House of Representatives

Explanatory Memorandum

(Circulated by the Treasurer, the Rt. Hon. Sir Arthur Fadden.)

Ed. Note

INTRODUCTORY NOTE:-

The primary purpose of the Income Tax (International Agreements) Bill 1953 is to give the force of law to international agreements entered into by the Commonwealth for the purposes of relieving international double taxation of incomes and preventing fiscal evasion. Machinery provisions to facilitate the practical application of the agreements are also proposed in the Bill.

In 1946, the Commonwealth and the United Kingdom signed an agreement which had as its primary purpose the relief of double taxation on income derived by residents of Australia from sources in the United Kingdom and on incomes received by residents of the United Kingdom from sources in Australia.

The agreement with the United Kingdom was considered by the Parliament in 1947 and it at present has the force of law by reason of the provisions of Part IIIB. of the Income Tax and Social Services Contribution Assessment Act 1936-1953. The agreement appears as the Third Schedule to that Act.

On 14th May, 1953, a convention was signed by the Commonwealth and the United States of America. The primary purpose of this convention is to relieve double taxation by Australia and the United States on income flowing between the two countries. This convention requires ratification before it becomes effective.

It is proposed in the Income Tax (International Agreements) Bill 1953 to give the force of law to the convention with the United States. In order that the law relating to international agreements concerning income tax may appear in one Act it is proposed to repeal the provisions of the Income Tax and Social Services Contribution Assessment Act relating to the agreement with the United Kingdom. Appropriate provisions enabling the continued application of that agreement are included in the Income Tax (International Agreements) Bill 1953, while the necessary amendments of the existing law are contained in the Income Tax and Social Services Contribution Assessment Bill (No. 3) 1953.

The full text of the agreement with the United Kingdom is set out in the First Schedule to the Income Tax (International Agreements) Bill, while the convention with the United States appears as the Second Schedule to that Bill.

The provisions of the convention with the United States and notes relating to the various Articles will be found in a subsequent part of this explanatory memorandum.

Notes on Clauses

Income Tax and Social Services Contribution Assessment Bill (No. 3) 1953.

CLAUSE 2.- COMMENCEMENT.

It is provided in section 5(1A.) of the Acts Interpretation Act 1901-1950 that every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent, unless the contrary intention appears in the Act.

In this clause it is proposed that the Income Tax and Social Services Contribution Assessment Act (No. 3) 1953 shall come into operation on the day on which it receives the Royal Assent. A corresponding proposal is contained in the Income Tax (International Agreements) Bill 1953.

These provisions in the two Bills are necessary in order to avoid undue delay in giving effect to the convention with the United States. Action to ratify this convention will be taken as soon as practicable after Royal Assent has been given to the Bills and, if the instruments of ratification are exchanged before the end of 1953, the convention will be effective in Australia from the commencement of the year of income which began on 1st July, 1953 and in the United States from 1st January, 1953.

CLAUSE 3.- PARTS.

The various Parts into which the Principal Act is divided are enumerated in section 5 of that Act.

This clause is a drafting amendment deleting reference to Part IIIB., which it is proposed to repeal by clause 6(1.) of this Bill.

CLAUSE 4.- CREDIT IN RESPECT OF TAX PAID ABROAD ON EX-AUSTRALIAN DIVIDENDS.

This clause proposes four drafting amendments to section 45 of the Principal Act.

Section 45 provides for the allowance of credits against Australian tax for overseas tax paid on dividends received by residents of Australia from companies not resident in Australia.

For the purposes of determining the amount to be allowed as a credit it is necessary to ascertain the amount of Australian tax payable on this dividend. This amount is now ascertained under section 160K of the Principal Act but that provision is to be repealed. Paragraph (a) accordingly provides for the deletion from section 45 of a reference to section 160K of the Principal Act and inserts in its stead a reference to section 16 of the proposed Income Tax (International Agreements) Act 1953. The amount of Australian tax attributable to dividends will in the future be ascertained in accordance with that provision.

The amendment applies for the income year ending on 30th June, 1954, and subsequent years.

Paragraphs (b) and (c) are consequential upon a renumbering in 1952 of certain provisions of the Principal Act referred to in section 45 of that Act. The references are being brought into line with the revised numbering and the amendments will apply for the years ended 30th June, 1952, and subsequent years.

Paragraph (d) omits from section 45 of the Principal Act a reference to Part IIIB., which is being repealed. It also inserts a reference to the Income Tax (International Agreements) Act 1953, which contains provisions corresponding with Part IIIB. The amendment applies for the income year which began on 1st July, 1953, and for subsequent years.

CLAUSE 5.- REBATE IN CASE OF DOUBLE AND TREBLE TAXATION.

Clause 5 proposes the repeal of section 159 of the Principal Act.

Section 159 provides for the partial relief of double and treble taxation on income derived by residents of the United Kingdom from sources in Australia. The section was, in effect, superseded by the coming into force of the United Kingdom-Australia double taxation agreement. Section 160G of the Principal Act has ensured that section 159 has had no practical application in relation to income derived after the income year which ended on 30th June, 1947.

The repeal, which will apply for the year ending 30th June, 1954, and subsequent years, will delete a provision which has ceased to be effective.

CLAUSE 6.- REPEAL OF PART IIIB.-RELIEF FROM DOUBLE TAXATION.

Sub-section (1.) will repeal Part IIIB. of the Principal Act.

Part IIIB. gives the force of law to the United Kingdom-Australia double taxation agreement and, in addition, contains machinery relating to that agreement and the relief of double taxation.

It is proposed in the Income Tax (International Agreements) Bill 1953 to continue the force of law given to that agreement in 1947 and also to give the force of law to the convention with the United States relating to income tax. Appropriate machinery provisions are also proposed in that Bill, which contains a number of provisions corresponding with those now contained in Part IIIB. of the Principal Act.

Provisions corresponding with sections 160G and 160R of the Principal Act are not required in the revised law. Section 160G becomes unnecessary because its sole purpose was to limit the operation of section 159, which is to be repealed. Section 160R is redundant because there do not now exist circumstances in which it could have practical application. All other provisions of Part IIIB. have a counterpart in this Bill or the Income Tax (International Agreements) Bill and are shown in this memorandum opposite the proposed new provisions.

The repeal will apply as from the commencement of the income year which began on 1st July, 1953.

Sub-section (2.) is a drafting provision necessitated by a renumbering in 1952 of certain provisions of the Principal Act referred to in section 160Q (4.) of that Act. The sub-section will apply in relation to the income years ended 30th June, 1952, and 1953 and will bring the law into line with the revised numbering.

CLAUSE 7.- REDUCTION OF PROVISIONAL TAX.

This clause proposes a new section in the Principal Act to replace section 160R now contained in Part IIIB., which is to be repealed.

The existing section 160R authorizes the Commissioner to reduce the amount of provisional tax payable for an income year where the application of an agreement is likely to reduce the amount of tax ultimately payable on the income of that year.

The proposed new section 221YDC grants a similar authority to the Commissioner and, in addition, authorizes the Commissioner to reduce the provisional tax where a credit under section 45 of the Principal Act is likely to be allowable.

The new section will apply to provisional tax on income of the year of income which commenced on 1st July, 1953, and subsequent years.

CLAUSE 8.- REPEAL OF THIRD SCHEDULE.

Clause 8 proposes the repeal of the Third Schedule to the Principal Act.

The Third Schedule is a copy of the United Kingdom-Australia double taxation agreement. The repeal is complementary with the repeal of Part IIIB. of the Principal Act and the proposed enactment of the Income Tax (International Agreements) Act 1953. The agreement will appear as the First Schedule to that Act and will be given the force of law by that Act.

The agreement, which has had the force of law since 1947, is not printed in this memorandum, but is set out in full in the First Schedule to the Income Tax (International Agreements) Bill 1953.

CLAUSE 9.- APPLICATION OF AMENDMENTS.

The amendments proposed by the Bill will apply for the years indicated in this clause. The years to which the amendments will commence to apply have been stated in the notes explaining the various clauses of the Bill.

INCOME TAX (INTERNATIONAL AGREEMENTS) BILL 1953.

CLAUSE 2.- COMMENCEMENT.

Section 5 (1A.) of the Acts Interpretation Act 1901-1950 provides that every Act shall come into operation on the twenty-eighth day after the day on which it receives the Royal Assent, unless the contrary intention appears in the Act.

In this clause it is proposed that the Income Tax (International Agreements) Act 1953 come into force on the day on which it receives Royal Assent.

As explained in relation to clause 2 of the Income Tax and Social Services Contribution Assessment Bill (No.3) 1953, this course is being adopted in order to avoid any unnecessary delay in the ratification, and coming into effect, of the convention with the United States.

CLAUSE 3. SECTION 3.-DEFINITIONS.

Sub-section (1.) contains definitions designed to facilitate the drafting of the Bill.

The term "agreement" will mean an agreement or convention a copy of which has been included as a schedule to the proposed Act. The force of law as respects Australian tax will be given to such agreements and conventions by the section which provides for their inclusion as a schedule. The agreement with the United Kingdom and the convention with the United States will be the only "agreements" for the purposes of the Bill.

"Australian tax" will mean income tax and social services contribution, which includes the additional tax on the undistributed income of private companies.

"Foreign tax" will include any tax which is the subject of an agreement, but will not extend to Australian tax. The existing definition of "foreign tax" provides that the term includes tax only if it is a tax for which credit may be given under an agreement. Practical operation of the provision has shown that nothing is added to the effectiveness of the definition by reason of the qualification, which it is now proposed to omit.

The term "the Assessment Act" will mean the Income Tax and Social Services Contribution Assessment Act 1936-1953. The definition was not required while provisions relating to agreements were given the force of law by that Act. It will, however, be necessary in the proposed Act to make references to the Income Tax and Social Services Contribution Assessment Act and the definition will facilitate those references.

The term "the United Kingdom agreement" is now being defined as a matter of drafting expediency. The term will mean the agreement made with the United Kingdom in 1946 and given the force of law in 1947.

"The United States convention" has also been included as a drafting expediency. The term means the convention relating to taxes on income signed on behalf of the Commonwealth and the United States on 14th May, 1953.

The proposed sub-section (2.) is, subject to minor drafting variations, the same as the corresponding provision enacted in 1947 as sub-section (2.) of section 160F of the Assessment Act. Its purpose is to permit references in agreements to profits to be construed, unless the context requires otherwise, as references to taxable income. The provision is required because the Australian law imposes tax upon taxable income and not upon profits as such.

CLAUSE 4. SECTION 4.-INCORPORATION.

A number of the provisions of the Bill will require to be interpreted having regard to provisions of the Assessment Act. Sub-section (1.) accordingly incorporates the Assessment Act with the Income Tax (International Agreements) Act and the two measures will be read as a single enactment.

Sub-section (2.), which corresponds with the present section 160J of the Assessment Act, will apply where provisions of the Bill are inconsistent with the Assessment Act or with an Act imposing income tax.

The agreements contain provisions designed to vary the effect of the Assessment Act and the rates of tax. It is accordingly necessary to ensure that the terms of the agreements and machinery provisions for the practical application of the agreements prevail over conflicting provisions of the Assessment Act and the law imposing rates of tax. The sub-section will result in those statutes being applied subject to the provisions of the proposed Act which, will include in its schedules the agreements with the United Kingdom and the United States.

CLAUSE 5. SECTION 5.-AGREEMENT WITH UNITED KINGDOM.

The Agreement concluded with the United Kingdom in 1946 has the force of law by reason of section 160H of the Assessment Act. It is, however, proposed, in the Bill amending the Assessment Act, to repeal that section.

Clause 5 will ensure, subject to the provisions of the proposed Income Tax (International Agreements) Act, that the United Kingdom agreement will have the force of law in relation to Australian tax as from the beginning of the income year which commenced on 1st July, 1953. As the repeal of section 160H of the Assessment Act will be effective as from the close of the income year which ended on 30th June, 1953, there will be continuity in the application of the agreement.

The clause will provide that the agreement will also have the force of law in all future years in which the terms of the agreement require that agreement to be effective-that is, until the agreement is terminated by notice given under Article XVI. of the agreement.

Since the agreement will have the force of law subject to the proposed Income Tax (International Agreements) Act, the agreement will not prevail over the provisions of that Act. This position accords with the existing law.

CLAUSE 6. SECTION 6.-CONVENTION WITH UNITED STATES OF AMERICA.

This clause will, subject to the proposed Act, give the force of law to the convention relating to income tax signed with the United States on 14 May, 1953.

The convention, which requires ratification, will become effective in relation to Australian tax from the beginning of the income year which commenced on the 1st July following the convention becoming effective in respect of United States tax. The convention will become effective in the United States as from 1st January of the year in which instruments of ratification are exchanged. It follows that effect as regards Australian tax will be given to the convention as from the beginning of the income year which commences in the year in which those instruments are exchanged. The convention will, by reason of clause 6, have the force of law in Australia as from the same date.

If instruments of ratification are exchanged before the end of 1953, the convention will become effective on, and have the force of law in Australia as from, the commencement of the income year which began on 1st July, 1953.

The convention will continue to have the force of law until it ceases, in accordance with a notice of termination given under Article XXI. of the convention, to be effective.

CLAUSE 7. SECTION 7.-DETERMINATION OF CLAIMS FOR CREDITS.

Sub-section (1.), which requires the Commissioner to determine the amount of credits to be allowed for foreign tax, has no counterpart in the present law.

Under the agreement with the United Kingdom, a credit is only allowable in respect of United Kingdom tax relating to dividends and only then if the taxpayer elects to have an amount of United Kingdom tax included in his assessable income for the purposes of Australian tax.

The credit allowed is not part of the assessment and there is no direct right of objection or appeal against the amount of the credit. There is, however, a right of objection and appeal against the amount of United Kingdom tax included in the assessable income and, in this indirect way, a challenge might in some circumstances be made against the amount of a credit.

Even this partial right would not exist against the amount of a credit allowable under the convention with the United States and it is proposed to grant taxpayers the same rights of objection and appeal against the amount of a credit as are provided in relation to assessments.

As a preliminary step, sub-section (1.) will require the Commissioner to determine whether a credit is allowable and, if so, the amount of the credit. This action by the Commissioner will provide the basis from which rights of objection and appeal will flow under clause 10.

Sub-section (2.) provides that the determination of the amount of a credit shall not be part of an assessment. The necessity for this provision arises from technical difficulties associated with the definition in the Assessment Act of the expression "assessment". As the rights of taxpayers will be fully protected under the proposed law, the retention of this provision in the law will not be unfavourable to persons entitled to credits.

By sub-section (3.) the Commissioner is required to give written notice of the determination of a credit. Taxpayers will accordingly be in a position to know the amount of a credit and, if dissatisfied, to take appropriate action to protect their position.

Sub-section (4.) will permit the Commissioner to include a notice of determination of credit in a notice of assessment. The adoption of this course has not been made mandatory because, in some circumstances, taxpayers will be unable to supply all the information necessary for the calculation of the credit before the assessment for the material income year is made. In these cases, a separate notice of determination will be given and taxpayers will then have a right of objection against the amount of the credit allowed.

CLAUSE 8. SECTION 8.-EVIDENCE OF DETERMINATIONS.

It is proposed by this clause to make a notice of determination, or a copy of a notice certified by the Commissioner, the Second Commissioner or Deputy Commissioner, conclusive evidence that a determination has been made.

In proceedings on appeal against a determination, the production of a notice or certified copy of a notice will not be evidence of the correctness of the determination. If, however, the determination is not the subject of an appeal, a notice or certified copy will be conclusive evidence of the correctness of a determination.

CLAUSE 9. SECTION 9.-AMENDMENT OF DETERMINATIONS.

This clause relates to the amendment of determinations of credits.

Sub-section (1.) will permit a determination to be amended by the Commissioner at any time, subject to the succeeding provisions of the section.

Where a person has made a full and true disclosure of all the facts material to the making of a determination, sub-section (2.) will prohibit the Commissioner from decreasing the amount of a credit except for the purpose of correcting an error in calculation or a mistake of fact, or in consequence of a variation in, or a credit or refund of, Australian or foreign tax. If a taxpayer has made a full and true disclosure of all material facts, the Commissioner will not be permitted to decrease the amount of a credit because of a mistake of law made in the original determination.

Amended determinations, where permitted, may be made at any time. The absence of a time limit is necessary because the amount of foreign tax payable may give rise to a variation of the credit allowable by Australia. It is not practicable for the Commonwealth to determine the period in which the amount of foreign tax may be altered and it would accordingly be inappropriate for Australia to place a time limit on the amendment of determinations of credit. Such a limitation could be detrimental to either the taxpayer or the Revenue.

Under sub-section (3.) an amendment to increase a determination will be permitted at any time if the amendment is for the purpose of correcting an error in calculating or a mistake of fact or in consequence of an alteration, credit or refund of Australian or foreign tax. The provision corresponds in principle with-sub-section (2.) relating to amendments decreasing the amount of credits.

Sub-section (4.) permits the amendment at any time of determinations for the purpose of giving effect to a decision of a Court or Board of Review. In addition, the Commissioner may, at any time, increase the amount of a credit pursuant to an objection lodged by a taxpayer or pending an appeal to a Court or a reference to a Board of Review. In these circumstances, sub-section (2.) will not apply to prevent the amendment of determinations for the purpose of increasing the amount of a credit.

In sub-section (5.) it is proposed that amended determinations shall be deemed to be determinations. Provisions of the law relating to original determinations and to objections and appeals against determinations will accordingly apply in relation to amended determinations and objections and appeals against those amended determinations.

CLAUSE 10. SECTION 10.-REVIEWS AND APPEALS.

Division 2 of Part V. of the Assessment Act provides for the lodging of objections against assessments and for appeals to Courts and references to Boards of Review of decisions on the objections.

In sub-section (1.) it is proposed that rights in relation to objections and appeals against assessments, and of reviews of assessments, granted under Division 2 of Part V. of the Assessment Act shall be extended to determinations of credits. In order to render more effective this adaptation of existing provisions of the Assessment Act it is provided in paragraph (a) that references in the material provisions of the Assessment Act shall be read as references to determinations under the proposed Income Tax (International Agreements) Act.

Paragraph (b) provides a specific adaptation of section 188 (2.) of the Assessment Act under which fees lodged in relation to an appeal to a Court or reference to a Board of Review are refunded in prescribed circumstances. A fee paid in relation to an appeal against, or a review of, a determination of credit will be refunded if the amount of the credit is increased as a result of a decision of a Court or Board of Review or in an amended determination made by the Commissioner.

Paragraph (c) adapts the provision of section 190 (b) of the Assessment Act under which the burden of proving an assessment is excessive lies on the taxpayer. Correspondingly, the burden of proving that a credit is insufficient will lie on the person claiming the credit.

Section 191 of the Assessment Act applies where the Commissioner, after considering an objection, reduces the assessment. In these cases, it is the reduced assessment which is considered on an appeal or reference. Paragraph (d) adapts this provision so that, in the event of the Commissioner amending a determination to increase the amount of a credit, it is the amended determination which is considered by the Court or Board of Review.

Sub-section (2.), which corresponds with section 201 of the Assessment Act, will ensure that a determination of credit or an assessment is not affected by the mere lodging of an appeal to a Court or request for reference to a Board of Review. Taxpayers will be liable to pay outstanding tax even though an appeal against, or request for review of, a determination has been lodged.

CLAUSES 11 AND 12. SECTION 11.-INFORMATION FOR CREDIT TO BE FURNISHED WITHIN THREE YEARS. SECTION 12.-ELECTION IN RESPECT OF FOREIGN TAX ON DIVIDEND.

Clause 11 proposes that, except in special circumstances, a credit for foreign tax shall be allowed only if all the information necessary for determining the amount of the credit is supplied to the Commissioner within three years of the date on which the tax against which the credit is claimed becomes due and payable.

In the case of credits to be allowed for United States tax it is anticipated that taxpayers will generally be in a position to furnish the necessary information when lodging the returns of income in which the material income is included. Details of United Kingdom tax, and reliefs from that tax, will not, however, be so readily available, but it is expected that, in the generality of cases, taxpayers will be able to furnish the necessary details within the three year period specified. In the isolated cases in which special circumstances prevent the forwarding of the information within that period, the Commissioner will be empowered to extend the period for a further three years.

The proposed section accords with the provisions of section 160L of the Assessment Act relating to the furnishing of information relating to credits for foreign tax.

Clause 12 corresponds with section 160L of the Assessment Act except that it omits references to supplying information. That matter is covered in clause 11 of this Bill.

Paragraph (2) of Article XII. of the United Kingdom agreement provides that a resident of Australia shall be allowed against the Australian tax payable in respect of a dividend, a credit of the United Kingdom tax payable in relation to the dividend only if the recipient elects to have an amount of United Kingdom tax included in his assessable income.

The proposed sub-section (1.) allows the taxpayer three years in which to make the appropriate election but also permits the Commissioner, in special circumstances, to extend that period for a further three years. This provision accords with the existing law and with the preceding clause relating to the furnishing of information required for the determination of a credit.

The United States convention does not contain a provision corresponding to Article XII. (2) of the United Kingdom agreement and the proposed section will, as in the past, have application only in relation to United Kingdom tax on dividends received from that country.

Where a taxpayer elects to have an amount of United Kingdom tax included in his assessable income, sub-section (2.) will ensure that that amount of tax is treated as part of the dividend to which it relates. The credit to which the taxpayer is entitled will accordingly be calculated having regard to the amount of United Kingdom tax included in the assessable income. Furthermore, in the case of a company, the amount treated as a dividend will rank for the rebate allowable under the provisions of section 46 (1.) of the Assessment Act.

Sub-section (3.) corresponds with existing section 160L (4.) of the Assessment Act. It is complementary to sub-section (2.) in that it ensures that a repayment of United Kingdom tax will be treated as assessable income of the year in which the dividend to which it relates was received. It will, in fact, be treated as part of that dividend.

The provision is necessary because, in its absence, the amount of repayment would, under section 26A of the Assessment Act, be treated as assessable income of the year in which the repayment is made. If that position obtained, the amount of the repayment would not be taken into account in determining the credit to be allowed and the taxpayer would be adversely affected.

Where an amount of a repayment is treated as assessable income under section 26A of the Assessment Act and the taxpayer subsequently makes an effective election under Article XII. (2) of the United Kingdom agreement, the proposed sub-section (3.) will permit the exclusion of the material amount from the assessable income of the year in which the repayment was made and its inclusion in the income of the year in which the relevant dividend was received. This action will permit full effect to be given to the election made by the taxpayer.

Sub-section (4.) authorizes the amendment of an assessment at any time for the purpose of making the adjustments permitted by sub-sections (2.) and (3.).

CLAUSE 13. SECTION 13.-DIVIDEND PAID WITHOUT DEDUCTION IN FULL OF FOREIGN TAX.

This section, which corresponds with the present section 160M of the Assessment Act, will apply in relation to dividends paid by United Kingdom companies to residents of Australia. The United States system of taxation will not bring the section into operation in relation to dividends received from that country.

Under the United Kingdom taxation law a company paying a dividend is permitted, but not required, to deduct from a dividend an amount in respect of tax paid by the company. The amount so deducted from a dividend paid to a resident of Australia, is, if the shareholder elects, treated as assessable income for Australian tax purposes. The benefit to the taxpayer lies in the fact that, if the election is made, a credit for the United Kingdom tax is allowed against the Australian tax on the dividend.

In some instances, the appropriate deduction from a dividend is not made by the company and a special provision is necessary in order to ensure that, in these circumstances, a taxpayer can make an effective election and obtain the benefit of a credit.

The proposed section accordingly provides that, where authorized deductions from a dividend are not made in full by the company paying the dividend, a person who makes the appropriate election, may have included in his assessable income an amount equal to United Kingdom tax which would have been deducted if the company had declared an amount of dividend which, after the full deduction had been made, would have left for payment to the shareholder the amount actually received by him. If this course is adopted by the shareholder he will be entitled to a credit in relation to the United Kingdom tax.

The position can be explained by an example in which a resident of Australia receives from a United Kingdom company a dividend of Pd55 from which no deduction for tax is made. If the standard rate of United Kingdom tax is 9s. in the Pd1, the company would, if it were to make the authorized deduction in full, have had to declare a dividend of Pd100 in order to ensure that the shareholder actually received Pd55. On declaring the dividend of Pd100 the company would have deducted Pd45 for tax and the shareholder would have been paid Pd55. If the taxpayer made the appropriate election, his assessable income would include the Pd55 actually paid to him and, by reason of the proposed section 13, the Pd45, less any relief from United Kingdom tax. A credit for the Pd45, reduced by any relief from United Kingdom, would then be allowed against the Australian tax on the dividend.

In a case in which a dividend of Pd55 is paid without deduction for tax, the section will permit the inclusion of an additional Pd45 (reduced by any relief) in the assessable income of a taxpayer who elects to that effect, and a credit of Pd45 (reduced by any relief) will then be allowed against the tax assessed.

CLAUSE 14. SECTION 14.-MAXIMUM CREDITS.

In broad principle, this section will correspond with section 160P of the Assessment Act under which the amount of credit allowable was limited to the lesser of the amount calculated as the Australian tax attributable to the income to which the credit relates or the total Australian tax otherwise payable for the material year of income.

The proposed section has been drafted in order to place a corresponding limit on the sum of the credits allowable under agreements and under section 45 of the Assessment Act. This latter section provides for the granting of credits for overseas tax which is paid on dividends and which is not the subject of an agreement.

The section proposed will accordingly ensure that the sum of the credits allowable under agreements and under section 45 will not exceed the Australian tax attributable to the income to which the credits relate.

It was also necessary to provide that the sum of the credits should not exceed the Australian tax for the income year in which the material income was received. This latter circumstance could, but for the proposed provision, arise in some instances where a rebate in relation to government loan interest is allowable. The full rebate will, however, continue to be allowable.

CLAUSE 15. SECTION 15.-APPLICATION OF CREDIT.

The proposed section 15, which is similar in purpose to section 160Q of the Assessment Act, provides for the manner in which credits for foreign tax are to be applied.

Sub-section (1.) will provide that credits for foreign tax shall be a debt due and payable by the Commissioner on behalf of the Commonwealth, but this provision is subject to the operation of sub-section (2.) which will permit the Commissioner to apply the amount of a credit against liability to the Commonwealth for any liability imposed by an Act administered by the Commissioner.

Where an amount is so applied by the Commissioner, the person to whom the credit was due, is deemed by sub-section (3.) to have paid, at the time of the application of the credit by the Commissioner, the tax against which the credit was applied.

In the case of a private company, deductions are allowable for taxes paid or payable in determining the amount, if any, upon which undistributed profits tax is to be imposed. The payment or application of a credit has the effect of reducing the total burden of tax and sub-section (4.) provides for a corresponding reduction in the deduction to be allowed for taxes paid or payable. The provision corresponds with the present section 160Q (4.) of the Assessment Act.

In the event of the Commissioner paying or applying a credit which is in excess of the amount to which a person is entitled, sub-section (5.) will authorize the Commissioner to recover the excess as if it were Australian tax. A credit may become excessive in amount if the assessment of overseas tax is reduced by amendment or if the Australian assessment is for any reason reduced.

CLAUSE 16. SECTION 16.-ASCERTAINMENT OF AUSTRALIAN TAX ON DIVIDEND.

Article XII. (2) of the United Kingdom agreement and section 45 of the Assessment Act provide for the granting of credits to relieve international double taxation on dividends received by residents of Australia from companies resident in the United Kingdom or in other countries outside Australia.

The amount of a credit is restricted to the amount of Australian tax imposed on the dividend and it has accordingly been necessary to provide a statutory basis for ascertaining the amount of Australian tax on a dividend.

In addition, it is necessary to ascertain, for the purposes of Article VI. (3) of the United Kingdom agreement the amount of Australian tax payable on certain dividends paid to United Kingdom residents.

When the United States convention comes into effect it will also be necessary for the purposes of Articles VII. (1) and XV. (2) of that convention to ascertain the amount of Australian tax on dividends.

The existing section 160K of the Assessment Act prescribes a basis for ascertaining the quantum of Australian tax payable in respect of a dividend. As explained in relation to clause 6 of the Income Tax and Social Services Contribution Assessment Bill (No. 3) 1953, Part IIIB. of the Assessment Act, which includes 160K, is to be repealed.

It accordingly becomes necessary to provide in the Income Tax (International Agreements) Act a basis of ascertaining the amount of Australian tax on a dividend. Clause 16 will provide this requirement.

Owing to changes made in the income tax law in the course of implementing the recent budget, the provisions of the present section 160K of the Assessment Act have ceased to be satisfactory. The proposed section will, so far as concerns general principles, be similar in its effects to the present law, but very considerable variations in drafting forms have been found appropriate in several of the sub-sections.

Sub-section (1.) has not been varied to any major extent and it provides that the amount of Australian tax payable in respect of a dividend, a part of a dividend or an amount deemed (under the Assessment Act or the proposed Act) to be a dividend is to be ascertained in accordance with the section.

Sub-section (2.) provides for the ascertainment of the Australian tax payable by a company, other than a company in the capacity of a trustee or a private company liable to pay tax on its undistributed profits. The Australian tax will be ascertained by applying to the net dividend the average rate of tax payable by the company and deducting from the amount so ascertained the appropriate proportion of any rebate allowed in respect of the dividend. The terms "the net dividend", "the average rate of tax" and "the dividend" are explained below in relation to sub-sections (6.), (7.) and (8.).

Where a private company is liable to pay undistributed profits tax, sub-section (3.) provides that the amount of Australian tax shall be the sum of the amount determined under sub-section (2.) and an amount ascertained by applying to the adjusted net dividend the rate of additional tax imposed on the undistributed amount. The present rate of additional tax is 10s. in the Pd. "The adjusted net dividend" is explained below when dealing with sub-sections (6.) and (7.).

Sub-section (4.) relates to an individual or a company in the capacity of a trustee. In these cases the amount of Australian tax payable in respect of a dividend will be ascertained by applying the average rate of tax to the net dividend.

Sub-section (5.) relates to the income of trustees and partnerships assessed under special provisions of the Assessment Act. The sub-section, which is similar in its effects to the relevant part of the existing section 160K (4.), provides that the Commissioner shall determine the amount of the Australian tax which, in his opinion, is reasonably attributable to a dividend.

Sub-section (6.) provides the means by which "the net dividend" and "the adjusted net dividend" are to be ascertained. In this connexion, algebraic formulae have been adopted. The formulae have the advantage of avoiding complex and extensive definitions and it is believed that they will be more readily interpreted by persons having reference to the section than would provisions expressed in the usual form.

Before explaining the formulae it will be convenient to discuss the definitions in sub-section (8.) and the meanings given in sub-section (7.) to the symbols used in the formulae.

The terms defined in sub-section (8.) are-

"apportionable deductions": For the purpose of determining the amount of Australian tax on a dividend, it has been the practice since the United Kingdom agreement came into force in 1947 to apportion deductions and rebates of a concessional nature over the various classes of income included in the assessable income of the person who receives the dividend. This practice is being retained and the definition covers the deductions which are to be so apportioned.

These deductions include all concessional deductions allowable under the Assessment Act, e.g., deductions for maintenance of dependants, medical expenses, life insurance premiums and superannuation fund contributions.

Also covered by the term "apportionable deductions" will be deductions allowed in respect of calls on company shares and for gifts to public benevolent institutions, public hospitals, &c.

Deductions in respect of rates on non-income-producing land are not now apportioned, as are concessional deductions. These rates are not, however, incurred in producing assessable income and the deduction allowed is of a concessional nature. It is accordingly consistent with the principles of the section to treat deductions for rates not incurred in producing assessable income in the same manner as concessional deductions. They will accordingly be covered by the definition of "apportionable deductions".

"public loan interest": Special income tax concessions are allowed in respect of certain interest from securities issued by governments, local governing bodies and public authorities in Australia. The term "public loan interest" has been defined so as to cover the interest in respect of which these concessions are granted.

"the average rate of tax": Paragraph (a) of the definition provides the basis for arriving at the average rate of tax in the case of a company which has derived dividend income taxed at a rate imposed expressly in relation to dividends. A rate of tax is so imposed in the case of non-resident public companies and there may be isolated instances in which it applies in relation to non-resident life assurance companies.

In these cases the average rate of tax is determined by ascertaining the tax which would have been payable on the dividends if the company had derived no other taxable income by the amount of the taxable income which consists of dividends.

Paragraph (b) of the definition applies in all other cases, that is, where there is no rate of tax applying expressly in relation to dividends. In these cases the rates of tax are determined by the quantum of taxable income and the first step in ascertaining the average rate of tax on dividends is to determine the amount of tax which would have been payable by the taxpayer if his taxable income had consisted solely of dividends, if he had not been entitled to any rebate or credit and if, in the case of a private company, no additional tax had been payable on undistributed profits. In other words, the gross tax, other than undistributed profits tax, is ascertained. The average rate is then arrived at by dividing the taxable income into that gross tax.

"the dividend": This term means the amount of a dividend, part of a dividend or other amount in relation to which it is necessary to ascertain the Australian tax payable. No deductions are allowed in determining "the dividend". The position in relation to deductions and to any portion of a dividend which is exempt is covered in the ascertainment of "the net dividend" under sub-section (6.).

"the year of income": This definition is a drafting expediency and the term means, in effect, the year of income in which "the dividends" is derived.

Sub-section (7.) enumerates the meanings to be given to the various terms employed in the formulae used in ascertaining "the net dividend" and "the adjusted net dividend".

"A"

is the assessable portion of "the dividend" remaining after allowing deductions relating directly to "the dividend". This symbol will mean the net assessable portion of the dividend and accordingly ensures that no tax is attributed to exempt dividends or to the part of a dividend which is offset by a deduction.

"B"

will, in the generality of cases, equal the "apportionable deductions". There are, however, circumstances in which deductions usually allowable from income other than dividends and public loan interest, exceed that income and are accordingly allowed from dividends or public loan interest. In these cases "B" will be the apportionable deductions or the amount of the excess, whichever is the greater. A practicable application of this provision will be seen in the examples below.

"C"

is the taxable income of the material year of income.

"D"

is the public loan interest included in the taxable income, that is, the amount of the public loan interest reduced by the amount of the deductions, if any, which relate directly to that interest. Because decisions of the High Court demonstrate that other deductions may not be set against public loan interest in the course of calculating the concessions granted in relation to this interest, apportionable deductions are not to be apportioned against that interest. This position will be further discussed in relation to the formula for ascertaining "the net income".

"E"

is a symbol which is used only in relation to "the adjusted net dividend" which, in turn, applies only where a private company is liable to pay additional tax on undistributed profits.

In the generality of cases, "E" will equal the net dividend. A private company may, however, derive public loan interest in relation to which a rebate of 2s. in the Pd is allowable under section 160AB of the Assessment Act. Because of this rebate, interest of this class is treated as public loan interest for the purposes of ascertaining "the net dividend". This interest, however, carries no concession for the purposes of undistributed profits tax and it is accordingly equitable to recognise that, in arriving at the undistributed profits tax in respect of dividend, the interest subject to rebate under section 160AB should be treated in the same manner as interest generally. If this were not done, private companies could be prejudiced. In these cases "E" will accordingly be the amount which would have been "the net dividend" if the material interest had not been public loan interest. Example 4 which follows will show the practical effect of the method adopted.

"F"

is the undistributed amount upon which undistributed profits tax is payable for the material year of income.

"G"

is the public loan interest, other than interest in relation to which a rebate of 2s. in the Pd is allowable under section 160AB of the Assessment Act.

Sub-section (6.) provides that "the net dividend" shall be-

A - B*((A)/(C + B - D))


and that "the adjusted net dividend" shall be-

E*((F - G)/(C - G))


The effect of the first formula is that the part of "the dividend" included in the taxable income is reduced by a proportion of the apportionable deductions or, in isolated cases, by a proportion of the excess of deductions over so much of the income as does not comprise dividends or public loan interest. The amount deducted from "A" is an amount which bears to the apportionable deductions (or the excess of deductions if the case so requires) the same proportion as the part of the dividend included in the taxable income bears to the taxable income plus the apportionable deductions (or excess of deductions) less public loan interest. In other words the apportionable deductions (or excess of deductions) are, for the purposes of the section, treated as though they were deductible ratably from the income, other than public loan interest, remaining after allowing all deductions other than the apportionable deductions (or the excess of deductions if the case so requires).

The reason for excluding public loan interest from the calculation is to be found in the fact that tax concessions apply in relation to this interest. Decisions of the High Court demonstrate that, for the purpose of granting these concessions, no part of any apportionable deductions can be set against the interest. This position is fully recognised in the formulae and apportionable deductions are, in effect, applied ratably against all classes of income, other than public loan interest.

The first formula will apply in all cases in which the Australian tax payable in relation to a dividend has to be ascertained. The second formula will only apply in cases in which a private company liable to pay undistributed profits tax has derived a dividend in relation to which the Australian tax payable is to be ascertained.

In the assessment of undistributed profits tax, deductions are allowed from the taxable income in order to arrive at the undistributed amount. These deductions are in respect of income taxes paid or payable, dividends paid, retention allowances, &c. In order to arrive at the undistributed profits tax payable in respect of a dividend, it is necessary to subtract from the dividend a proportion of those deductions.

In determining the appropriate proportion of the deductions, it is necessary to bear in mind that, in view of Court decisions, no part of the deductions can be set against public loan interest which is liable to tax at rates not exceeding the 1930-31 rates of income tax. This interest is excluded from the calculation and, in the generality of cases, the practical effect of the formula

E*((F - G)/(C - G))


will be-

(the net dividend) * ((undistributed amount less interest taxable at 1930-31 rates)/(taxable income less interest taxable at 1930-31 rates))


In effect, the deductions will be apportioned ratably over the classes of income against which deductions may be set.

A modification of this position occurs where the taxable income includes public loan interest in respect of which a rebate of 2s. in the Pd is allowable. For the purpose of arriving at "the net dividend" no deductions are set against the interest in respect of which that rebate is allowed. The practical effect of the rebate does not, however, affect undistributed profits tax and private companies would be prejudiced if deductions were not applied in part against this interest for the purpose of ascertaining the undistributed profits tax payable on a dividend.

In these cases, the symbol "E" in the formula will not mean "the net dividend", "E" will, in these circumstances, be the amount which would have been the net dividend if the interest subject to rebate at 2s. in the Pd had not been public loan interest. An equitable apportionment of the deductions allowed for the purposes of undistributed profits tax will be achieved by this means.

The practical effect of the section can be demonstrated by examples.

An analysis of the assessment would show-

Calculation of credit-

The credit allowable for United States tax will be the amount of that tax (Pd45) or the Australian tax on the dividend, whichever is the less. It is accordingly necessary to ascertain the amount of the Australian tax on the dividend, and this is obtained by the application of the proposed section 16.

Under sub-section (4.) the Australian tax payable in respect of the dividend will be ascertained by applying the average rate of tax to the net dividend.

The average rate of tax, as defined in sub-section (8.) will be-

(Tax on taxable income if it were wholly dividend)/(Taxable income)


= (Pd117 6s.)/(1,000)


The net dividend will be-

(A - B*((A)/(C + B - D)))


= ((dividend in the taxable income) - (apportionable deductions)*((dividend in the taxable income)/(taxable income + apportionable deductions - public loan interest)))


= (200 - 500*((200)/(1,000 + 500 - 300)))


= (200 - 500*((200)/(1,200)))


= (200 - 83)


= 117


The Australian tax payable in respect of the dividend is accordingly

(117 * (Pd117 6s.)/(1,000)) = Pd13 14s. 5d.


As this amount is less than the United States tax, a credit of Pd13 14s. 5d. is allowable.

The assessment would be as follows:-

Calculation of credit-

The Australian tax payable on the dividend from the United States company will be ascertained by applying the average rate of tax to the net dividend.

The tax on Pd1,500 taxable income consisting of dividends is, before the allowance of any credit or rebate, Pd246 17s. The average rate of tax is accordingly

(Pd246 17s.)/(1,500)


The net dividend is

A - B*((A)/(C + B - D))


In this case, paragraph (b) of the meaning given to the symbol "B" will apply because the deductions not relating to dividends exceed the total of the assessable income, other than dividends. The symbol "B" accordingly means the amount of the excess, that is, Pd500.

The transposition of values in place of the symbols in the formula will accordingly give the net dividend as-

(600 - 500*((600)/(1,500 + 500)))


=(600 - (500 * (600)/(2,000)))


=(600 - 150)


= 450


The Australian tax payable on the dividend received from the United States company is

(450 * (Pd246 17s.)/(1,500))


, that is Pd74 1s. 1d. As this amount is less than the United States tax on the dividend, a credit of Pd74 1s. 1d. is allowable.

The assessment would be-

Calculation of Credit.

The average rate of tax will be applied to the net dividend in order to ascertain the amount of Australian tax payable on the dividend of Pd800.

The tax on Pd2,000 taxable income comprising dividends is Pd412 6s. and the average rate of tax in this case is-

(Pd412 6s.)/(2,000)


In the formula

A - B*((A)/(C + B - D))


the symbol "B" will in this case, equal the apportionable deductions, namely Pd200. The net dividend will, therefore, be-

(800 - 200*((800)/(2,000 + 200 - 400)))


= (800 - (200 * (800)/(1,800)))


= (800 - 89)


= 711


The Australian tax payable on the dividend is-

(711 * (Pd412 6s.)/(2,000)) = Pd146 11s. 6d.


As the United States tax on the dividend is only Pd120, the credit is limited to Pd120.

Calculation of Credit.

The amount of the credit will be the lesser of the United States tax (Pd900) and the Australian tax payable in respect of the dividend, which will be determined under sub-section (3.).

The primary tax attributable to the dividend will be ascertained by applying the average rate of tax to the net dividend and deducting from the resultant amount the proportion of any rebate on the dividend which relates to the net dividend.

The average rate of tax, under paragraph (b) of the definition of that term, is-

(Tax on taxable income if it consisted wholly of dividends and no rebate or credit were allowable)/(Taxable income.)


= (Pd8,500)/(Pd30,000)


The net dividend, ascertained from the formula

(A - B*((A)/(C + B - D)))


, is-

(6,000 - 1,000*((6,000)/(30,000 + 1,000 - 9,000)))


= (6,000 - (1,000 * (6,000)/(22,000)))


= (6,000 - 273)


= 5,727


The rebate to be brought into account is-

((amount of rebate relating to "the dividend" included in the taxable income) * ((the net dividend)/("the dividend" included in the taxable income)))


= (Pd1,700 * (5,727)/(6,000))


= Pd1,622 13s.


The primary tax payable in respect of the dividend is-

(5,727 * (Pd8,500)/(30,000))


= Pd1,622 13s.


Proportion of rebate to be deducted is Pd1,622 13s.

Primary tax attributable to the dividend is Nil

Because of the rebate allowed on dividends to resident companies, there will not, in any case, be primary tax payable in respect of a dividend received by a resident company. The calculations above show the appropriate result and no credit will be allowed against primary tax.

Undistributed profits tax may, however, be payable in respect of dividends. Where this tax is payable the amount attributable to a dividend will be ascertained by applying the rate of additional tax imposed on the undistributed amount to "the adjusted net dividend".

The rate of additional tax is at present 10s. in the Pd1.

The adjusted net dividend is ascertained from the formula

E*((F - G)/(C - G))


In this case paragraph (b) of the meaning given to the symbol "E" will apply because the taxable income includes interest on which a rebate of 2s. in the Pd1 is allowable under section 160AB of the Assessment Act. "E" will accordingly be the amount which would have been the net dividend if that interest had not been public loan interest. It is, therefore, necessary to re-apply the formula

(A - B*((A)/(C + B - D)))


on the assumption that that interest carries no concession. The value of "E" is-

(6,000 - 1,000*((6,000)/(30,000 + 1,000 - 4,000)))


= (6,000 - (1,000 * (6,000)/(27,000)))


= (6,000 - 222)


= 5,778


The adjusted net dividend is then-

(5,778 * ((undistributed amount less interest to which 1930-31 rates apply)/(taxable income less interest to which 1930-31 rates apply)))


= (5,778 * ((10,000 - 4,000)/(30,000 - 4,000)))


= (5,778 * (6,000)/(26,000))


= 1,333


The undistributed profits tax payable on the dividend is

1,333 at 10s. = Pd666 10s.


As the United States tax on the dividend is Pd900, a credit of Pd666 10s. is allowable against the undistributed profits tax.

There will be no undistributed profits tax in this case. A United Kingdom or United States company is entitled under the appropriate agreement to a concession in respect of the quantum of tax on dividends if it is not engaged in trade or business in Australia through a permanent establishment in Australia. Furthermore, if it is not so engaged, section 104 (2) of the Assessment Act exempts the company from undistributed profits tax. There will accordingly be no cases in which a company entitled to rebate under clause 17 will pay undistributed profits tax.

Calculation of Rebate.

The average rate of tax in this case will be

((Pd8,500)/(30,000))


The net dividend will be ascertained as follows:-

(A - B*((A)/(C + B - D)))


= (10,000 - nil*((10,000)/(30,000 + nil - nil)))


= 10,000


The Australian tax payable in respect of the dividend is-

(10,000 * ((Pd8,500)/(30,000))) = Pd2,833 6s. 8d.


Ascertainment of Tax Payable in Respect of Dividend.

"The average rate of tax" which, in this case, will be calculated under paragraph (a) of the definition of that term, is-

((Tax which would have been paid on dividends if there had been no other taxable income)/(Taxable income consisting of dividends))


In view of the decision of the High Court in Douglass v. Commissioner of Taxation (45 C.L.R. 95) and subsequent cases the taxable income consisting of dividends would be taken as the gross dividend of Pd10,000 reduced by the Pd3,000 deduction relating directly to that dividend.

The tax on Pd7,000 taxable income consisting of dividends would, in the case of a non-resident company be Pd1,950, that is Pd5,000 at 5s. in the Pd1 and Pd2,000 at 7s. in the Pd1. The average rate of tax in this case would accordingly be

((Pd1,950)/(7,000))


.

The net dividend would be ascertained from the formula-

(A - B*((A)/(B + C - D)))


= (7,000 - 2,000*((7,000)/(35,000 + 2,000 - 0)))


= (7,000 - (2,000 * (7,000)/(37,000)))


= 7,000 - 378


= 6,622


The Australian tax payable in respect of the dividend is accordingly-

(6,622 * (Pd1,950)/(7,000)) = Pd1,844 14s.


CLAUSE 17. SECTION 17.-REBATES OF EXCESS TAX ON DIVIDENDS.

Article VI (3) of the United Kingdom agreement provides that, in specified circumstances, the Australian tax on dividends paid to United Kingdom residents shall be reduced to one-half of the amount which would, but for the agreement, be payable.

Article VII (1) of the United States convention provides that, except in specified circumstances, the Australian tax on dividends paid by Australian companies to United States residents shall not exceed 15% of the dividend.

Effect has been given to the concession in the case of United Kingdom shareholders by allowing a rebate from the tax otherwise assessed. The law has not contained a specific provision authorising this procedure. The procedure has, however, been acceptable to taxpayers and to the Commissioner and sub-section (1.) of the proposed section 17 will permit the allowance of a rebate to give effect to provisions of an agreement restricting the Australian tax payable in respect of dividends.

The sub-section (1.) makes it clear that the rebate is to be part of an assessment and taxpayers will accordingly have the usual rights of objection and appeal if they are dissatisfied with the amount of the rebate.

Sub-section (2.) limits the sum of the rebates allowable under the section to so much of the Australian tax in respect of the income of the year to which the rebate relates as remains after the allowance of all other rebates and deductions from tax. In other words, the sum of the rebates allowable under the section are not to exceed the tax actually payable and accordingly will not result in the taxpayer being entitled to have an amount paid to him by the Commissioner. The provision is required because, in its absence, the sum of the rebates allowable under the proposed section and the deduction from tax allowable under section 127 of the Assessment Act could exceed the amount of tax actually payable in respect of the income of the material year of income.

CLAUSE 18. SECTION 18.-SOURCE OF DIVIDENDS.

This clause relates to dividends paid by companies which are not residents of Australia, but which are resident in a country with which an agreement has been made. For the purposes of the agreement, the dividends will be deemed to have their source in the country in which the paying company is resident.

This provision, which has a counterpart in Article XII (2) of the United Kingdom agreement, is necessary in order to ensure that appropriate credits are allowable in relation to overseas tax on dividends.

Sub-section (2.) provides that the section shall not have the effect of limiting the provisions of an agreement deeming a dividend to have a source outside Australia. As mentioned above, Article XII (2) of the United Kingdom agreement contains a provision of that nature, and the sub-section will ensure that full effect is given to that provision of the agreement.

CLAUSE 19. SECTION 19.-CERTAIN DIVIDENDS PAID TO UNITED KINGDOM RESIDENTS.

This clause, except for minor drafting variations, proposes the re-enactment of section 160T of the Assessment Act, which is being repealed.

The section will apply where a company which is resident in both Australia and the United Kingdom pays a dividend to a United Kingdom resident. Under United Kingdom law, the dividend does not bear United Kingdom tax in the hands of the recipient even although the paying company recoups itself out of the dividend an amount to meet the tax which the paying company has met.

Concessions granted under paragraph (2) and (3) of Article VI of the United Kingdom agreement are dependent upon the recipient of a dividend paying United Kingdom tax on the dividend. In fact, the burden of the tax is passed on to the recipient. It is accordingly equitable that the recipient be treated as having paid that tax and the section, by ensuring this result, will cause the appropriate concessions to be granted.

CLAUSE 20. SECTION 20.-COLLECTION OF TAX DUE TO UNITED STATES OF AMERICA.

This section will enable the Commonwealth to collect tax on behalf of the United States where a person has received the benefit of a concession to which he is not entitled. The United States has, under Article XVI of the convention, assumed a similar responsibility on behalf of Australia.

Article VII (2) of the convention provides that the rate of United States tax on dividends paid to Australian residents from sources in the United States shall not exceed 15%. A tax of 30% is at present imposed on these dividends.

There are circumstances in which a person may incorrectly be granted the benefit of this concession, e.g. a person entitled to a dividend from a United States corporation may although not resident in Australia, have the dividend paid through an agent in Australia, thereby causing the rate of United States tax to be reduced to 15%. It would be inappropriate to permit such an unfair advantage to be taken of the provisions of the convention.

It is accordingly provided, in sub-section (2.) that the Commissioner may recover from a person who is liable to pay tax to which the section applies, the amount of tax due to the United States. In addition to having the right to sue for the amount involved, the Commissioner may also, under sub-section (3.), invoke the provisions of section 218 of the Assessment Act. Section 218 enables the Commissioner to require a person holding money on behalf of a defaulting taxpayer to pay to the Commissioner so much of the money held as is sufficient to meet the liability for tax.

Sub-section (4.) authorizes the Commissioner, the Second Commissioner or a Deputy Commissioner to certify that the person named in the certificate owed United States tax, that the amount shown as due by that person is United States tax to which the section applies and that the amount is the equivalent of the United States tax. A certificate is not, however, conclusive evidence and it is open to the person concerned to submit evidence to the Court in support of claim that the tax is not due.

Sub-section (5.) provides for the amount collected by the Commonwealth as United States tax to be paid to the United States. An appropriation out of Consolidated Revenue of the necessary funds is contained in the sub-section.

Sub-section (6.) is a drafting expedient defining the term "United States tax".

CLAUSE 21. SECTION 21.-REGULATIONS.

This clause proposes to grant power to make regulations under the Act. Regulations would, of course, be valid only if they are not inconsistent with the provisions of the Act.

The clause is inserted because regulations may be desirable in order to facilitate the practical application of agreements.

CLAUSE 22. SECTION 22.-APPLICATION OF THIS ACT.

The operation of the United Kingdom agreement in respect of income derived up to the close of the income year which ended on 30th June, 1953, is provided for in Part IIIB. of the Assessment Act. Although Part IIIB. is to be repealed, it will remain effective in respect of the income derived up to the end of that year.

This clause accordingly sets out that the proposed Act shall not affect assessments or credits for a year of income before the year which commenced on 1st July, 1953. In other words, the proposed Act will apply as from 1st July, 1953, or, where a taxpayer furnishes returns for an irregular accounting period, from the commencement of the year of income which began on that date.

THE FIRST SCHEDULE

NOTE :-

Clause 5 of the Bill inserts as the First Schedule to the Bill a copy of the agreement between the Government of the United Kingdom and the Government of the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.

This agreement was signed on 29th October, 1946 and was given the force of law in Australia in 1947, when a copy of it was inserted as the Third Schedule to the Income Tax Assessment Act 1936-1947. The agreement, which has not been varied, was on that occasion considered by the Parliament.

The present proposal involves the inclusion of a copy of the agreement as a schedule to the proposed Act relating to international income tax agreements. A separate Bill proposes the deletion of the copy of the agreement from the Act in which it is now included.

In the circumstances the printing in this memorandum of the agreement and relevant explanatory notes has not been undertaken.

THE SECOND SCHEDULE.

INTRODUCTORY NOTE :-

Clause 6 of the Bill inserts as the Second Schedule to the Bill a copy of the convention between the Commonwealth and the United States of America for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.

The convention requires ratification.

Following upon the signing in 1946 by the United Kingdom and the Commonwealth of an agreement for the avoidance of double taxation on incomes there were advanced, from time to time, proposals for the conclusion of a corresponding agreement between Australia and the United States of America.

Although the laws of Australia and the United States contain provisions which mitigate the effects of double taxation by the two countries, it became clear that the burden of taxation on incomes earned in Australia by United States enterprises was a deterrent to further investment of United States capital in Australia. The Commonwealth accordingly decided that discussions, directed towards securing an agreement on satisfactory terms, should be undertaken.

The first discussions, which took place in Canberra in March, 1952, enabled broad propositions upon which an agreement might be based to be developed for examination by the Commonwealth Government. After a careful study of these propositions and consideration in detail of their practical application, the Government decided to proceed with further negotiations directed towards reaching a final agreement.

These negotiations took place in Washington earlier this year and the Australian Ambassador and the Commonwealth Government were kept acquainted with the progress made. Early in May, the Government gave its approval for the Ambassador to sign, on behalf of the Commonwealth, conventions in respect of income tax, estate duty and gift duty. The conventions relating to estate duty and gift duty are the subject of another explanatory memorandum.

The double taxation of income may occur when income is derived from sources in one country by an individual or company resident in another country.

In the absence of an international agreement, it is a general practice for countries to tax all income arising from sources in their territories. Australia follows this practice. However, a number of countries, including the United Kingdom and the United States, tax their residents on income from all sources. Income derived by the residents of those countries from sources in Australia accordingly bears tax both in Australia and in the country of residence of the recipient.

The convention adopts two methods for the relief of double taxation on incomes flowing between the two countries.

Under the first method, which can be referred to as "the residence basis" the country in which income has its source grants exemption from tax. This exemption ensures that double taxation does not occur because only the country of residence of the recipient imposes tax.

The second method is applied where the country of the origin of the income continues to tax that income while the country in which the recipient resides either exempts the income or, if it imposes tax, allows against its tax on the income a credit for the tax paid in the country of origin.

In conjunction with the second method it is usual to find in international taxation agreements that a concessional rate of tax is allowed in respect of dividends flowing between countries. This course has been adopted in the convention with the United States but, unlike the Australian agreement with the United Kingdom, no exemption of dividends has been conceded.

Details of the treatment to be afforded in relation to various classes of income will appear from the Articles of the convention and the succeeding explanatory notes. However, as a summary in broad terms, it can be stated that the residence basis of taxation is generally applied in respect of-

A.

Shipping and air transport profits.

B.

Business profits, if the recipient has no permanent establishment in the country of the origin of the income.

C.

Pensions and purchased annuities.

D.

Royalties in respect of literary, dramatic, musical or artistic works, but not royalties in respect of motion picture films.

E.

Remuneration received by a businessman from an employer in the country in which the businessman resides if the businessman visits the other country for a period not exceeding 183 days in the income year.

F.

Remuneration earned during a period not exceeding two years by a professor or teacher for teaching in a country in which he is temporarily present.

Except where specifically exempted by the taxation laws of the country concerned, all other classes of income, whether or not specifically referred to in the convention, are taxed by the country in which the income has its origin. In these cases, relief from double taxation is afforded by the country of residence.

The full text of the convention, together with explanatory notes relating to each Article, is set out below.

CONVENTION BETWEEN THE GOVERNMENT OF THE COMMONWEALTH OF AUSTRALIA AND THE GOVERNMENT OF THE UNITED STATES OF AMERICA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME.

The Government of the Commonwealth of Australia and the Government of the United States of America, desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, have appointed for that purpose as the respective Plenipotentiaries :

The Government of the Commonwealth of Australia :

Sir Percy C. Spender, K.B.E., Q.C., Ambassador Extraordinary and Plenipotentiary of the Commonwealth of Australia, and

The Government of the United States of America :

Mr. Walter Bedell Smith, Acting Secretary of State of the United States of America,

who, having communicated to one another their full powers, found in good and due form, have agreed as follows :

ARTICLE I

Article I prescribes the taxes which are the subject of the convention.

In the case of Australia, the income tax and social services contribution is the subject of the convention. This tax, which is the only tax on incomes now imposed in Australia, includes the additional tax on the undistributed income of private companies.

In the case of the United States, the taxes covered by the convention are the Federal income taxes, including surtaxes and excess profits taxes.

Paragraph (2) provides that the convention shall apply to any future tax imposed by the Commonwealth or by the United States, if that tax is substantially similar in character to the taxes which are at present the subject of the convention. The convention will not, however, extend to any tax imposed by State legislatures in the United States or to any tax imposed in Australia by an authority other than the Commonwealth.

ARTICLE II

Paragraph (1) comprises definitions designed to facilitate the drafting of the convention.

Defined terms calling for comment are-

"Australia": For the purposes of the Assessment Act, the term "Australia" includes the Territory of Papua but not the Territories of New Guinea and Norfolk Island. The definition in the convention provides that all three Territories be regarded as part of Australia for the purposes of the convention.

Income arising in the Territories will accordingly be treated as having a source in Australia and, if both countries tax that income, a credit will be allowed by the United States. For example, a United States citizen residing in the Commonwealth and taxed by both Australia and the United States on income from sources in the Territories will be allowed a credit to relieve the double taxation. The credit will be allowed by the United States, which will bear the full cost of relieving the double taxation.

"Australian resident" and "United States resident": In various provisions of the convention it was appropriate to employ a term covering a person (individual or company) resident in Australia, but not also resident in the United States. "Australian resident" accordingly means a person who satisfies the Assessment Act definition of "resident of Australia" but who is not regarded for the purposes of United States tax as resident in the United States.

The United States taxes its citizens, wherever resident, on a basis similar to that employed in relation to its residents. United States citizens are, therefore, not regarded as Australian residents.

A United State, corporation-that is, a company, association or like entity created or organised in, or under the laws of the United States-cannot in any circumstances be an Australian resident. Correspondingly, a company incorporated in Australia which is regarded as a resident of Australia for Australian taxing purposes, cannot be a United States resident.

The definition of "Australian resident" provides that a corporation (other than a United States corporation) which is a resident of Australia shall not be deemed to be resident in the United States even though carrying on trade or business in that country. This provision was necessary because, in its absence, a company incorporated in Australia would be regarded as resident in the United States merely because it engaged in trade or business in the United States. That result would have placed all those companies outside the scope of the definition of "Australian resident". The provision enables all companies incorporated and controlled in Australia to be treated as Australian residents.

The defined term "United States resident" corresponds substantially with the definition of "Australian resident". It does not make reference to Australian citizens because Australia does not impose tax on a basis of citizenship. Moreover, Australia does not regard companies as residents of this country merely because they carry on business here and it was accordingly unnecessary to include a provision relating to this matter.

While persons resident in both Australia and the United States are not covered by the definition, they will be entitled to relief from double taxation in the form of credits allowed under Article XV.

"resident of Australia": The term means a person (individual or company) who is a resident of Australia, as defined in the Assessment Act. The person may also be resident in the United States.

"industrial or commercial profits": The term is, in effect, restricted to business profits. It does not extend to shipping and air transport profits, which are the subject of a specific Article ensuring that double taxation of these profits does not occur.

"permanent establishment": The application of important provisions of the convention will, in part, depend upon whether an enterprise of one country carries on trade or business in the other country through a "permanent establishment". It was desirable to give a wide meaning to that term, which has been defined at considerable length.

A branch, management or fixed place of business constitute a permanent establishment and, subject to qualifications mentioned below, an agency will be similarly regarded. Factories, workshops, mines, oilwells, offices and agricultural and pastoral properties are also included as permanent establishments.

It may be practicable for an enterprise of one country to fulfil contracts which render it necessary to use or install equipment or machinery in the other country, but which do not require the setting up of a branch, or other place of business which constitutes a permanent establishment in that other country. To cover this position, the definition explicitly includes as a permanent establishment the use or installation of substantial equipment or machinery in a country. The same result will follow where substantial equipment or machinery is used or installed in one country for, or under a contract with, an enterprise of the other country.

The definition states four circumstances which, in themselves, are not to be regarded as constituting a permanent establishment. The four circumstances are-

A.

the carrying on of business through a bona fide commission agent or broker who acts in the ordinary course of his business in return for commission at the customary rate.

B.

the existence of a "buying house".

C.

the existence of a subsidiary company.

D.

the conduct of business activities through an agent who does not habitually exercise a general authority to negotiate and conclude contracts on behalf of his principal or who does not fill orders from stocks of goods or merchandise located in the country in which the agent represents his principal.

The definition corresponds closely with the definition of "permanent establishment" in the agreement between Australia and the United Kingdom.

Paragraph (2) of Article II ensures that in applying the provisions of the convention each country will, unless the context requires otherwise, give to undefined expressions in the convention the meaning which those expressions have in its own taxation laws. For example, Australia will, when applying the provisions of the convention, look to its own taxation law for the meaning of terms not defined in the convention.

ARTICLE III

INTRODUCTORY NOTE :-

This Article relates to the taxation of industrial or commercial profits earned in either Australia or the United States by an enterprise conducted by a resident of the other country. It also contains provisions relating to the allocation of profits between the Head Office of an enterprise and its permanent establishment in the other country.

The provisions of the Article correspond closely with those of Article III of the Australia-United Kingdom double taxation agreement.

Broadly stated, the Article adopts the principle that an enterprise of one of the countries shall not be taxed in the other country on its profits earned in the other country unless it carries on trade or business through a permanent establishment in that other country. The residence basis of taxation applies in these cases.

On the other hand, a country in which a permanent establishment is located will tax the entire profits earned in its territory by the enterprise conducting that permanent establishment. In these circumstances, the country of the origin of the profits will have the prior right to tax and the country of residence, if it imposes tax, will relieve double taxation by allowing a credit under Article XV.

Paragraph (1)

Paragraph (1) applies the principle of the Article in relation to Australian enterprises deriving profits from sources in the United States.

The industrial or commercial profits of an Australian enterprise will be free of United States tax unless the enterprise has a permanent establishment in the United States. In other circumstances, the United States will tax the profits having a source in that country and Australia will, under its present law, exempt those profits and thereby ensure that double taxation is not imposed by the two countries.

Paragraph (2)

This paragraph relates to United States enterprises earning industrial or commercial profits in Australia.

These profits will be exempt from Australian tax if the enterprise is not engaged in trade or business through a permanent establishment in this country. For example, Australia will not tax profits earned by a United States enterprise the whole of whose Australian activities are conducted by an agent who does not negotiate and conclude contracts on behalf of his principal and who does not supply goods or merchandise from stocks in Australia.

Activities of any substantial extent are generally conducted through a branch or other organization falling within the meaning of "permanent establishment". In these cases, the enterprises will be taxed on their entire profits from sources in Australia. The United States will grant credits to relieve double taxation.

The corresponding provision in the Australia-United Kingdom agreement is similar in its general effects, but it contains a provision under which Australia retained a right to continue its existing basis of taxing non-resident motion picture film and insurance undertakings. A provision having the same effect has been inserted as paragraph (b) of Article XX. of the convention with the United States.

Paragraph (3)

This paragraph provides that all allowable expenses, including executive and general administrative expenses, reasonably attributable to a permanent establishment, shall be deductible in arriving at the profits attributable to a permanent establishment. This principle applies in Australia under the present taxation law.

In the application of the rule stated in the paragraph, the principle underlying section 38 of the Assessment Act is to be applied by Australia. This section provides that where goods manufactured out of Australia are sold in Australia, a deduction shall be allowed of the amount for which goods of the same nature and quality could have been purchased on a wholesale market in the country of manufacture. In these circumstances it would be inappropriate to allow also a deduction for expenses contributing to the cost of production. The modification of the rule stated in the paragraph frees Australia from an obligation to allow deductions for actual expenses where a deduction for the wholesale price of goods is allowed under section 38.

Paragraph (4)

Paragraph (4) provides that the quantum of profit attributable to a permanent establishment is the amount of profit which it might have been expected to derive in the country in which it is located if it had been an independent enterprise and had engaged on an "arm's length" basis with its Head Office in activities the same as, or similar to, those it conducted.

In ascertaining the Australian profit derived through a permanent establishment in Australia, deductions allowable for goods or services supplied by Head Office will not exceed the cost at which the permanent establishment could, as an independent enterprise, have obtained those goods or services from a stranger.

The principle, which is expressed in similar terms in the agreement with the United Kingdom, will afford a protection for Commonwealth revenue.

Paragraph (5)

This paragraph permits some modification of the "arm's length" basis where the information available does not permit the determination of profits on that basis. In these circumstances the taxation authority will be permitted to exercise any discretion or to make any estimate, authorized by the law that authority is administering. In the case of Australia, the Commissioner will, in the stated circumstances, be permitted to apply section 136 of the Assessment Act in relation to United States residents.

Paragraph (6)

This paragraph provides that no profit shall be attributed to a permanent establishment merely because of buying operations. The provision confirms the existing position.

ARTICLE IV

This Article, which relates to the profits of inter-connected companies, is complementary to paragraphs (3) and (4) of Article III dealing with the quantum of profits to be attributed to permanent establishments.

A subsidiary company does not, either under Australian law or the convention, constitute a permanent establishment of its parent company. Nevertheless charges for goods and services may be made on a basis influenced by the connexion between the companies, and the purpose of paragraph (1) of the Article is to ensure an appropriate allocation between associated companies of the whole of the profits earned by the inter-connected companies.

For this purpose, the "arm's length" basis adopted in Article III is adapted for application in the case of associated companies.

Where the commercial or financial relations between enterprises differ from those which might be expected to apply between independent enterprises, the principles of the Article will apply if an enterprise of one country participates (directly or indirectly) in the management, control or capital of an enterprise of the other country or if the same persons participate directly or indirectly) in the management, control or capital of enterprises of the two countries.

Paragraph (2) provides that profits to which paragraph (1) of the Article apply shall be deemed to be profits of the enterprise to which they have been attributed and taxed accordingly.

Paragraph (3) is similar to paragraph (5) of Article III and will modify the application of the "arm's length" principle if information required for the purposes of giving effect to that principle is not available.

ARTICLE V

Broadly stated, the purpose of this Article is to provide that shipping and air transport profits earned by Australian and United States enterprises shall be taxed only in the country in which the enterprise is resident. It is, however, necessary that the craft be registered in that country.

The Article will not apply in the case of an enterprise resident in both countries.

Where the Article does not apply, any double taxation on shipping and aircraft profits will be relieved by the granting of a credit.

ARTICLE VI

Paragraph (1) requires Australia to exempt from tax dividends paid by United States corporations to United States residents.

Under existing Commonwealth law, these dividends are liable to Australian tax if paid out of profits having a source in Australia. In practice, however, it is seldom practicable for Australia to collect the tax, but the shareholders are required to pay United States tax on the dividends.

Under paragraph (2) the United States will grant a corresponding exemption in respect of dividends paid by Australian companies to Australian residents.

ARTICLE VII

Paragraph (1) applies in respect of dividends paid by Australian companies to shareholders, whether individuals or corporations, who are United States residents.

If the United States recipient of the dividend is liable for United States tax on the dividend, the amount of the Australian tax is not to exceed 15% of the dividend, provided that the shareholder does not carry on trade or business through a permanent establishment in Australia.

The amount of Australian tax on the dividends will not, in any circumstances, be increased as a result of the operation of the provision.

A very large proportion of the dividends flowing from Australia to the United States is paid to United States corporations by subsidiary companies incorporated in Australia. Under the existing law, the profits of the subsidiary company are taxed by Australia and the dividends paid to the United States parent corporation are also taxed by Australia. Those dividends are again taxed by the United States in the hands of the parent company, while the ultimate individual shareholder who receives a dividend from the parent corporation is also subjected to United States tax.

At the rates of tax recently enacted, each pound of profit earned by an Australian public company and distributed as a dividend to a United States corporation bears Australian taxes of up to 11s.6.6d. By restricting the amount of Australian tax on the dividends to 15% of those dividends, the aggregate of the Australian taxes will generally be 8s. 11.4d. for each pound of profit distributed by a public company.

In the case of private companies, the Australian taxes on a very large proportion of the dividends will be in excess of 8s. in the Pd1 and, in addition, a tax on undistributed profits may be levied.

The concessional rate of tax to be applied under the paragraph to dividends is consistent with the principles of the taxation agreement entered into by Australia and the United Kingdom in 1946. In that agreement, complete exemption is allowed in relation to dividends paid to United Kingdom parent companies by wholly-owned Australian subsidiaries. Under the convention with the United States, Australia will be entitled, in corresponding circumstances, to levy a tax of 15% of the dividend.

Where dividends are paid to United Kingdom shareholders, other than parent companies, the agreement with the United Kingdom permits Australia to levy one-half of its normal tax, which may be compared with the 15% permitted by the provisions of the United States convention. The adoption of a flat rate in lieu of a provision to impose one-half of the normal tax will facilitate the practical operation of the convention without there being any material effect upon Commonwealth revenue.

Under paragraph (2) of the Article, the United States will reduce to a rate of 15% its tax upon dividends from sources in the United States and paid to Australian residents who do not carry on trade or business through a permanent establishment in the United States.

The United States at present imposes a withholding tax of 30% on these dividends and will accordingly surrender 50% of its tax on dividends flowing from the United States to Australian residents.

ARTICLE VIII

This Article will ensure that both Australia and the United States may determine the amount of any undistributed profits tax payable by a company without having regard to any concessions granted under the convention in respect of the tax on dividends.

A comparable provision was included in the agreement with the United Kingdom, its purpose being to eliminate competitive anomalies which could have been detrimental to Australian companies.

In existing circumstances, the Article will have no practical application. However, it protects a sound principle and ensures that the Commonwealth Parliament will be unfettered by the convention when enacting the rate of tax to be levied upon the undistributed profits of companies.

ARTICLE IX

This Article relates to the remuneration of persons resident in either Australia or the United States and who make short business visits to the other country.

Remuneration received from an employer in the country in which the visitor normally resides, will be exempt from tax in the other country if the time spent in the country visited does not exceed 183 days of the income year in which the visit occurs.

If the remuneration is paid by a person resident in the country visited or if the aggregate of the visits in any income year exceeds 183 days, the exemption will not apply. In the event of both countries taxing the remuneration, the country in which the visitor normally resides will allow a credit to relieve the double taxation.

Paragraph (3) ensures that an employer resident in one country will not be treated as also resident in the other country because he trades through a permanent establishment in the other country. This paragraph accords with the existing practice in Australia.

ARTICLE X

The purpose of this Article is to provide a residence basis of taxation in respect of cultural royalties, that is, royalties in respect of literary, dramatic, musical or artistic works.

The agreement with the United Kingdom provides a similar basis of taxation in relation to industrial, as well as cultural, royalties.

The provision agreed upon with the United States will apply only if copyright subsists in the work concerned, and it is designed to ensure that in no circumstances will the article apply to royalties in relation to motion picture films. Australia's right to continue its existing basis of taxing film rentals and other income from motion picture films is further protected in Article XX.

Where a royalty falls within the requirements of the article, it will, if the recipient does not carry on business through a permanent establishment in the other country, be taxed only in the country in which the recipient of the royalty resides.

A royalty not covered by the article will be taxed in the country in which it has its source, and the country of residence will, if it also imposes tax on the royalty, allow a credit to relieve the double taxation.

ARTICLE XI

The United States at present imposes a withholding tax of 30% upon various classes of income, including royalties and rentals, derived by residents of Australia from sources in the United States. This tax is levied on the gross amount of the income and no deduction is allowed in respect of expenses incurred in earning the income.

The levying of tax on gross income produces inequitable results, particularly where the expenses relating to the income are substantial.

The Article will permit Australian residents deriving royalties in relation to natural resources and rents from realty to elect to pay United States tax assessed on the basis of a return in which relevant expenses are claimed. The rate of tax will then be the rate applicable to the net income and not a flat rate of 30%. Australian residents who do not make the appropriate election will continue to pay the United States tax of 30% of the gross royalties and rents.

The Article will have no practical effect upon Australian procedure. The existing Commonwealth law provides for the taxation of the taxable income-that is, the gross amount of income reduced by appropriate deductions.

ARTICLE XII

Under paragraph (1), a pension or purchased annuity derived from sources in one country by a resident of the other country will not be taxed in the country from which it is derived. There will accordingly be no double taxation of these classes of income.

The Article does not apply in relation to annuities paid under wills or trust instruments. In these cases any double taxation imposed will be relieved by the country in which the taxpayer resides allowing a credit under Article XV.

ARTICLE XIII

This Article applies in relation to the remuneration of professors and teachers who are resident in one country but who are temporarily present in the territory of the other country. In these circumstances, remuneration received for teaching at a university, college, school or other educational institution during a period of up to two years is free of tax in the country visited.

ARTICLE XIV

This Article relates to income derived in one country by a religious, scientific, educational or charitable organization of the other country. Income of these organisations will, generally speaking, be exempt from tax in the country of its origin.

An exception to this general rule will apply if the income of such an organization would not be exempt in the other country if the organization was established in that other country. The exception will, in view of the laws of the two countries, apply only in relation to income from business activities. Income of this class will not be exempted by the United States nor would the Article require Australia to exempt such income.

The Australian law, however, already grants full exemption of the income to which the Article refers. The Article will accordingly not require Australia to extend its present concessions.

ARTICLE XV

Under paragraph (1) of this Article the United States agrees to allow against its tax on income derived by its citizens from sources in Australia a credit for the Australian tax on that income.

The purpose of the credit is to ensure that relief is granted when income having its origin in Australia is taxed both in Australia and in the United States.

The amount of the credit will be determined under the existing United States law relating to credits, provided that if the present law is liberalised, Article XX will require the provision more favourable to the taxpayer to be applied.

The credit allowable under the present United States law is the lesser of-

(a)

the Australian tax on the income taxed in both countries; and

(b)

the proportion of the United States tax which is attributable to that income.

In the ultimate the tax burden on the income will be the greater of the Australian tax and the United States tax on the income.

Where a United States corporation owns at least 10 per cent, of the shares with voting rights in an Australian company, the United States will allow against its tax on a dividend paid by that company to the United States corporation, a credit in respect of the Australian tax paid on the dividend and the Australian tax paid by the Australian company on a proportionate part of the profit out of which the dividend was paid. The total credit is restricted to the amount of the United States tax on the dividend.

Paragraph (2) applies where a resident of Australia derives income from sources in the United States and that income is subjected to tax both in Australia and in the United States. In these circumstances, Australia will allow against its tax on that income a credit in respect of the United States tax on the income.

Except in relation to dividends, income arising and taxed in the United States, will, under the existing law, be exempt from Australian tax. With few, if any, exceptions, a credit will be allowed by Australia only in relation to dividends.

Under the existing law, dividends received by Australian residents from United States corporations bear a tax of 30% in the United States. Where the dividend is also taxed in Australia, a credit for the United States tax is allowed against the Australian tax. This credit, which is allowed under section 45 of the Assessment Act, is granted only in relation to the tax on the part of the dividend paid out of profits not earned in Australia.

So far as concerns dividends from United States corporations, the credits under the convention will be substituted for the present credits.

The amount of the credit under the convention, which will be determined under Australian law, will not be limited to the United States tax on the dividend paid out of ex-Australian profits. The United States tax will be reduced, as provided in Article VII of the convention, to 15% of the dividend and a credit for this tax will be allowed by Australia, irrespective of the source of the profits from which the dividends are paid.

The credit allowable under paragraph (2) of Article XV will be the United States tax on the dividend or the Australian tax on the dividend, whichever is the less. For example, a dividend of Pd1,000 paid by a United States corporation to an Australian resident will be subject to Pd150 United States tax. If the Australian tax on the dividend (calculated in accordance with clause 16 of the Bill) be Pd200, Australia will allow a credit of Pd150 and the shareholder will pay Pd50 Australian tax in respect of the dividend. On the other hand, if the Australian tax on the dividend is Pd120, the credit will be the amount of the Australian tax. In these circumstances, no Australian tax will be payable in respect of the dividend.

Paragraph (3) states three conditions affecting the granting of credits. In sub-paragraph (a) it is provided that profits, remuneration or other income in respect of personal services shall be deemed to be income derived in the country in which the services are rendered. This provision ensures that the country in which services are performed will have the prior right to tax and that the other country, if it imposes tax, will grant an appropriate credit to relieve the double taxation.

Sub-paragraph (b) recognises Australia as the source of income taxed in this country under special provisions relating to film rentals and related income and to certain income of non-resident insurance undertakings. The provision ensures that the United States will allow a credit to relieve double taxation, thus leaving Australia free to continue its present basis of taxing these classes of income.

In sub-paragraph (c) it is provided that the terms "Australian tax" and "United States tax" shall not include tax which represents a penalty, e.g., additional tax imposed as a result of late lodgment of returns or the omission of income from returns. The effect of this provision, which is the counterpart of Article II (2) of the agreement with the United Kingdom, is that a credit will not be allowed in respect of tax which represents a penalty.

ARTICLE XVI

As explained in relation to clause 20 of the Bill, there are circumstances in which persons not entitled to a benefit under the convention may nevertheless avoid a measure of United States tax by reason of the operation of the convention.

This position may arise, for example, if a person resident outside Australia arranges for a dividend due to him by a United States corporation to be paid to him through an agent in Australia. There might also be a loss of Commonwealth revenue if a person not entitled to the concessional rate of Australian tax provided for in Article VII failed to disclose his country of residence.

The purpose of the Article is to provide a provision under which, in the circumstances mentioned, reciprocal assistance would be given in the collection of the tax involved. The Article does not, however, place an absolute responsibility on either country to collect tax, since it applies only to the extent that the collection of the tax is practicable. Furthermore, the Article does not apply in respect of taxes generally, but only in relation to tax avoided by reason of the inappropriate application of provisions of the convention.

ARTICLE XVII

This Article authorizes the taxation authorities of the two countries to confer if a taxpayer of either country submits proof that the action of a taxation authority has resulted in double taxation contrary to the provisions of the convention.

The necessary facts will be presented to the country in which the taxpayer is resident or of which he is a citizen. In the case of a company, the facts must be presented to the country in which the company is incorporated.

On receipt of the facts, the country concerned will, if it considers the action appropriate, consult with the other country in an endeavour to reach an agreement for the avoidance of the double taxation involved.

ARTICLE XVIII

Under this Article the taxation authorities of the two countries will be authorized to exchange certain information available to them under their taxation laws.

Information will be exchanged only if it is necessary for carrying out the provisions of the convention or for the prevention of fraud, or the administration of laws designed to prevent the avoidance of tax. Secrecy will be maintained regarding the information exchanged, but information may be used in relation to appeals against assessments and credits, or in relation to references to tribunals, such as a Board of Review.

In no circumstances is there to be an exchange of information which would disclose a trade secret or trade process.

ARTICLE XIX

This Article authorizes the taxation authorities of the two countries to communicate directly for the purpose of giving effect to the convention. Direct communication will provide the most expeditious means of effecting contacts necessary in exchanging information and examining questions arising from the practical application of the convention.

ARTICLE XX

Sub-paragraph (a) of the Article provides that the provisions of the convention shall not be construed as restricting any exemption, deduction, credit or other allowance granted under the laws of either country or which may in the future be granted under those laws.

The provision was included because there may be circumstances in which, say, an exemption from tax granted under the law in respect of a specific class of income is not referred to in the convention. It would be inappropriate to interpret the convention in a manner which limited a concession specifically approved by the legislature and the sub-paragraph will protect the interests of taxpayers by ensuring the continuation of concessions for so long as the law authorizes the concessions.

Sub-paragraph (b) relates to provisions of the Australian income tax law concerning the taxation of film rentals and associated income, and of certain insurance premiums, derived by undertakings not resident in Australia. The provision will enable Australia to continue the present basis upon which it now taxes those incomes. If the income is also subjected to United States tax, relief from double taxation will be granted by the United States, which will allow a credit for the Australian tax under Article XV.

ARTICLE XXI

Paragraph (1) provides that the convention be ratified by both governments and that the instruments of ratification be exchanged as soon as possible. It is proposed to exchange instruments as soon as practicable after the Bill has received the Royal Assent.

In paragraph (2) it is provided that the convention shall become effective in the case of the United States on the 1st January of the year in which the instruments of ratification are exchanged. In the case of Australian tax the convention will be effective as from the income year commencing on the 1st July in the year in which the instruments are exchanged.

If the instruments of ratification are exchanged before the end of 1953, the convention will apply to United States tax as from 1st January 1953 and to Australian tax for the income year which commenced on 1st July 1953 and subsequent years.

Paragraph (3) provides that the convention apply indefinitely but permits either country to give notice of termination on or before 30th June in any year after 1955. If notice of termination is given, the convention will cease to be effective in relation to United States tax as from the 1st January next following the giving of the notice. There will accordingly be at least six months of any pending termination.

In the case of Australian tax, the convention would cease to be effective for the income year commencing on 1st July of the year after the year in which the notice of termination is given. There would accordingly be at least twelve months notice of a pending termination.