Edited version of private advice

Authorisation Number: 1052044241743

Date of advice: 30 August 2023

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 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 (the US Convention) apply to reduce to 15% the withholding tax on the unfranked dividends paid by Company A to Z LP to the extent to which a proportion of such dividends was attributed to:

•         the Trust as a limited partner of Z LP, and

•         Ultimate Investor D (being one of the two Ultimate Investors) as one of the Trustees and Grantors of the trust?

Answer

Yes.

Question 2

If the answer to Question 1 is "Yes", will the Ultimate Investor D (being one of the Ultimate Investors) be entitled to apply in writing for a refund by the Commissioner of Taxation (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 the Ultimate Investor's 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 commenced 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.

Z LP

2.    Z LP is a limited partnership formed in the Cayman Islands which comprises of Z LLC as general partner and other investors being limited partners.

3.    Z LP is governed by the Amended & Restated Limited Partnership Agreement (Partnership Agreement).

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

5.    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 as evidenced by the distribution statement that shows the income being distributed to the limited partner.

6.    In 20XX, Z LP acquired X% of the ordinary shares in Company A.

7.    In 20XX, Z LP subscribed for additional shares in Company A.

Dividends received by Z LP

8.    The dividends were paid by Company A and withholding tax withheld by Company A and remitted to the ATO.

Income received

9.    The Partnership Agreement provides that Distributable Cash, as defined by the Partnership Agreement, received by the Fund shall be distributed to the partners within 60 days, or as soon as practicable thereafter.

Tax partnership status

10.  Z LP is taxable as a partnership as per the Partnership Agreement.

The Trust and Ultimate Investors

11. The Trust is a limited partner of Z LP and a fiscally transparent entity for US federal income tax purposes.
12. The Trust was created on XX April 2XXX under a trust agreement (Trust Agreement) between the Ultimate Investor D and Ultimate Investor B (the Ultimate Investors) as both the Trustees and Grantors of the Trust.
13. Under the Trust Agreement, the Trust is revokable and the Grantors (being the Ultimate Investors) are exclusively entitled to all net income and principal from the trust property. The Trustees (being the Ultimate Investors) hold all interests in the Trust Property.
14. The Ultimate Investors are US citizens that are not a resident of a State other than Australia for the purposes of a double tax agreement between that State and Australia. The Ultimate Investors are residents of the US for federal income tax purposes and are not residents of Australia.
15. The Trust and Ultimate Investors do not carry on any business in Australia.

16.  At 30 June 2019, the Trust held approximately 0.0XX% of Z LP's interest in Company A.

17. The Ultimate Investors received distributions from Z LP via the Trust and were subject to US federal income tax on this income. The total distributions received included the Ultimate Investors' 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.
18. The dividends ultimately received by the Trust and Ultimate Investors were net of withholding tax of 30%.
19. Under US federal income tax law, Z LP and the Trust are treated as fiscally transparent entities such that the Ultimate Investors are subject to US federal income tax on their proportion of income and profits derived by Z LP.
20. The Trust and the Ultimate Investors have not previously applied for a refund of the dividend withholding tax 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 withholding tax for non-residents and the US Convention

Non-resident taxpayers will, prima facie, be liable to withholding tax under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) on Australian sourced dividend income, unless an exemption or exclusion applies (subsection 128B(1) of the ITAA 1936).

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

Subsection 5(1) of the International Tax Agreements Act 1953 gives the force of law to the provisions of the US Convention.

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

The Ultimate Investors are residents of the US for federal income tax purposes and indirect investors in Company A, an Australian incorporated company, through a limited partnership, Z LP, in which the Trust is a limited partner.

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

Based on the facts as outlined above, the US Convention will apply to the Ultimate Investors as they are US citizens that meet the requirements of Article 4(1)(b)(ii). As such, they will be treated as residents of the US for the purposes of applying the US 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 relevant rate is 30%.

However, certain DTAs may set a different rate of withholding in circumstances where a resident of a country which has a DTA with Australia is beneficially entitled to a dividend.

The primary legislation governing DTAs 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 US 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 US 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 US Convention and that the Ultimate Investors are beneficially entitled to the dividends.

Dividends

Article 10(6) of the US 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 US Convention is that the distributions paid by Company A to Z LP of certain amounts in 20XX were dividends for the purposes of Article 10 of the US Convention as they are income from the holding of shares in Company A, an Australian resident company.

Beneficially entitled

The term 'beneficially entitled' is not defined in the US Convention, however Article 3(2) of the US 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 DTAs, the OECD Commentaries provide important guidance on interpretation and application of the OECD Model Tax Convention and can be considered, in interpreting DTAs.

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.

Paragraph 12.4 of the 2014 OECD Commentary on Article 10 of the OECD Model Tax Convention describes the concept of beneficial ownership as a recipient's right to use and enjoy the income not being constrained by a contractual or legal obligation to pass on the payment received to another person. Such an obligation will normally derive from relevant legal documents but may also be found to exist on the basis of facts and circumstances showing that, in substance, the recipient does not have the right to use and enjoy the amounts unconstrained.

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 and the US. All profits derived by Z LP are treated as profits of the partners themselves in proportion to their partnership interest in Z LP for Caymans Islands and US federal income tax purposes.

The Trust is a limited partner in Z LP and received distributions from Z LP that included its share of the net unfranked dividends in accordance with its percentage interest in Z LP. The Ultimate Investors, including Ultimate Investor D, were not only exclusively entitled to the income of the trust ), but were subject to US federal income tax on this income as the relevant Trustees and Grantors.

Based on the relevant facts and circumstances as outlined above, it can be concluded that the Ultimate Investors are beneficially entitled to their relevant proportion of dividends paid by Company A to Z LP for the purposes of the US Convention.

Article 10 of the US Convention

Article 10(2)(a) of the US Convention does not apply as the Ultimate Investors are not a company and do not directly hold at least 10 percent of the voting power in the company paying the dividends.

Article 10(3) of the US Convention does not apply as the Ultimate Investors do not own shares representing 80 percent or more of the voting power of the company paying the dividends.

Article 10(5) of the US Convention does not apply as the Ultimate Investors do not carry on business in Australia through a permanent establishment.

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

Limitation of Benefits

Article 16 of the US Convention applies to deny treaty benefits unless the relevant entity is a 'qualified person' for the purposes of the Convention. Article 16(1) of the Convention states:

Except as otherwise provided in this Article, a resident of one of the Contracting States that derives income from the other Contracting State shall not be entitled to the benefits of this Convention otherwise accorded to residents of one of the Contracting States unless such resident is a "qualified person" as defined in paragraph (2).

Article 16(2) of the Convention contains the definition of a 'qualified person'. Sub-paragraph (a) provides that an individual who is resident of one of the Contracting States shall be a qualified person.

As outlined in paragraph 14, the Ultimate Investors are individuals and residents of the US, the Ultimate Investors are each a qualified person such that Article 16 of the US Convention will not apply to deny treaty benefits.

Consequently, Article 10(2) of the US Convention will apply to reduce to 15% the withholding on unfranked dividends paid by Company A to Z LP to the extent to which a portion of such dividends was attributed to the Trust as a limited partner of Z LP and Ultimate Investor D is one of the two Ultimate Investors exclusively entitled to the Trust's net income.

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 dividends paid to Z LP. As outlined above in response to Question 1, Ultimate Investor D was beneficially entitled to a proportion of such unfranked dividends which has resulted in an overpayment of withholding tax. As Article 10(2)(b) of the US Convention applies to reduce the withholding tax rate to 15%, Company A has 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 relevant facts and circumstances as outlined above 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 relevant facts and circumstances as outlined above, the Trust and the Ultimate Investors 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 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.

Consequently, Ultimate Investor D is 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 US Convention, on their portion of unfranked dividends paid by Company A to Z LP.

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