the recipient was a permanent resident of that other country prior to rendering the services).

[Article 19, paragraph 1]

Business income

2.297 Remuneration paid in respect of services rendered in connection with a business carried on by any governmental authority referred to in paragraph 1 of this Article is excluded from the scope of the Article. Such remuneration will remain subject to the provisions of Article 14 ( Income from Employment ), Article 16 ( Directors' Fees ) or Article 17 ( Entertainers and Sportspersons ). [Article 19, paragraph 2]

Article 20 - Students

Exemption from tax

2.298 This Article applies to students or business apprentices who are temporarily present in one of the countries solely for the purpose of their education or training if they are, or immediately before the visit were, a resident of the other country. In these circumstances, payments from abroad received by the students or business apprentices solely for their maintenance, education or training will be exempt from tax in the country visited. This will apply even though the student or business apprentice may qualify as a resident of the country visited during the period of their visit.

2.299 The exemption from tax provided by the visited country extends to maintenance payments received by the student or apprentice that are made for maintenance of dependent family members who have accompanied the student or apprentice to the visited country.

Employment income

2.300 Where a New Zealand student visiting Australia solely for educational purposes undertakes any employment in Australia, for example:

•

some part-time work with a local employer; or

•

during a semester break undertakes work with a local employer,

the income earned by that student as a consequence of that employment may, as provided for in Article 14 ( Income from Employment ), be subject to tax in Australia.

2.301 For business apprentices, this Article only applies where the apprentice's remuneration consists solely of subsistence payments to cover training or maintenance. Remuneration for service, that is, salary equivalents, fall for consideration under Article 14 ( Income from Employment ), as will any income derived from employment with a local employer.

2.302 A payment for maintenance, education or training would not be expected to exceed the level of expenses likely to be incurred to ensure the student or business apprentice's maintenance, education or training (that is, a subsistence payment).

2.303 In these situations, the payments received from abroad for the student or business apprentice's maintenance, education or training will not be taken into account in determining the tax payable on the employment income that is subject to tax in Australia. No Australian tax would be payable on the employment income if the student qualifies as a resident of Australia during the visit and the taxable income of the student does not exceed the tax-free threshold applicable to Australian residents for income tax purposes.

Article 21 - Other Income

Allocation of taxing rights

2.304 This Article provides rules for the allocation between the two countries of taxing rights with respect to items of income not dealt with in the preceding Articles of the Convention. The scope of the Article is not confined to such items of income arising in one of the countries - it extends also to income from sources in a third country.

2.305 Broadly, such income derived by a resident of one country is to be taxed only in the country of residence unless it is from sources in the other country, in which case the income may also be taxed in the other country. This is consistent with the reservations of both Australia and New Zealand to Article 21 ( Other Income ) of the OECD Model. [Article 21, paragraphs 1 and 3]

2.306 Although paragraph 3 refers to income 'arising' in a country, rather than the more usual reference to income 'from sources' in a country found in Australia's treaties, no difference in meaning is intended. The wording in this provision in the Convention reflects New Zealand's treaty practice and the wording used in the United Nations Model Double Taxation Convention between the Developed and Developing Countries .

2.307 Where the income may be taxed in both countries in accordance with this provision, the country of residence of the recipient of the income is obliged by Article 23 ( Elimination of Double Taxation ) to provide double taxation relief.

2.308 This Article does not apply to income (other than income from real property as defined in paragraph 2 of Article 6 ( Income from Real Property )) where the right or property in respect of which the income is paid is effectively connected with a permanent establishment which a resident of one country has in the other country. In such a case, Article 7 ( Business Profits ) will apply. [Article 21, paragraph 2]

2.309 This Article does not apply in the situation where business profits are not taxed in the country of source because of the absence of a permanent establishment. That is, in the absence of a permanent establishment, paragraph 1 of Article 7 ( Business Profits ) provides that the profits of an enterprise of a country shall be taxable only in that country.

Example 2.23

Esk Co, an Australia resident company, derives business profits from the sale of merchandise through an independent agent located in New Zealand. As Esk Co does not have a permanent establishment in New Zealand, the business profits will be taxable in Australia pursuant to Article 7 ( Business Profits ) and not under Article 21 ( Other Income ).

Article 22 - Source of Income

Deemed source

2.310 Consistent with Australia's treaty practice, this Article effectively deems income, profits or gains derived by a resident of a country which, in accordance with the Convention, may be taxed in the other country, to have a source in that other country. It therefore avoids any difficulties arising under domestic law source rules in respect of the exercise by Australia of the taxing rights allocated to Australia by the Convention over income derived by residents of New Zealand.

Article 23 - Elimination of Double Taxation

2.311 Double taxation does not arise in respect of income flowing between Australia and New Zealand:

•

where the terms of the Convention provide for the income to be taxed only in one country; or

•

where the domestic taxation law of one of the States exempts the income from its tax.

2.312 It is necessary, however, to prescribe a method for relieving double taxation for other classes of income, profits or gains which, under the terms of the Convention, remain subject to tax in both countries. In accordance with international practice, Australia's tax treaties provide for double tax relief to be provided by the country of residence of the taxpayer by way of an exemption of the foreign income, or a credit or deduction against its tax for the tax of the country of source. This Article also reflects that approach.

Australian method of relief

2.313 This Article requires Australia to provide Australian residents a credit against their Australian tax liability for New Zealand tax paid under New Zealand laws and in accordance with the Convention, on income which is taxable in Australia. The term 'income' in this context is intended to have a broad meaning and includes items of profit or gains which are dealt with under the income tax law. [Article 23, paragraph 1]

2.314 Australia's general foreign income tax offset rules, together with the terms of this Article and of the Convention generally, will form the basis of Australia's arrangements for relieving a resident of Australia from double taxation on income, profits or gains that are also taxed in New Zealand.

2.315 Accordingly, effect is to be given to the tax credit relief obligation imposed on Australia by paragraph 1 of this Article by application of the general foreign income tax offset provisions (Division 770 of the ITAA 1997).

2.316 Dividends and branch profits derived from New Zealand by an Australian resident company that are exempt from Australian tax under the foreign source income measures (for example, sections 23AH or 23AJ of the ITAA 1936) will continue to qualify for exemption from Australian tax under those provisions. As double taxation does not arise in these cases, the credit form of relief will not be relevant.

New Zealand relief

2.317 This Article also requires New Zealand to provide New Zealand residents relief by way of a credit against their New Zealand tax liability for Australian tax paid under Australian laws and in accordance with the Convention, on income which is taxable in New Zealand. However, in the case of dividends derived by a New Zealand resident from an Australian company, no credit will be given in New Zealand for Australian tax paid in respect of profits out of which the dividend is paid. [Article 23, paragraph 2]

Fiscally transparent entities

2.318 Paragraph 3 of this Article ensures that double taxation will be relieved in situations where, in accordance with paragraph 2 of Article 1, the same income is taxed in Australia and New Zealand in the hands of different persons. This situation may arise where the two countries allocate the income to different persons for tax purposes; for example, where one country treats the recipient entity as a taxpayer and taxes income received at the entity level, while the other country treats the same income as having been derived by the participants in the entity and taxes that income in the hands of the participants. Assume, for example, that the country of source treats a partnership as a company and the country of residence of a partner treats it as fiscally transparent. In such cases, this paragraph obliges the country of residence of the partners to provide relief from double taxation in respect of taxes imposed by the source country on that income in accordance with the provisions of Article 23. [Article 23, paragraph 3]

2.319 In the case of Australia a similar outcome is achieved in domestic law by subsection 770-130(2) of the ITAA 1997.

2.320 Paragraph 3 also applies where the country in which the income arises regards the income as derived by a resident entity, while the other country regards the entity as fiscally transparent and allocates the income to its own residents who are participants in the entity (see Example 2.6). In these circumstances, paragraph 3 provides that the country of residence of the participants will provide relief in respect of taxes imposed in the source country.

2.321 Similarly, where the income arises in a third country, the country of residence of the participant in the entity would provide relief for tax imposed on the income in the hands of the entity in the other country.

Example 2.24

In this case an entity which is treated for tax purposes in New Zealand as a resident company, derives interest income from a third country. The third country taxes the royalty at source at 10 per cent gross. New Zealand taxes that interest income at 30 per cent as foreign income of a New Zealand resident company (assuming that no deductions are available) and gives a foreign tax credit for that foreign tax, so collecting a net 20 per cent tax. Australia regards the entity as fiscally transparent and taxes the Australian resident participant in the entity on the interest income.

Under paragraph 3 of this Article, Australia is required to give a foreign income tax offset for the New Zealand tax actually imposed on the income (that is, the net 20 per cent after a New Zealand foreign tax credit). The offset is subject to the normal limits discussed in paragraph 2.313 on paragraph 1 of Article 23.

Whether Australia would grant an offset for the third country tax on the interest would depend on the operation of the foreign income tax offset rules and any treaty between Australia and the third country. Normally it would be expected that such an offset would be available subject to the limits arising under Australian domestic law and any treaty with that third country.

Example 2.25

In this case, an entity which is treated for tax purposes in New Zealand as a resident company, derives royalty income from Australia. New Zealand taxes that royalty income at 30 per cent as foreign income of a New Zealand resident company and gives a foreign tax credit for the 5 per cent tax rate set in paragraph 2 of Article 12, so collecting a net 25 per cent tax.

Australia regards the entity as fiscally transparent and taxes the Australian resident participant in the entity on the royalty income. Under paragraph 3 of Article 23, Australia is required to give a foreign income tax offset for the New Zealand tax actually imposed on the income (that is, the net 25 per cent after a New Zealand foreign tax credit). The offset is subject to the normal limits discussed in paragraph 2.313 on paragraph 1 of Article 23.

2.322 As discussed in paragraphs 2.89 to 2.96, in certain circumstances treaty benefits under the Convention apply to income flowing through MITs. Where such income is allocated for Australian tax purposes to an Australian resident unitholder and taxed in their hands (that is, where the unitholder is presently entitled to income of the MIT), the unitholder will be entitled to double tax relief for New Zealand tax imposed on that income.

Example 2.26

In this diagram, interest income arising in New Zealand (not from a financial institution) is paid to a listed Australian MIT with Australian resident individual unitholders who are presently entitled to income of the MIT. The MIT satisfies the conditions in paragraph 7 of Article 4 ( Resident ), with the result that the treaty limits on New Zealand tax on the interest apply. For Australian tax purposes, the interest income is allocated to the unitholders and taxed in their hands.

Australia is required to provide double tax relief for New Zealand tax imposed on the part of the interest income allocated to the Australian resident unitholders.

Article 24 - Non-Discrimination

2.323 The Convention includes rules to prevent tax discrimination. The Australian tax system is generally non-discriminatory. However, for clarity this Article provides that certain features of the Australian tax system should not be seen as coming within the Article's terms. Similarly, the Article provides that certain features of the New Zealand tax system are not affected by its provisions. The measures identified can be characterised as being an integral part of the administration of the two countries' economic and tax policy and the collection of their taxes.

Discrimination based on nationality

2.324 This Article prevents discrimination on the grounds of nationality by providing that nationals of one country may not be less favourably treated than nationals of the other country in the same circumstances. [Article 24, paragraph 1]

2.325 The discrimination that this Article precludes applies to both taxation and any requirement connected with such taxation. Accordingly, discrimination in the administration of the tax law is also generally precluded.

2.326 The term 'national' is defined in subparagraph i) of paragraph 1 of Article 3 ( General Definitions ) of the Convention and covers both an individual who is a citizen or national of one country or the other, and a company, partnership or association 'deriving its status as such from the laws in force in that Contracting State'. Accordingly, a company that is incorporated in Australia would be a national of Australia while a company that is incorporated under a law of New Zealand would be a national of New Zealand for the purposes of this paragraph. [Article 3, subparagraph 1i)]

The meaning of 'in the same circumstances' and 'in particular with respect to residence'

2.327 The expression 'in the same circumstances' refers to persons who, from the point of the application of the ordinary taxation laws, are in substantially similar circumstances both in law and in fact.

2.328 Where a person operates in an industry that is subject to government regulation such as prudential oversight, another person operating in the same industry but not subject to the same oversight, would not be in the same circumstances.

2.329 The inclusion of the further clarification 'in particular with respect to residence' makes clear that the residence of the taxpayer is one of the factors that are relevant in determining whether taxpayers are placed in similar circumstances. Therefore, different treatment accorded to a New Zealand resident compared to an Australian resident will not constitute discrimination for the purposes of this Article. A potential breach of paragraph 1 of this Article only arises if two persons who are residents of the same country are treated differently solely by reason of one being a national of Australia and the other a national of New Zealand.

The meaning of 'more burdensome' taxation

2.330 Unlike paragraph 1 of Article 24 ( Non-Discrimination ) in the OECD Model and equivalent provisions in Australia's other tax treaties, this provision refers only to 'more burdensome' taxation rather than 'other or more burdensome'. However, it is not intended that the words 'more burdensome...taxation' would refer only to the quantum of taxation.

2.331 The phrase is also applicable to more onerous administrative or compliance requirements that a taxpayer may be called upon to meet where those requirements differ based on nationality grounds.

Non-residents of Australia/New Zealand

2.332 Consistent with paragraph 1 of Article 24 ( Non-Discrimination ) of the OECD Model, paragraph 1 of this Article applies to persons who are residents of neither Australia nor New Zealand. Consequently, residents of third countries who are citizens or nationals of either Australia or New Zealand are able to seek the benefits of this provision. Paragraph 1 does not, however, extend to residents of either country who are not 'nationals' (as defined in subparagraph i) of paragraph 1 of Article 3 ( General Definitions )) of either country.

Non-discrimination and permanent establishments

2.333 The tax on permanent establishments of enterprises of the other country shall not be levied less favourably than on the country's own enterprises carrying on the same activities in similar circumstances. This applies to all residents of a treaty country, irrespective of their nationality, who have a permanent establishment in the other country. [Article 24, paragraph 2]

2.334 For this paragraph to apply, the enterprises of both States must be 'in similar circumstances'. Therefore, the comparison must be made between a permanent establishment and local enterprises which are not only carrying on the same activities but are also carrying on those activities 'in similar circumstances'. This is to address situations where resident and non-resident enterprises may be carrying on the same activities but the circumstances in which they do so are very different. For example, one may be conducting dealings on a non-arm's length basis and the other on an arm's length basis. The provision recognises that appropriate differences in taxation treatment are not precluded because of the differing circumstances.

2.335 Permanent establishments of non-resident enterprises may be treated differently from resident enterprises as long as the treatment does not result in more burdensome taxation for the former than for the latter. That is, a different mode of taxation may be adopted with respect to non-resident enterprises, to take account of the fact that they often operate in different conditions to resident enterprises. The provision would not affect, for example, domestic law provisions that tax a non-resident by withholding, provided that calculation of the tax payable is not greater than that applying to a resident taxpayer.

Non-resident individuals

2.336 Non-resident individuals do not have to be granted the personal allowances, reliefs or reductions available to residents of the tax treaty countries. [Article 24, paragraph 2]

2.337 This means that Australia will continue to be able to grant certain tax offsets only to resident individuals, such as the tax offset for dependents contained in Division 13 of the ITAA 1997.

2.338 Unlike paragraph 3 of Article 24 ( Non-Discrimination ) of the OECD Model, the Article is not just limited to those benefits conferred by a country relating to civil status or family responsibilities of the individual. For Australian tax purposes, it also extends, for example, to the tax-free threshold which may be considered not to be based either on civil status or family responsibilities.

Deductions for payments to foreign residents

2.339 The treaty partner countries must allow the same deductions for interest, royalties and other disbursements paid to residents of the other country as it does for payments to its own residents. However, the treaty countries are allowed to reallocate profits between related enterprises on an arm's length basis under Article 9 ( Associated Enterprises ) and to limit deductions in accordance with paragraph 8 of Article 11 ( Interest ), and paragraph 6 of Article 12 ( Royalties ). [Article 24, paragraph 3]

Companies owned or controlled abroad

2.340 A country must not give less favourable treatment to an enterprise, the capital of which is owned or controlled, wholly or partly, directly or indirectly, by one or more residents of the other country. That is, Australian companies owned or controlled by New Zealand residents may not be given other or more burdensome treatment than locally owned or controlled Australian companies. [Article 24, paragraph 4]

2.341 Differential tax treatment based on residency is not affected by this paragraph. Nor does the paragraph require the same treatment of non-resident shareholders in the company as resident shareholders. Accordingly, there is no obligation under paragraph 4 or any other provision of this Article to allow imputation credits to non-resident shareholders.

Exclusions

2.342 Certain provisions of the law of both countries that are important for purposes of economic regulation and integrity of the tax system are not restricted in their application by this Article. Although most are generally recognised by the international community as not being discriminatory, the specific exclusion of these provisions will ensure that they can continue to operate for their intended purpose. The provisions of the law of Australia and New Zealand which are not restricted in the application by this Article are those that:

•

prevent the avoidance or evasion of taxes;

•

defer tax where an asset is transferred out of the jurisdiction;

•

provide for consolidation of group entities;

•

provide for the transfer of losses within company groups;

•

do not allow tax rebates, credits or exemptions in relation to dividends paid by a company;

•

provide for deductions for research and development expenditure; or

•

are agreed in an Exchange of Notes between the two Governments to be unaffected by the Article.

Avoidance or evasion provisions

2.343 The operation of domestic measures to combat avoidance and evasion is not affected by this Article. [Article 24, subparagraph 5a)]

2.344 The reference to 'laws ... designed to prevent avoidance or evasion of taxes' includes, in the case of Australia, thin capitalisation, dividend stripping, transfer pricing, controlled foreign company, transferor trust and foreign investment fund provisions, and collection measures including conservancy. Although it is commonly accepted by most OECD member countries that such provisions do not contravene Non-Discrimination Articles, this outcome is specifically provided for in the Convention by the exclusion of such rules from the operation of this Article. [Article 24, paragraph 6]

2.345 The enforcement and operation of the various aspects of the withholding tax provisions relating to non-residents are preserved by this Article. For example, section 26-25 ( Interest or royalty ) of the ITAA 1997 provides that where interest or royalties are paid to a non-resident and the payer fails to deduct withholding tax, the interest or royalty cannot be claimed as a deduction. No similar measure exists in relation to payments from a resident to another resident. [Article 24, subparagraph 5a) and paragraph 6]

Capital gains roll-over relief

2.346 This Article will not affect the operation of any provision of domestic tax legislation which does not permit the deferral of tax arising on the transfer of an asset where the transfer of the asset by the transferee would take the asset beyond the taxing jurisdiction of the country.

2.347 Under Australia's domestic tax legislation, permanent establishments generally enjoy the same tax treatment as resident enterprises. However, roll-over relief is denied to a permanent establishment where an asset that is taxable Australian property is transferred to a non-resident if the asset is not taxable Australian property in the hands of the transferee. Australia will be able to continue to deny roll-over relief in these circumstances. [Article 24, subparagraph 5b)]

Consolidation

2.348 Domestic law rules which provide for single entity treatment of a group of entities are excluded from the operation of this Article, provided that there is no discrimination regarding access to consolidation treatment between Australian resident companies on the basis of ownership of the company.

2.349 Australia's consolidation measures are restricted to wholly-owned Australian resident entities. This Article will not apply to these measures, with the result that domestic law provisions continue to operate to preclude permanent establishments of non-resident companies from consolidating with resident entities that may be wholly-owned by a non-resident. [Article 24, subparagraph 5c)]

Transfers of losses within company groups

2.350 Under New Zealand's company grouping rules, companies in the same group can group losses either by election or by subvention payment. However, the loss company must either be incorporated in New Zealand or carrying on business through a fixed establishment for the period from the first day of the year in which the net loss was incurred to the last day of the year in which the loss is grouped. The loss company must not be treated under a tax treaty as not being a resident of New Zealand or otherwise be liable to overseas income tax.

2.351 A specific exclusion to this Article was included at the request of New Zealand to ensure these rules ensure they continue to operate for their intended purpose. [Article 24, subparagraph 5d)]

Rebates, credits and exemptions paid for dividends by a company

2.352 Domestic law rules of either country which allow an inter-corporate dividend rebate, credit or exemption are excluded from the operation of Article 24. Dividends paid to non-residents are subject to withholding tax and are not assessable income. Where dividends are fully franked they are exempt from withholding tax. As no imputation credits arise for non-residents, there is no possibility of excess imputation credits arising. Accordingly, it is not possible for non-residents to offset excess franking credits against their Australian source income or to seek a refund of any excess imputation credits. This Article preserves this domestic law treatment. [Article 24, subparagraph 5e)]

Research and development expenditure

2.353 The domestic law research and development provisions are excluded from the operation of Article 24. It follows that Australia will be able to continue to apply its domestic law rules concerning access to concessions in respect of research and development expenditure. Currently, these concessions are only available to companies that are incorporated in Australia. [Article 24, subparagraph 5f)]

Power to carry out an Exchange of Notes

2.354 The two Governments may agree in an Exchange of Notes that other domestic law provisions will not be affected by the requirements of Article 24. Australia and New Zealand can agree in respect of existing laws or laws that are enacted in the future. In the course of negotiations, the delegations noted:

'It is understood that paragraph g) of paragraph 5 of Article 24 ( Non-Discrimination ) applies to existing and future provisions of the laws of a Contracting State.'

[Article 24, subparagraph 5g)]

Taxes to which this Article applies

2.355 This Article applies to taxes of every kind and description imposed on behalf of the Contracting States, or their political subdivisions. It is intended that the Article extend to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, these taxes.

2.356 In the case of Australia, the relevant taxes include the income tax (including the petroleum resource rent tax and tax on capital gains), the GST and fringe benefits tax. The provisions of this Article also apply to taxes imposed by the Australian states and territories.

2.357 In the case of New Zealand, the relevant taxes are all taxes imposed by New Zealand except for those imposed by local authorities. [Article 24, paragraph 7]

More favourable treatment

2.358 Nothing in this Article prevents either country from treating residents of the other country more favourably than its own residents.

Article 25 - Mutual Agreement Procedure

Consultation on specific cases

2.359 This Article provides for consultation between the competent authorities of the two countries with a view to reaching a solution in cases where a person is able to demonstrate actual or potential imposition of taxation contrary to the provisions of the Convention. [Article 25, paragraph 2]

2.360 In the case of Australia, the competent authority is the Commissioner or an authorised representative of the Commissioner. [Article 3, subparagraph 1e)]

2.361 A person wishing to use this procedure may present a case to the competent authority of the country of which the person is a resident. If the case comes under paragraph 1 of Article 24 ( Non-Discrimination ) of the Convention, the person may present a case to the competent authority of the country of which the person is a national.

2.362 Presentation of a case by a person to a competent authority must be made within three years of the first notification of the action which the taxpayer considers gives rise to taxation not in accordance with the Convention. Presentation of a case does not deprive the person of access to, or affect their rights in relation to, other legal remedies available under the domestic laws of the countries. [Article 25, paragraph 1]

2.363 If the person's claim seems to the competent authority to which the case has been presented to be justified, and that competent authority is not itself able to solve the problem, then the competent authority is required to seek to resolve the case by mutual agreement with the competent authority of the other country, with a view to avoiding taxation not in accordance with the Convention. [Article 25, paragraph 2]

2.364 If, after consideration by the competent authorities, a solution is reached, it must be implemented in accordance with the provisions of the Article.

Implementation of a solution

2.365 The solution reached by mutual agreement between the competent authorities of the relevant countries must be implemented notwithstanding any time limits in the domestic laws of the tax treaty countries. This allows the competent authorities the flexibility to reach a satisfactory solution and avoids problems that might arise where each country has a different time limit in their domestic law. [Article 25, paragraph 2]

Consultation on general problems

2.366 This Article also authorises consultation between the competent authorities of the two countries for the purpose of resolving any difficulties that arise regarding the interpretation or application of the Convention. This may allow, for example, the competent authorities to agree to apply an agreed solution to a broader range of taxpayers, notwithstanding that the original uncertainty may have arisen in connection with an individual case that comes under the procedure outlined in paragraphs 1 and 2 of this Article.

2.367 The competent authorities may also consult together with a view to eliminating double taxation in cases where the Convention does not provide a solution. However, in eliminating such double taxation, the competent authorities must act within their statutory powers. In the course of negotiations, the delegations noted:

'With respect to the provision allowing the competent authorities to consult for the elimination for double taxation in cases not provided for in the Convention, it is understood that this does not provide any additional powers to the competent authorities beyond their usual statutory powers.'

[Article 25, paragraph 3]

Methods of communication between competent authorities

2.368 The competent authorities are permitted to communicate directly with each other without having to go through diplomatic channels. This may be done by electronic means (for example, facsimile transmission, email or web conferencing), letter, telephone, direct meetings or any other convenient means. [Article 25, paragraph 4]

General Agreement on Trade in Services dispute resolution process

2.369 This Article also deals with disputes that may be brought before the World Trade Organisation Council for Trade in Services under the dispute resolution processes of the General Agreement on Trade in Services (GATS).

2.370 Australia and New Zealand are both parties to the GATS. Article XVII ( National Treatment ) of the GATS requires a party to accord the same treatment to services and service suppliers of other parties as it accords to its own like services and service suppliers.

2.371 Articles XXII ( Consultation ) and XXIII ( Dispute Settlement and Enforcement ) of the GATS provide for discussion and resolution of disputes. Where a measure of another party falls within the scope of a tax treaty, paragraph 3 of Article XXII ( Consultation ) provides that the other party to the tax treaty may not invoke Article XVII ( National Treatment ). However, if there is a dispute as to whether a measure actually falls within the scope of a tax treaty, either country may take the matter to the Council on Trade in Services for referral to binding arbitration.

2.372 This provision is based, in all essential respects, on an OECD Model Commentary recommendation, and is common in recent international treaty practice. [Article 25, paragraph 5]

Arbitration

2.373 In some instances, the competent authorities will not reach agreement on a solution to a particular case. Paragraph 6 of this Article provides for arbitration to be used to assist in resolving those cases. The provisions contained in this paragraph are broadly consistent with those of paragraph 5 of Article 25 ( Mutual Agreement Procedure ) of the OECD Model.

2.374 Only those cases presented under paragraph 1 of this Article (that is, where a person contends that the actions of either Australia or New Zealand will result in taxation not in accordance with the Convention) are eligible. Cases arising under paragraph 3 of this Article, for example, a case involving a general difficulty in interpreting or applying the Convention raised by a competent authority, are not eligible to be resolved through this arbitration mechanism.

2.375 Cases arising under paragraph 1 can only access the arbitration mechanism if the competent authorities are unable to reach agreement within two years from when the case was first presented by the competent authority in one country to the competent authority of the other country. If the case remains unresolved after that time, the person may request that the arbitration mechanism be used. Access to arbitration in such cases is automatic; it is not subject to the specific agreement of the competent authorities.

2.376 As discussed in the OECD Model Commentary, it is not intended that the arbitration mechanism be an alternative to the mutual agreement procedure. Where the competent authorities have reached an agreement that does not leave any issues unresolved in the case, that case is not eligible for arbitration even if the taxpayer does not agree with the solution reached. However, if any issue remains outstanding so that taxation contrary to the Convention remains, the competent authorities cannot consider (either singly or together) the case is resolved and refuse the person access to the arbitration mechanism.

2.377 Unlike the mutual agreement procedure, which may be invoked where a taxpayer considers that taxation not in accordance with the treaty will or may result, the arbitration mechanism is only available in respect actual taxation contrary to the Convention which has resulted from the actions of either Australia or New Zealand, or both. This would include instances where an assessment or determination of tax has been made, or otherwise where the taxpayer has been officially notified by the ATO or New Zealand Inland Revenue Department that they are going to be taxed on an item of income. [Article 25, paragraph 6]

2.378 Not all unresolved issues arising from the case are eligible to be resolved through arbitration. Paragraph 7 of this Article establishes that the issues to which the arbitration mechanism applies are issues of fact and issues to which Australia and New Zealand agree in an Exchange of Notes are to be covered by the arbitration mechanism. Where cases involve both unresolved issues of fact and other unresolved issues (for example, the interpretation to be given to a particular provision in the Convention), only the issues of fact may be resolved through arbitration. The mutual agreement procedure will continue to apply in respect of other issues. [Article 25, paragraph 7]

2.379 Further, unresolved issues cannot be submitted for arbitration if a decision on those issues has already been reserved or rendered by a court or administrative tribunal of either Australia or New Zealand. As discussed in the OECD Model Commentary, this means where a court or administrative tribunal of one of the States has already rendered a decision that deals with those issues and that applies to that person. Paragraph 6 of this Article in the Convention also covers those instances where a court or administrative tribunal has reserved its decision. However, it is not intended that a person would be prevented from having unresolved factual issues arising in their case submitted for arbitration merely because another person is pursuing appeals through the domestic courts on similar issues.

2.380 Paragraph 6 provides that unless a person directly affected by the case rejects the arbitration decision on the issues, the decision is binding on both Australia and New Zealand. The competent authorities are required to reflect that decision in the mutual agreement in respect of the case. The outcomes of the mutual agreement are to be implemented notwithstanding any time limits in the domestic laws of both States. [Article 25, paragraph 6]

2.381 The arbitration mechanism contained in paragraphs 6 and 7 of this Article shall have effect from the date agreed in a subsequent Exchange of Notes through the diplomatic channel. This Exchange of Notes is expected to occur when Australia and New Zealand have established the underlying procedures governing the arbitration mechanism. Once paragraphs 6 and 7 have effect, cases which have been presented under to the relevant competent authority in accordance with paragraph 1 of the Article in this Convention, whether the case is presented before or after the date agreed in the Exchange of Notes, may be submitted to arbitration if they meet the criteria under paragraphs 6 and 7 of Article 25 ( Mutual Agreement Procedure ). However, arbitration is not available in respect of cases that were brought to the competent authorities under paragraph 1 of the existing New Zealand Agreement. [Article 30, paragraph 2]

Article 26 - Exchange of Information

2.382 The Convention allows for the competent authorities to exchange information on a wide range of taxes and irrespective of whether the country of whom the information is requested has a domestic tax interest in the information sought. The information allowed to be exchanged does not have to concern a resident of either Australia or New Zealand.

2.383 The provisions relating to exchange of information in the Convention are identical in effect to those included in the existing New Zealand Agreement by the amending Protocol signed on 15 November 2005.

Foreseeably relevant information

2.384 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 ) or Article 2 ( Taxes Covered ) of the Convention, and may therefore cover persons who are not residents of Australia or New Zealand.

2.385 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. [Article 26, paragraph 1]

Taxes to which this Article applies

2.386 Under the Convention, the Australian competent authority can request and obtain information concerning taxes of every kind and description imposed under New Zealand's tax laws. The New Zealand competent authority can request and obtain information concerning taxes of every kind and description under the federal laws administered by the Commissioner. This means, for example, that information concerning Australian indirect taxes (for example, the GST) may be requested and obtained from New Zealand.

2.387 This would also extend to information sought for the prevention of tax evasion, such as for the purposes of both Australia and New Zealand's promoter penalty regimes. In the course of negotiations, the delegations noted:

'The delegations agreed that the term 'concerning taxes' is intended to have a wide operation and an indirect but relevant connection with the information would be a sufficient connection. Accordingly, it was agreed that the competent authorities could exchange information for the purposes of their respective promoter penalty regimes to the extent that the information relates to the promotion of tax avoidance, tax evasion or abuse of administrative guidance.'

2.388 It is intended that the Article extend to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, these taxes.

Use of exchanged information

2.389 The purposes for which the exchanged information may be used and the persons to whom it may be disclosed are restricted in a manner which is consistent with the approach taken in the OECD Model. However, the final sentence of this paragraph permits the information to be used for other purposes when such use is authorised by the competent authority of the supplying country.

2.390 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, and can only be disclosed to the persons identified in paragraph 2 of the Article. [Article 26, paragraph 2]

No domestic tax interest required

2.391 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. [Article 25, paragraph 4]

Limitations

2.392 The country requested to provide information under this Article is not obliged to do so where:

•

it would be required to carry out administrative measures at variance with the law and administrative practice of either Australia or New Zealand; or

•

such information is not obtainable under the domestic law or in the normal course of administration of Australia or New Zealand.

[Article 26, subparagraphs 3a) and 3b)]

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

•

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

•

be contrary to public policy.

[Article 26, subparagraph 3c)]

Information held by institutions such as banks, other financial institutions or nominees

2.394 Paragraph 5 ensures that paragraph 3 of this Article cannot be used to prevent the supply of information solely because the information is held by institutions such as banks, other financial institutions or nominees. This reflects the 2005 changes to Article 26 ( Exchange of Information ) of the OECD Model. [Article 26, paragraph 5]

Information that exists prior to the entry into force of this Convention

2.395 Under this Article, the competent authorities can exchange information that relates to transactions or events occurring prior to entry into force of the Convention. This approach conforms with the international practice contained in paragraph 10.3 of the OECD Commentary on Article 26 ( Exchange of Information ).

Article 27 - Assistance in the Collection of Taxes

2.396 Australia and New Zealand are authorised and required 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 ( Persons Covered ) or Article 2 ( Taxes Covered ) of the Convention. 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 this Article.

2.397 The provisions relating to assistance in collection in the Convention are identical in effect to those included in the existing New Zealand Agreement by the amending Protocol signed on 15 November 2005. [Article 27, paragraph 1]

Definition of revenue claim

2.398 The term revenue claim is defined for the purposes of this Article to mean an amount owed in respect of taxes of every kind and description under New Zealand's tax laws, or any Australian federal tax administered by the Commissioner, but only insofar as the imposition of such taxes is not contrary to the Convention 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.

2.399 It is intended that the Article extend to any identical or substantially similar taxes which are subsequently imposed by either country in addition to, or in place of, these taxes. [Article 27, paragraph 2]

Enforceable revenue claims

2.400 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.

2.401 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 2.405 to 2.408), 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. [Article 27, paragraph 3]

2.402 Where New Zealand makes a revenue claim, the Commissioner will apply the provisions of Division 263 in Schedule 1 to the Taxation Administration Act 1953 for the administration and collection of that claim.

Measures of conservancy

2.403 Australia or New Zealand may 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.

2.404 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 the taxpayer's associates from dealing with certain assets. [Article 27, paragraph 4]

Time limits

2.405 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. [Article 27, paragraph 5]

2.406 This paragraph follows the OECD provision but has no practical effect in Australia as there is currently no time limit imposed on the collection of a revenue claim.

Priority of claims

2.407 Any 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.

2.408 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. [Article 27, paragraph 5]

Restriction on judicial and administrative proceedings

2.409 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. [Article 27, paragraph 6]

Change in circumstances

2.410 Where the relevant conditions in paragraph 3 or 4 of this Article 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, the competent authority of the requesting country is required to promptly notify the competent authority of the other country of that fact. [Article 27, paragraph 7]

2.411 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.

2.412 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. [Article 27, paragraph 7]

Limitations

2.413 The requested country is permitted to refuse the request for assistance in certain circumstances.

2.414 The first limitation on the obligations of the country receiving the request is that it 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 the Article. [Article 27, subparagraph 8a)]

2.415 However, this 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.

2.416 The second limitation provides that the country is not required to satisfy a request 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. [Article 27, subparagraph 8b)]

2.417 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. [Article 27, subparagraph 8c)]

2.418 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. [Article 27, subparagraph 8d)]

2.419 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. [Article 27, subparagraph 8e)]

Article 28 - Members of Diplomatic Missions and Consular Posts

2.420 The purpose of this Article is to ensure that the provisions of the Convention do not result in members of diplomatic missions or consular posts receiving less favourable treatment than that to which they are entitled in accordance with international conventions. Such persons are entitled, for example, to certain fiscal privileges under the Diplomatic Privileges and Immunities Act 1967 and the Consular Privileges and Immunities Act 1972 which reflect Australia's international diplomatic and consular obligations.

Article 29 - Miscellaneous

Obligation for Australia and New Zealand to consult every five years

2.421 Paragraph 1 of this Article requires Australia and New Zealand to consult each other every five years regarding the operation of the Convention to ensure that it continues to operate effectively in avoiding double taxation and preventing tax evasion. The first consultation is to occur no later than the end of the fifth year after entry into force of the Convention.

2.422 Regular evaluations of the Convention will ensure it remains consistent with both Australia and New Zealand's objectives. [Article 29, paragraph 1]

Most favoured nation obligation

2.423 The Convention includes a 'most favoured nation' clause which requires New Zealand to notify Australia if it agrees in another tax treaty to provide more favourable treatment of interest derived by financial institutions. New Zealand is further obliged to enter into negotiations with Australia to provide the same treatment under the Convention. [Article 29, paragraph 2]

2.424 This 'most favoured nation' clause will ensure that Australian financial institutions receive no less favourable treatment than financial institutions in New Zealand's other treaty partner countries. Thus for example, if New Zealand agreed in a future treaty to grant an interest withholding tax exemption for financial institutions, without a requirement that AIL be paid, or agreed to a withholding tax rate limit lower than 10 per cent in the event AIL was not paid, New Zealand would be obliged to negotiate with Australia to provide similar outcomes for Australian financial institutions.

Article 30 - Entry into Force

Date of entry into force

2.425 This Article provides for the entry into force of the Convention. The Convention will enter into force on the last date on which diplomatic notes are exchanged notifying that the domestic processes to approve the Convention in the respective countries have been completed. In Australia, enactment of the legislation giving the force of law in Australia to the Convention along with tabling the Convention in Parliament are prerequisites to the exchange of diplomatic notes. [Article 30, paragraph 1]

Date of application for Australian taxes

Withholding taxes

2.426 Once it enters into force, the Convention will apply in Australia in respect of withholding tax on income that is derived by a non-resident in relation to income derived on or after the first day of the second month next following the date on which the Convention enters into force. [Article 30, sub-subparagraph 1a )( i)]

Fringe benefits tax

2.427 The Convention will apply in Australia in respect of fringe benefits provided on or after 1 April next following the date on which this Convention enters into force. [Article 30, sub-subparagraph 1a )( ii)]

Other Australian taxes

2.428 The Convention will first apply to other Australian taxes as regards any year of income beginning on or after 1 July next following the date on which the Convention enters into force.

2.429 Where a taxpayer has adopted an accounting period ending on a date other than 30 June, the accounting period that has been substituted for the year of income beginning on 1 July next following the date on which the Convention enters into force will be the relevant year of income for the purposes of the application of such Australian tax. [Article 30, sub-subparagraph 1a )( iii)]

Date of application for New Zealand taxes

Withholding taxes

2.430 In New Zealand, the Convention will apply in respect of withholding tax on income that is derived by a non-resident in relation to income derived on or after the first day of the second month next following the date on which the Convention enters into force. [Article 30, sub-subparagraph 1b )( i)]

Other New Zealand taxes

2.431 The Convention will first apply to New Zealand taxes as regards any year of income beginning on or after 1 April next following the date on which the Convention enters into force. [Article 30, sub-subparagraph 1b )( ii)]

Arbitration

2.432 Paragraph 2 of this Article establishes that the provisions allowing for arbitration (paragraphs 6 and 7 in Article 25 ( Mutual Agreement Procedure )) shall have effect from a date agreed in a subsequent Exchange of Notes between Australia and New Zealand. [Article 30, paragraph 2]

Exchange of Information and Assistance in Collection

2.433 Article 26 ( Exchange of Information ) and Article 27 ( Assistance in the Collection of Taxes ) are intended to have effect from the date of entry into force of the Convention, irrespective of the year of income to which the information or the revenue claim relates (subject to any domestic law time limits).

Termination of the existing New Zealand Agreement

2.434 The existing New Zealand Agreement shall cease to have effect from the dates on which the Convention commences to have application for the respective taxes. The existing New Zealand Agreement shall be terminated on the last of those dates. [Article 30, paragraph 3]

Article 31 - Termination

2.435 The Convention is to continue in effect until terminated. Either country may terminate the Convention after the expiration of five years from the date of its entry into force. Termination is by notice in writing of termination through the diplomatic channel, at least six months before the end of any calendar year beginning after the expiration of that five-year period.

Cessation in Australia

2.436 In the event of either country terminating the Convention, the Convention would cease to be effective in Australia for the purposes of:

•

withholding tax on income derived by a non-resident, in relation to income derived on or after the first day of the second month next following that in which the notice of termination is given;

•

fringe benefits tax, in respect of fringe benefits provided on or after 1 April next following that in which the notice of termination is given; and

•

other Australian taxes, as regards any year of income, profits or gains in the Australian year of income commencing on or after 1 July next following that in which the notice of termination is given.

[Article 31, subparagraph a)]

Cessation in New Zealand

2.437 The Convention would correspondingly cease to be effective in New Zealand for the purposes of:

•

withholding tax on income derived by a non-resident, in relation to income derived on or after the first day of the second month next following that in which the notice of termination is given; and

•

other New Zealand taxes, for income years beginning on or after 1 April next following that in which the notice of termination is given.

[Article 31, subparagraph b)]