Edited version of private advice

Authorisation Number: 1052039273995

Date of advice: 11 October 2022

Ruling

Subject: Dividend and interest withholding tax

Question 1

Will Article 10(2) of the Convention between the Government 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 [1983] ATS 16, and the Protocol amending the Convention [2003] ATS 14 (the United States Convention) apply to reduce to 15% the withholding tax applying to unfranked dividends beneficially owned by the Investor that are paid by Company A to Z LP?

Answer

Yes.

Question 2

If the answer to Question 1 is "Yes", will Person A as the beneficiary of the Investor be entitled to apply in writing for a refund by the Commissioner under subsection 18-70(1) of Schedule 1 to the Taxation Administration Act 1953 (the TAA 1953) of dividend withholding tax amounts in excess of 15% withheld and remitted by Company A to the Commissioner on their portion of unfranked dividends paid by Company A to Z LP?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A

1.    Company A is a company incorporated in Australia as the head company of the Company A tax consolidated group (Company A TCG) which includes Company B and Company C.

2.    Company A was established to acquire, through its wholly owned subsidiary, Company C, the rights to harvest trees in Australia.

3.    The Company A TCG also owns a mill located in Australia.

4.    Company B, owns shares in a New Zealand subsidiary, which through its wholly owned subsidiaries owns facilities in New Zealand.

Z LP

5.    Z LP is a limited partnership formed in the Cayman Islands.

6.    Z LP is governed by the Amended & Restated Limited Partnership Agreement.

7.    Z LP is not an Australian resident and does not have any operations in Australia nor does it carry on business in Australia.

8.    Z LP is not taxed in its own right under Cayman Islands income tax law. It is treated as 'fiscally transparent' in the Cayman Islands such that profits derived by Cayman LP are not taxed in the Cayman Islands but rather are treated as profits of the investors in proportion to their interest in Z LP.

9.    In 2017, Z LP acquired X% of the ordinary shares in Company A.

10.  In 2018, Z LP subscribed for additional shares in Company A.

Dividends received by Z LP

11.  The dividends paid by Company A and withholding tax withheld by Company A and remitted to the ATO are as follows:

The Investor Trust (The Investor)

1.    Person A and Person B (Beneficiaries) are the ultimate beneficiaries of the Investor Trust.

12.  The Investor and the Beneficiaries are residents of the United States for tax purposes.

13.  At 30 June 2019, the Investor held approximately 0.Y% of Z LP's interest in Company A.

14.  The Investor is a limited partner of Z LP.

15.  The Investor does not carry on a business in Australia through a permanent establishment.

16.  The Investor received distributions from Z LP. The total distributions received partly comprise the Investor's portion of the net unfranked dividends from Company A in accordance with its percentage interest in Z LP. Of the dividends received by Z LP from Company A, certain cash was retained by Z LP to fund ongoing expenses.

17.  The distributions received by Investor were net of withholding tax of 30%.

2.    During the 2019 income year, the Beneficiaries were presently entitled to the distributions the Investor received.

18.  Under United States domestic law, Z LP is treated as a fiscally transparent entity such that Investor's proportion of profits derived by Z LP are taxable in the United States.

19.  The Investor and the Beneficiaries have not previously applied for a refund of the dividend withholding tax previously withheld by Company A.

Relevant legislative provisions

Convention between the Government 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 [1983] ATS 16

Protocol amending the Convention [2003] ATS 14

Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 section 7

Income Tax Assessment Act 1936 section 128B

Income Tax Assessment Act 1936 subsection 128B(1)

Income Tax Assessment Act 1936 subsection 128B(4)

Income Tax Assessment Act 1997 subsection 6-5(3)

International Tax Agreements Act 1953 subsection 4(1)

International Tax Agreements Act 1953 subsection 4(2)

Taxation Administration Act 1953 Schedule 1 subsection 18-70(1)

Reasons for decision

Question 1

Australian taxation for non-residents and the United States Convention

Non-resident taxpayers will, prima facie, be liable to pay income tax under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) or withholding tax under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) on Australian sourced income, unless an exemption or exclusion applies.

Australia has entered into treaties, commonly known as double tax agreements (DTA), with many countries to avoid the incidence of double taxation and fiscal evasion, including the United States Convention.

Subsection 5(1) of the International tax Agreements Act 1953 gives the force of law to the provisions of the United States Convention, as amended by the Protocol Amending the Convention between the Government 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 [2003] ATS 14 (Protocol).

Article 1(1) of the United States Convention states that the Convention applies to persons who are residents of one or both of the Contracting States.

The Investor is a resident of the United States for tax purposes and an indirect investor in Company A, an Australian incorporated company, through a limited partnership, Z LP, in which the Investor is an ultimate investor.

Article 4(1)(b)(ii) of the United States Convention states that for the purposes of the United States Convention a person is a resident of the United States if the person is a United States citizen, other than a United States citizen who is a resident of a State other than Australia for the purposes of a double tax agreement between that State and Australia.

Based on the facts provided, it is considered that the United States Convention will apply to the Investor and they will be treated as a resident of United States for the purposes of applying the United States Convention (Article 4(1)(b)(ii)).

Dividend withholding tax

Subsection 128B(1) of the ITAA 1936 states that (subject to excluding provisions) the operative provisions of the section apply to a dividend paid to a non-resident by an Australian resident company.

Subsection 128B(4) of the ITAA 1936 provides that a person who derives dividend income to which the section applies is liable to pay income tax upon that income at the rate declared by the Parliament.

Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 prescribes that the rate is 30%.

However, where a dividend is beneficially owned by a resident of a country which has a tax treaty with Australia, that treaty may set a different rate of withholding in circumstances where the treaty applies specifically to the circumstances of the recipient.

The primary legislation governing DTA's in Australia is the International Tax Agreements Act 1953 (Agreements Act). Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (with some limited exceptions).

Article 10(1) of the United States Convention outlines how dividends are to be taxed:

Dividends paid by a company which is a resident of one of the Contracting States for the purposes of its tax, being dividends to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State.

Article 10(2) of the United States Convention provides that those dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident for the purposes of its tax, and according to the law of the state, but:

(a)   the tax charged shall not exceed 5 percent of the gross amount of the dividends, if the person beneficially entitled to those dividends is a company which holds directly at least 10 percent of the voting power in the company paying the dividends; and

(b)   the tax charged shall not exceed 15 percent of the gross amount of the dividends to the extent to which those dividends are not within sub-paragraph (a).

In summary, it must be established that the distributions paid by Company A are dividends for the purposes of Article 10 of the United States Convention and that the Investor is the beneficial owner of the dividends.

Dividends

Article 10(6) of the United States Convention defines dividends as income from shares, as well as other amounts which are subjected to the same taxation treatment as income from shares by the law of the State of which the company making the distribution is a resident for the purposes of its tax.

The effect of Article 10(6) of the United States Convention is that the distributions paid by Company A to Z LP as per the table in paragraph 11 are dividends for the purposes of Article 10 of the United States Convention as they are income from the holding of shares in Company A.

Beneficial owner

Z LP is a limited partnership formed in the Cayman Islands. Z LP holds X% of the shares that have been issued by Company A. Z LP is not taxed under Cayman Islands income tax law and is treated as a fiscally transparent entity in the Cayman Islands. All profits derived by Z LP are treated as profits of the partners themselves in proportion to their partnership interest in Z LP.

The term 'beneficial ownership' is not defined in the Unites States Convention, however Article 3(2) of the United States Convention provides that:

As regards the application of this Convention by one of the Contracting States, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has under the laws of that State relating to the taxes to which this Convention applies.

In general, when interpreting DTA's, the OECD Commentaries provide important guidance on interpretation and application of the OECD Model Tax Convention and can be considered, in interpreting tax treaties.

Paragraph 12.1 of the 2014 OECD Commentary on Article 10 (being the Article dealing with dividends) of the OECD Model Tax Convention states:

The term 'beneficial owner' is therefore not used in a narrow technical sense (such as the meaning that it has under the trust law of many common law countries), rather, it should be understood in its context, in particular in relation to the words 'paid to a resident', and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.

Therefore, the Investor as a partner in Z LP, will be the beneficial owner of the dividends received from Company A for the purposes of the United States Convention as Z LP is treated as a fiscally transparent entity, all of the profits belong to the partners in accordance with their interest in the partnership.

Article 10 of the United States Convention

Article 10(2)(a) of the United States Convention does not apply as the Investor is not a company and does not directly hold at least 10 percent of the voting power in the company paying the dividends.

Article 10(3) of the United States Convention does not apply as the Investor does not own shares representing 80 percent or more of the voting power of the company paying the dividends.

Article 10(5) of the United States Convention does not apply as the Investor does not carry on business in Australia through a permanent establishment.

Therefore, Article 10(2)(b) of the United States Convention will apply so that the percentage of withholding tax applicable to dividends received by the Investor would be at the rate of 15%.

Question 2

Subdivision 18-B of Schedule 1 to the TAA 1953 contains the rules allowing certain amounts withheld or paid to the Commissioner under the pay as you go (PAYG) withholding provisions to be refunded to recipients.

Relevantly, subsection 18-70(1) of Schedule 1 of the TAA 1953 states:

An entity (the recipient) may apply in writing to the Commissioner for the refund of an amount if:

(a)  another entity (the payer):

(i)    withheld an amount purportedly under Division 12 from a payment made to, or received for, the recipient.....

(b)  either:

(i)    the amount was so withheld, or paid to the Commissioner, in error...

(c)   section 18-65 does not apply because the payer did not become aware of the matter mentioned in paragraph (b), or the recipient did not apply for a refund, as mentioned in subsection 18-65(1); and

(d)  if subparagraph (a)(i) applies - the payer has already paid the withheld amount to the Commissioner.

Paragraphs 18-70(1)(a) and 18-70(1)(b) of Schedule 1 to the TAA 1953

Company A has withheld and remitted to the Commissioner an amount equating to 30% of the unfranked dividend distribution paid to Z LP that are beneficially owned by the Investor which has resulted in an overpayment of withholding tax. As Article 10(2)(b) of the United States Convention applies to reduce the withholding tax rate to 15%, Company A have withheld and remitted a higher amount than necessary.

Law Administration Practice Statement PS LA 2011/11 (PS LA 2011/11) - Refunds of certain pay as you go withholding amounts also details the obligations and rights of a payer, a recipient and the Commissioner where an amount has been withheld, in error, purportedly under the PAYG withholding system. It also provides information as to how a recipient may obtain a refund of incorrectly withheld amounts (paragraph 4 of PS LA 2011/11).

The term 'in error' is discussed in paragraph 7 of PS LA 2011/11 and states:

The word error has its ordinary, broad meaning and includes an error of fact and an error of law. An error of fact is one where an error is made by a decision maker about the existence of a particular fact. An error of law is a misinterpretation or misapplication of a principle of law, or the application of an inappropriate principle of law to an issue of fact.

Paragraph 8 of PS LA 2011/11 provides examples that illustrate where an amount would be considered to have been withheld in error. In particular, one example relevant to this case states:

An incorrect (higher) withholding rate is used in calculating the amount withheld from a payment of an interest, unfranked dividend or royalty to a non-resident (for example, because they did not take account of the rate provided under an agreement or convention covered by the International Tax Agreements Act 1953). Subsequently an excess amount is withheld from these payments.

It is accepted based on the facts that the amounts withheld by Company A have been withheld 'in error'.

Paragraph 18-70(1)(c) of Schedule 1 to the TAA 1953

Where an overpayment of withholding tax is made, the recipient of the income can obtain a refund from either the payer under section 18-65 of Schedule 1 to the TAA 1953 or from the Commissioner under section 18-70 of Schedule 1 to the TAA 1953, subject to the requirements of the relevant sections being satisfied and the relevant timeframes being met.

Subsection 18-65(1) of Schedule 1 of the TAA 1953 relevantly states:

An entity (the payer) must refund to another entity (the recipient) an amount if:

(a)  the payer:

(i)  withheld the amount purportedly under Division 12 from a payment made to, or received for, the recipient (whether the amount has been paid to the Commissioner or not)...

(b)  either:

(i)            the amount was so withheld, or paid to the Commissioner, in error...

(c)   either:

(i)            the payer becomes aware of the matter mentioned in paragraph (b); or

(ii)           the recipient applies to the payer for the refund;

before the end of the financial year in which the amount was so withheld or paid to the Commissioner;...

Subsection 18-65(4) of Schedule 1 of the TAA 1953 explains the timeframes for the payer when a request for refund is made:

The request must be made within 7 working days (of the payer) after the payer receives the application for the refund or after the payer otherwise becomes aware of the matter mentioned in paragraph (1)(b) (as appropriate).

In accordance with the facts, the Investor and Person A as the beneficiary of the Investor have not previously sought a refund of the dividend withholding tax withheld by Company A. As such, the requirements of subsection 18-65(1) of Schedule 1 to the TAA 1953 have not been met. Therefore, paragraph 18-70(1)(c) of Schedule 1 to the TAA 1953 is satisfied.

Paragraph 18-70(1)(d) of Schedule 1 to the TAA 1953

Company A has remitted the relevant amount of withholding tax to the Commissioner. As such, this paragraph is satisfied.

Person A was presently entitled to the distribution that included his portion of the unfranked dividends that paid by Investor.

Consequently, Person A as the beneficiary of the Investor will be entitled to apply for a refund by the Commissioner of the dividend withholding tax amounts withheld and remitted by Company A that exceeds the 15% rate in accordance with Article 10(2)(b) of the United States Convention, on their portion of unfranked dividends paid by Company A to Z LP.

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