Explanatory Memorandum
(Circulated by authority of the Treasurer, the Rt. Hon. William McMahon.)Notes on Clauses
INCOME TAX ASSESSMENT BILL (NO. 4) 1967.
This is the first of the four Bills explained in this memorandum. The principal features of the Bill have already been mentioned and the following notes relate to each clause of the Bill.
Clause 1: Short Title and Citation.
This clause formally provides for the short title and citation of the Amending Act and the Principal Act as amended.
Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.
Sub-clause (1.) of clause 2 proposes that, subject to the succeeding sub-clauses, the Amending Act will come into operation on the day on which the Act is given the Royal Assent.
Sub-clause (2.) proposes that the amendments made by clauses 4(2.) and (3.), 5, 6(2.), 7 to 11, 18, 20(2.) and 25(2.) shall have effect on and from the date specified in the sub-clause. This is the day after the date of introduction of the Bill into Parliament.
Sub-clause (3.) proposes that the amendments made by clauses 3, 4(1.), 6(1.), 12 to 17, 19, 20(1.), 22 to 24, 25(1.) and 26 to 34 shall have effect as from 1st January, 1968. These amendments are related to the imposition of withholding tax on dividends and interest derived by non-residents on or after that day and are explained later in this memorandum.
Section 5 of the Principal Act lists the Parts and Divisions into which the Act is divided. Clause 3 will effect amendments in the list which are consequential upon other amendments proposed by the Bill to provisions of the Principal Act.
By clause 4 it is proposed to amend section 6 of the Principal Act which contains definitions of words and phrases used in that Act.
Sub-clause (1.) will omit two definitions relating to the dividend (withholding) tax which, because of other amendments proposed on the introduction of a withholding tax on interest, will no longer be necessary. It will also insert two new definitions.
Paragraph (a) of sub-clause (1.) will omit from section 6 of the Principal Act the definition of "dividend (withholding) tax". This term is defined to mean income tax payable in accordance with a section in the Principal Act - section 128B - that creates a liability for tax on dividends derived by non-residents from Australian companies. Amendments to section 128B of the Principal Act proposed by clause 17 will extend the operation of that section to interest paid to non-residents. The term "dividend (withholding) tax" is not used in the proposed new provisions of section 128B. It is, therefore, being dispensed with.
Paragraph (b) of sub-clause (1.) will insert a new definition - of a "foreign superannuation fund" - in section 6 of the Principal Act. In broad terms this means a provident, benefit, superannuation or retirement fund which has no connection with Australia other than by investment in this country of moneys of the fund. The purpose of the definition is to describe a class of fund which, in relation to dividends and interest derived from Australia, will be excluded from the scope of the special provisions of the Principal Act governing the taxation of superannuation funds.
A fund will qualify as a foreign superannuation fund only if it has been established, and is managed and controlled, outside Australia by persons who are not residents of Australia or of Australia's external territories. A further requirement of the definition is that the fund be established - and maintained and applied - solely for the purpose of providing benefits for persons who, at the time they became members of the fund, were not residents either outside Australia, or of any of Australia's external territories.
By clause 6, dividends and interest derived by a foreign superannuation fund (as defined) will be specifically exempted from tax on an assessment basis. The dividends and interest will, however, be subject to withholding tax if the fund is not exempt from tax on the income in its home country.
Further explanations of the provisions proposed in relation to foreign superannuation funds are given later in this memorandum in the notes on clauses 6 and 17 of the Bill.
Paragraph (c) of sub-clause (1.) will omit the definition of "non-resident dividend income". This term is defined to mean income upon which dividend (withholding) tax is payable under the provisions of section 128B of the Principal Act. Because of the changes proposed in that section by clause 17 in consequence of the introduction of a withholding tax on interest paid to non-residents, the term "non-resident dividend income" is not used in the proposed new provisions of section 128B. The definition is, therefore, redundant and is being omitted.
Paragraph (d) of sub-clause (1.) will insert a new definition - of "withholding tax" - in section 6 of the Principal Act. This definition will, in effect, replace the definition of "dividend (withholding) tax" that is being omitted by paragraph (a). Withholding tax on dividends and interest will be payable under the proposed new section 128B to be inserted in the Principal Act by clause 17 - see notes on that clause. The term "withholding tax" is accordingly defined to mean the tax payable in accordance with that section.
Sub-clause (2.) of clause 4 proposes amendments to section 6 of the Principal Act which relate to the circumstances in which a distribution by a company is to be treated as a "dividend" for income tax purposes.
The broad general principle of the Australian income tax law is that, subject to specific exemptions, distributions by a company to its shareholders whilst a going concern are taxable in the hands of the shareholders, whether made out of capital profits of income. This principle is carried into effect, for the purposes of the assessment provisions of the Principal Act, by the definition of "dividend'' in section 6 of that Act and by section 44(1.) of that Act. For withholding tax purposes, the definition of "dividend'' works in combination with section 128B of the Principal act to create a liability to that tax.
The definition of "dividend" is thus central to the taxation of distributions by a company to its shareholders and the proposed amendments are designed to remove weaknesses that have been found to exist in the present provisions of the law.
Broadly stated, the present definition provides that a "dividend" includes any amount paid, credited or distributed by a company to its shareholders but does not include "a return of paid-up capital''. The definition was recently considered by the High Court in the case of the Commissioner of Taxation v. Uther. In that case a company reduced its capital by cancelling part of its paid-up capital and distributed to its shareholders amounts very much in excess of the amount by which the nominal paid-up capital was reduced. The Court decided that no part of the amount distributed to the shareholders was liable to tax.
This result may be contrasted with the case where a company makes a distribution to its shareholders out of profits and the distribution is by way of a conventional dividend. The distribution will (subject to specific exempting provisions) be taxable. But if the same profits are distributed in consequence of a reduction in paid-up capital, the effect of the Court's interpretation is that the shareholders are not subject to tax on any part of the distribution.
The proposed amendments are designed to overcome the anomaly in the law revealed by the Court's interpretation of it. Broadly, the effect of the new provisions will be to tax in the hands of the shareholders of a company so much of any distribution made in consequence of a reduction of the nominal paid-up capital of the company as exceeds the amount by which the capital is actually reduced. The amount of the nominal paid-up capital returned to shareholders will not be taxed. Nor will a distribution out of a share premium account be taxed except where it is made as part of an arrangement to exploit the law.
Paragraph (a) of sub-clause (2.) of clause 4 will insert a new definition of "dividend'' in section 6 of the Principal Act.
Paragraphs (a), (b) and (c) of the proposed new definition re-enact in a slightly altered form, but with no change in substance, provisions now included in the definition of "dividend''. Subject to the exceptions which follow, "dividend'', where used in the income tax law, will continue to include any distribution by a company to its shareholders whether in money or other property, and any amount credited by a company to its shareholders as such. It will also, as now, include the paid-up value of shares distributed to shareholders to the extent to which that value represents a capitalization of profits.
Paragraphs (d), (e) and (f) will exclude certain amounts from the definition of dividends.
Paragraph (d) of the definition provides that an amount paid or credited out of a "share premium account'' - see notes on this definition below - is not to be treated as a dividend for income tax purposes.
The effect of paragraph (d) will be to treat an amount credited or distributed to a shareholder out of a share premium account of a company in the same way as the nominal amount paid-up on a share paid to the shareholder on a reduction of capital. Safeguards in respect of amounts credited or distributed out of a share premium account are proposed in the new sub-section (4.) to be inserted in section 6 of the Principal Act - see notes on that sub-section below. A consequential amendment is proposed by clause 8 to section 44(2.)(b)(iii) of the Principal Act which at present exempts a dividend paid out of profits arising from the issue of shares at a premium if the dividend is satisfied by the issue of shares in the company.
Paragraph (e) of the new definition of "dividend'' is part of the measures designed to remove the weakness in the law revealed by the decision of the High Court in the case already mentioned.
Sub-paragraph (i) of paragraph (e) will apply where any distribution is made, or an amount is credited, by a company to its shareholders on the cancellation or redemption of any of its shares. It provides that the amount of the distribution or the credit not treated as a dividend is to be only that part of the amount which represents a return to the shareholder of the nominal amount paid-up on the shares. Accordingly, if a company, by a reduction of capital, or a redemption of a redeemable preference share, cancels, say, a fully paid $1 share and, on cancellation, pays the shareholder $3, only the amount of $1 will be treated as being a return of paid-up capital. The balance of the distribution - $2 - will be treated as a dividend.
Sub-paragraph (ii) of paragraph (e) will apply where a company reduces the nominal amount paid-up on its shares otherwise than by cancellation or redemption of shares and distributes money or other property, or credits an amount, to its shareholders. Here again, only the part of the distribution or credit that represents a return to the shareholder of an amount equivalent to the amount by which the nominal amount paid-up on the shares is reduced shall be treated as not being a dividend. If, for example, a $2 share is fully paid, on a reduction of paid-up capital the nominal amount paid-up on the share is reduced to $1, and a distribution of $3 is made to a shareholder in respect of each of his shares in the company, $1 shall be treated as a return of paid-up capital and $2 as a dividend in respect of each share.
For the purposes of paragraph (e), an amount that is paid to a shareholder on a reduction of capital in respect of a bonus share issued by the company will be treated in the same manner as an amount paid to the shareholder on a reduction of capital in respect of a share paid up in cash subscribed by the shareholder.
Paragraph (f) will exclude a reversionary bonus on a policy of life assurance from the definition thus preserving the position that exists under the present law in respect of such bonuses.
The new definition of "dividend" will have effect in respect of dividends that are paid after the day on which the Bill was introduced into Parliament.
Paragraph (b) of sub-clause (2.) of clause 4 is associated with paragraph (d) of the new definition of "dividend" that has been explained above. It will insert a definition of "share premium account" in section 6 of the Principal Act. As has been stated, a payment out of a share premium account will not generally be treated as a dividend for income tax purposes.
The Uniform Companies Acts contain provisions that, broadly stated, require a company which issues shares at a premium to transfer an amount equal to the premiums received to a special account called the "share premium account". Under the company law, this account may be applied in the ways prescribed in that law.
For the purposes of the income tax law it is proposed that an account will be treated as a share premium account - whether the company receiving the share premiums gives it that description or not - if it is an account into which the company has credited amounts not greater than the share premiums received by it. An account will not be treated as a share premium account for income tax purposes if the amount credited in it includes an amount that is not in respect of share premiums received. A share premium that has at any time been so applied that it is no longer identifiable in the company's books will not be eligible to be credited into an account that qualifies as a share premium account for income tax purposes.
The broad effect of this definition will be to limit the amounts excluded from the scope of a dividend by virtue of paragraph (d) of the definition of dividend to such amounts paid or credited to shareholders as represent share premiums that have been received by the company, have been credited to a share premium account and have not been applied for other purposes.
Paragraph (c) of sub-clause (2.) of clause 4 will insert two new sub-sections - sub-sections (4.) and (5.) - in section 6 of the Principal Act. These sub-sections will qualify the operation of paragraph (d) of the new definition of "dividend" which provides that a distribution out of a share premium account is not to be treated as a dividend for income tax purposes.
Sub-sections (4.) and (5.) are designed as a safeguard against special arrangements that may be entered into for the purpose of exploiting the proposed exemption of distributions out of share premium accounts. Very broadly, the provisions will apply where a share premium account is created as part of a scheme for making a tax-free distribution of money or other property to shareholders.
Under sub-section (4.) where a share premium account has been created in these circumstances and, under the arrangement, any moneys are paid or credited or property is distributed to shareholders out of the share premium account, the moneys or property will be treated as a dividend. In these circumstances, paragraph (d) of the definition of "dividend" will not apply. The operation of this sub-section is, however, subject to the provisions of the proposed sub-section (5.) of section 6.
Sub-section (5.) modifies the operation of sub-section (4.) where, in pursuance of the agreement or arrangement under which shares were issued at a premium, the amount credited to a shareholder out of the share premium account is applied or to be applied in paying up an amount that is unpaid on a share in the company. In these circumstances, the amount credited to a shareholder out of the share premium account and retained by the company in the form of share capital in the company will not be treated as a dividend.
If, however, the agreement or arrangement is such that the application of the credit out of the share premium account in paying up a share is to be followed by further steps the result of which is that money or other property (other than shares in the company) is distributed to shareholders, sub-section (5.) will not limit the operation of sub-section (4.). The amount applied out of the share premium account will, in these circumstances, be treated as a dividend paid to the shareholders at the time the amount was originally credited for their benefit out of the share premium account.
Sub-clause (3.) of clause 4 formally provides that the amended definition of dividend is not to apply in respect of any amounts paid, credited or distributed by a company to shareholders on or before the date of introduction of the Bill into Parliament.
Clause 5: Income Attributable to Dividends.
Introductory Note :
This clause proposes the insertion in the Principal Act of a new section - section 6B.
The new section 6B and other proposed amendments explained later in this memorandum deal with the taxation of dividends derived from overseas companies by residents of Australia.
The general principle of the income tax law is that a resident shareholder is taxed on dividends paid to him by a company, whether the company is a resident or a non-resident. If the company is a non-resident and the shareholder has paid tax on the dividends for which he was personally liable in the country in which the company is resident, a credit for the foreign tax is allowed against the Australian tax on the dividend. These principles are carried into effect by sections 44 and 45 of the Principal Act. If the dividend flows from a country with which Australia has a double taxation agreement, a credit for the foreign tax on the dividend is available under the particular agreement.
A different method of relieving double taxation applies to income, other than dividends, derived abroad by residents of Australia. Under section 23(q) of the Principal Act, this income is exempt from Australian tax if it is not exempt from income tax in the country where it is derived.
Until a recent decision of the High Court - Commissioner of Taxation v Angus - the income tax law had been administered on the basis that the credit system of relief applied in relation to all foreign dividends whether received by the Australian taxpayer directly as a shareholder or indirectly through a trustee or other person. In the particular case considered by the Court the taxpayer derived dividends paid by a non-resident company as a beneficiary in a trust estate and the Court held that the income so derived was exempt from Australian tax under the double taxation relief provisions of section 23(q).
In brief, the amendments proposed by the Bill are designed to ensure that the exemption under section 23(q) cannot apply to foreign dividends beneficially derived by an Australian resident on shares not held in his name. It is proposed that a resident who beneficially derives an overseas dividend otherwise than as a shareholder in a company will be allowed a credit for overseas tax on the dividend on the same basis as if he had derived it as a shareholder.
Section 6B is one of the provisions proposed to give effect to this objective. It contains a definition for the purposes of the provisions being inserted into the Principal Act by the Bill that are explained in the notes on clauses 6(2.), 7, 9 and 18 of the Bill.
The purpose of the definition - of what is described as "an amount of income attributable to a dividend" - is to fix an amount which, under the other provisions referred to, is to be dealt with as if it had been a dividend received by the taxpayer as a shareholder in the company. Very broadly, where a trustee receives a dividend, a beneficiary who derives income through the trust estate will be deemed to derive an amount attributable to a dividend to the extent that the income he derives originates from the dividend received by the trustee.
Sub-section (1.) of section 6B will specify the circumstances in which income derived by a person otherwise than as a shareholder in a company is to be deemed to be attributable to a dividend.
By paragraph (a) of sub-section (1.), an amount of income derived by a person will be regarded as an amount attributable to a dividend where that amount is derived by the person as the beneficial owner of the shares on which the dividend was paid. For example, the shares may be registered in the name of a nominee and the dividend paid to the nominee, who then passes it on to the beneficial owner. In such a case the amount of income derived by the beneficial owner in respect of that dividend will be an amount attributable to the dividend.
Paragraph (b) will deem income derived by a person as a beneficiary in a trust estate to be an amount attributable to a dividend where the income arises from a dividend derived by the trustee of the trust estate. In other words, so much of the beneficiary's share of the trust income as would not have been derived by him but for the receipt of the dividend by the trustee will be treated under paragraph (b) as an amount attributable to a dividend.
Paragraph (b) also has the effect that where a dividend passes through more than one trust estate before distribution to a beneficiary it will, in the beneficiary's hands, be an amount attributable to a dividend.
The broad purpose of sub-section (2.) of the proposed section 6B is to make clear that the amount that is treated as an amount of income attributable to a foreign dividend derived by a beneficiary through a trust estate is not diminished by the payment of foreign tax for which a person deriving the dividend was personally liable. This will ensure that the beneficiary is treated on the same basis as a person who derives a foreign dividend as a shareholder and is personally liable for the foreign tax on the dividend. Such a person is required to include in his assessable income the gross dividend before deduction of the tax. Credit for the foreign tax against the Australian tax on the dividend is available under section 45 of the Principal Act or the appropriate double taxation agreement.
Paragraphs (a), (b), (c) and (d) of sub-section (2.) state the circumstances under which the amount attributable to a dividend is to be treated as including foreign tax in respect of the dividend.
Paragraph (a) specifies the income to which sub-section (2.) will apply. The sub-section will apply to an amount of income attributable to a dividend derived by a beneficiary in a trust estate in relation to a dividend paid by a company after the day on which the Bill was introduced into Parliament.
Paragraph (b) requires the dividend to have been paid by a company that is a resident of a country outside Australia.
Paragraph (c) requires income tax to have been paid under the law of that country in respect of the dividend or the amount attributable to the dividend. It is necessary that the income tax so paid be the personal liability of a person (for example, the trustee of the trust estate) who derived the dividend or an amount attributable to the dividend.
Under paragraph (d), it is necessary that the amount of income attributable to the dividend that is derived by the beneficiary be less than the amount he would have so derived if the overseas income tax had not been paid in respect of the dividend or an amount attributable to the dividend.
Where the tests of paragraphs (a) to (d) are satisfied, the sub-section provides that the amount attributable to the dividend that is derived by the beneficiary is to be treated as increased to the amount that it would have been if the overseas tax had not been paid. As already explained, this "grossing-up" procedure is necessary to ensure that the full amount of the relevant income, in respect of which credit is to be allowed for foreign tax, is included in the Australian assessment of the beneficiary. As a corollary, the amount by which the beneficiary's income attributable to a dividend is "grossed-up" will not be taxed to the trustee under Division 6 of Part III. of the Principal Act as income to which no beneficiary is presently entitled.
Sub-section (3.) of the proposed section 6B is a drafting measure. It is designed to make clear that references in the section to income being derived by a beneficiary are to be taken as relating to income of a trust estate to which a beneficiary is presently entitled for the purposes of Division 6 of Part III. of the Principal Act.
By sub-clause (1.) of this clause it is proposed to insert a new paragraph - paragraph (jb) - in section 23 of the Principal Act, under which certain income derived by a foreign superannuation fund will be exempt from tax by assessment. As explained in relation to the definition of "foreign superannuation fund" to be inserted in section 6 of the Principal Act by clause 4, the funds comprehended by the definition have no connection with Australia except that they make investments here.
The proposed exemption will apply to dividends paid to such a fund by Australian companies and to interest derived by the fund from Australia. Income of these kinds will, however, be subject to withholding tax except where the fund is exempt from tax on the income in its home country - see notes on clause 17.
The practical effect of this amendment will be to place dividends and interest earned in Australia by a foreign superannuation fund outside the scope of the special provisions of the Principal Act, e.g., section 23F of that Act, which govern the taxation of income of superannuation funds.
Sub-clause (2.) of clause 6 will amend section 23(q) of the Principal Act to ensure that the exemption under that section does not apply to dividends derived by a resident of Australia otherwise than as a shareholder.
As has been mentioned in the introductory note to the explanations on clause 5, the Principal Act provides two different methods for relieving double taxation of income derived abroad by residents of Australia. The credit system of relief applies to dividends derived by a person as a shareholder while, under section 23(q) of the Principal Act, income other than dividends is exempt from Australian tax if it is not exempt from income tax in the country of its source. (The credit system of relief applies to all income derived by Australian residents from Papua-New Guinea and the present amendments do not affect that position.)
Sub-section (1A.) of section 44 of the Principal Act ensures that the exemption method of relief does not apply to foreign dividends derived directly by a person as a shareholder and the object of the proposed amendment to section 23(q) is to make it clear that the exemption method also has no application where foreign dividends are derived indirectly through a trustee or other person. A dividend that is derived through a trustee or other person is, by the proposed new section 6B of the Principal Act, given the description of an amount of income attributable to a dividend and it is proposed to state by explicit words that the exemption under section 23(q) does not apply to an amount of such income.
Where a resident derives an amount of income attributable to a foreign dividend a credit for foreign tax on the dividend may be allowed. If the dividend comes from a country with which Australia has a double taxation agreement, a credit will be available under the agreement. If the dividend flows from another country, section 45 of the principal Act (which is explained in the notes on clause 9) may provide a credit entitlement.
The amendment to section 23(q) will apply to dividends paid after the date of introduction of the Bill into Parliament.
It is proposed by sub-clause (3.) of clause 6 to amend section 23(za) of the Principal Act which at present exempts from tax grants by the United States Educational Foundation in Australia.
That organisation was established under an agreement dated 26th November, 1949 between the Governments of the United States of America and Australia - commonly known as the Fulbright Agreement. It has now been superseded by a new organisation - the Australian-American Educational Foundation - established under an Agreement dated 28th August, 1964 between the two governments.
For all practical purposes the objects of the new organisation are the same as the organisation it replaces. Its funds are used to finance studies, research, instruction and other educational activities of, or for, citizens of the United States of America in Australia and of Australian citizens overseas.
The amendment proposed will re-express the exemption now authorised by paragraph (za) of section 23 of the Principal Act so that it applies to grants made by the Australian-American Educational Foundation in the same way as it has applied in the past to grants made by the United States Educational Foundation in Australia.
Sub-clause (4.) of clause 6, which does not amend the Principal Act, provides for the amended exemption authorised by section 23(za) to have effect as from the date of the relevant agreement - 28th August, 1964. The present exemption will cease to operate as from the date on which the Bill receives the Royal Assent.
Clause 7: Assessable Income to Include Repayment of Tax Paid Abroad in Respect of Dividends.
This clause proposes the repeal of section 26A of the Principal Act and the re-enactment of the section with some modifications.
Section 26A now provides for a repayment in respect of foreign tax that a company has deducted from a dividend derived by a taxpayer to be included in his assessable income if the taxpayer was not personally liable for that tax. The new section 26A will continue to operate in this way but will also make it clear that it applies where a trustee or other person is interposed between the company and the person beneficially deriving the dividend.
In the absence of a provision such as section 26A, the position would be that where an Australian shareholder receives an overseas dividend from which is deducted tax for which the shareholder is not personally liable, only the net amount actually paid by the company is included in the shareholder's assessable income. If for any reason the shareholder receives a repayment of, or a credit for, any of the tax deducted by the company the repayment is essentially income as it represents, in effect, payment to the shareholder of a part of his dividend which had been withheld from him by the company. Section 26A accordingly requires the repayment to be included in the shareholder's assessable income.
The changes made in the amended section 26A have effect where a person beneficially deriving a dividend does not derive it as a shareholder but through a trustee or other person. Under section 6B to be inserted in the Principal Act by clause 5 of the Bill, the amount that the person derives in this manner is described as an amount of income attributable to a dividend. If such an amount relates to a dividend paid after the date of introduction of the Bill into Parliament, the proposed new section 26A will require the amount that the taxpayer receives, in one way or another, in respect of a repayment of foreign tax deducted from the dividend by the paying company to be included in his assessable income. In their practical effects, the amendments proposed to section 26A of the Principal Act will require a repayment of foreign tax received by a person indirectly to be treated in the same way as a repayment received directly by a shareholder in the company which deducted the tax.
Clause 8 proposes two amendments to section 44 of the Principal Act which relates to the taxation of dividends.
Paragraph (a) of clause 8 will insert a new sub-section - sub-section (1B) - in that section. This sub-section ensures that, for the purposes of section 44, any dividend paid by a company out of a share premium account or in the course of reducing its paid-up capital will be treated as having been paid out of profits derived by the company.
So far as is material, section 44(1.) of the Principal Act requires dividends paid to a shareholder by a company out of profits derived by it to be included in the assessable income of the shareholder. The general intention of the law is that, subject to specific exemptions, section 44(1.) will bring into a shareholder's assessable income any amount that is a dividend as defined for income tax purposes.
However, judicial views expressed in the High Court decision in Commissioner of Taxation v. Uther indicate that this intention may not always be achieved where the amount that a shareholder receives is not strictly a dividend within the ordinary meaning of that word, even though it must have originated in profits of the company.
The proposed new sub-section (1B.) is designed to ensure that the new definition of dividend proposed by clause 4 is effective for the purposes of section 44(1.) of the Principal Act. If, on a reduction of capital an amount of the distribution to shareholders is a dividend under the new definition, that amount will be deemed by sub-section (1B.) of section 44 to be paid out of profits of the company. In the absence of this provision it might be argued that, although the amount was a dividend as defined, section 44(1.) was not effective for the purpose of including the amount in the assessable income of the shareholder because, technically, it had been paid as a composite sum including the nominal paid-up capital returned to shareholders.
The new sub-section (1B.) will apply to dividends paid after the date of introduction of the bill into Parliament.
Paragraph (b) of clause 8 proposes amendments to section 44(2.)(b)(iii) of the Principal Act that are consequential on paragraph (d) of the new definition of "dividend" proposed by clause 4 of the Bill. Section 44(2.)(b)(iii) exempts from income tax a dividend that is paid wholly and exclusively out of profits arising from the issue of shares at a premium if the dividend is satisfied by the issue of shares (bonus shares) of the company declaring the dividend.
Under paragraph (d) of the new definition of "dividend" (see notes on sub-clause (2.) of clause 4) an amount that is paid or credited to a shareholder out of a share premium account will not ordinarily be a dividend for income tax purposes. It is thus unnecessary to retain the reference in section 44(2.)(b)(iii) to profits from share premiums and it is therefore being deleted.
The deletion of these words necessitates a drafting change in section 44(2.)(b)(iii). Where a company issues at a premium securities that are convertible notes under section 51AB of the Principal Act, sub-section (8.) of that section provides that, for purposes of the exemption under section 44(2.)(b)(iii),the premiums on the notes are to be treated as share premiums. With the deletion from section 44(2.)(b)(iii) of the reference to share premiums it is necessary, in order to preserve the present position, to insert a reference to premiums on the issue of convertible notes in section 44(2.)(b)(iii). Paragraph (b) of clause 8 does this.
Clause 9: Credit in respect of Tax Paid Abroad on ex-Australian Dividends.
The purpose of the amendment to section 45 of the Principal Act proposed by this clause is to provide that the credit allowable under that section for foreign tax on dividends is to be allowed where dividends are derived through a trustee or other person on the same basis as where dividends are directly derived by a person as a shareholder.
Section 45 provides for the allowance of a credit against Australian tax for foreign tax paid on dividends received by a resident of Australia from a company that is a resident of a country outside Australia. The foreign tax qualifies for credit under the section only where the person in whose assessable income the dividend is included was personally liable to pay it. The amount of the credit is limited to the Australian tax on the dividend. If the dividends are paid partially out of profits derived from sources in Australia, an appropriate adjustment is made in the amount of the credit allowable for the foreign tax.
Section 45 does not apply in relation to tax of a country with which Australia has concluded a double taxation agreement. Nor does it apply to tax imposed by the Territory of Papua and New Guinea. Credits against Australian tax for these taxes are provided under the double taxation agreements set out in the Income Tax (International Agreements) Act 1953-1967 and under Division 18 of Part III. of the Principal Act.
The need to provide specifically that overseas dividends derived through trustees or other persons are to be subject to Australian tax has been discussed in the introductory note on clause 5. That clause describes a dividend derived in this way as an amount of income attributable to a dividend. Clause 6 proposes a complementary amendment to section 23(q) of the Principal Act to provide that an amount of income attributable to a dividend is not eligible for exemption under that provision.
Clause 9 will insert in section 45 of the Principal Act a new sub-section - sub-section (1A.) - that will give an entitlement to a credit for foreign tax on a foreign dividend to a person whose assessable income includes an amount of income attributable to the dividend.
Paragraphs (a) and (b) of sub-section (1A.) specify the circumstances in which the sub-section will apply.
Paragraph (a) requires that there be included in the assessable income of an Australian resident taxpayer an amount that is attributable to a dividend paid after the date of introduction of the Bill into Parliament by a company that is a resident of a country outside Australia.
Under paragraph (b) foreign income tax for which the taxpayer, or any other person, deriving the dividend or an amount attributable to the dividend was personally liable must have been paid in respect of the dividend or an amount attributable to the dividend.
Where the conditions in paragraphs (a) and (b) are satisfied the taxpayer will be entitled to a credit in respect of the foreign tax in his Australian income tax assessment on the same basis as if he had derived the dividend as a direct shareholder.
Where the amount attributable to the dividend derived by the taxpayer represents only a proportionate share of the whole dividend, the amount of credit to which the taxpayer will be entitled in relation to the total amount of foreign tax paid in respect of the whole dividend will be the taxpayer's proportionate share of the foreign tax.
Clause 10: Distributions by Liquidator.
This clause proposes an amendment of section 47 of the Principal Act with the object of ensuring that distributions in the course of an informal winding-up of a company are treated for income tax purposes in the same way as distributions by a liquidator in a formal liquidation.
Section 47 provides that distributions to shareholders of a company by a liquidator in the course of winding-up a company are to be treated as a dividend paid by the company out of profits derived by it, to the extent that the distributions represent income derived by the company. To this extent liquidator's distributions are taxable in the hands of shareholders on the same basis as a conventional dividend.
Where shareholders in a company do not put the company into formal liquidation but merely take possession of the company's tangible assets, collect and retain debts due to it, discharge debts due by it and then treat the company as wound up, section 47 does not apply. In these circumstances, the distributions so made to shareholders that represent income of the company escape taxation. The purpose of the amendments to section 47 is to correct this deficiency in the law by inserting two new sub-sections - sub-sections (2A.) and (2B.) - in section 47.
Sub-section (2A.) will apply where the business of a company is wound up otherwise than in the course of a formal liquidation under company law and, in connection with the winding up of the business, assets of the company are, after the date of introduction of the Bill into Parliament, distributed to shareholders otherwise than by the company. If the assets so distributed are not treated as dividends by other provisions of the income tax law, the sub-section provides that the distribution is to be treated, for the purposes of section 47, as if it had been made by a liquidator in the course of winding up the company. Sub-section (1.) of section 47 will then operate to treat the distribution as a dividend paid out of profits to the extent that it represents income derived by the company.
Sub-section (2B.) is designed to ensure that paragraph (2A.) is not exploited. As has been mentioned, a liquidation distribution is taxable only to the extent that it represents income, while distributions by companies that are going concerns are generally taxable whether they are paid out of income or other profits. Sub-section (2B.) will ensure that the latter principle, rather than the liquidation basis, is to be applied where distributions that purport to be made in the course of an informal winding-up are not followed by a dissolution of the company within a reasonable time.
It accordingly provides that, where sub-section (2A.) would otherwise apply in relation to distributions made in the course of an informal winding-up, but the company is not dissolved within three years (or such further time as the Commissioner of Taxation allows) after the date of the distribution, sub-section (2A.) is not to apply to the distribution. In these circumstances the distribution is to be treated as a dividend paid by the company to the shareholders out of profits derived by it and is to be taxable on that basis.
Clause 11: Interest on Convertible Notes.
This clause will repeal sub-section (8.) of section 51AB of the Principal Act. Sub-section (8.) provides that a premium on the issue of convertible notes is to be treated for purposes of the exemption in relation to bonus shares under section 44(2.)(b)(iii) of the Principal Act as if it were a premium on the issue of shares. As has been explained in the notes on clause 8, the effect of sub-section (8.) is being achieved by amendments to section 44(2.)(b)(iii) itself and, in these circumstances, retention of sub-section (8.) of section 51AB is unnecessary.
Clause 12: Losses of Previous Years.
This clause proposes a drafting amendment to sub-section (3.)(b) of section 80 of the Principal Act which is consequential upon the omission of the definition of "non-resident dividend income'' from section 6 of the Principal Act by clause 4. It will omit the present reference to non-resident dividend income included in the exempt income of a taxpayer and replace it with a reference to income upon which withholding tax is payable.
Section 80 provides that a loss incurred by a taxpayer may, within limits, be allowed as a deduction against income of future years. The deduction is allowable first against exempt income derived by the taxpayer. Technically, the exempt income of a taxpayer would include dividends and interest which are subject to withholding tax. But for the provisions of paragraph (b) of section 80(3.), this income would be taken into account in the year a loss was incurred or, if derived in a subsequent year, would be offset against the loss before a deduction is allowed against assessable income.
The amendment proposed will ensure that dividends or interest subject to withholding tax is not taken into account in the calculation of the amount of a loss that may be carried forward for deduction in a subsequent income year. It will also ensure that deductions for previous years' losses allowable against assessable income are not reduced by amounts of dividends and interest upon which withholding tax is payable.
This clause proposes a drafting amendment in the heading to Division 11 of Part III. of the Principal Act which is consequential upon the repeal of section 125 of the Principal Act proposed by clause 14 - see notes on that clause. The Division will now contain provisions relating only to interest paid by companies on bearer debentures and the new heading will reflect this position.
Clause 14: Interest Paid by a Company to a Non-Resident.
This clause, which is bound up with the proposal to impose a withholding tax on interest paid to non-residents, proposes the repeal of section 125 of the Principal Act.
Section 125 imposes tax on companies in Australia which pay or credit interest to non-residents. The tax is payable on the gross interest paid by a company on money that is -
- (a)
- secured by debentures and used in Australia or used in acquiring assets for use or disposal in Australia; or
- (b)
- lodged at interest in Australia.
By virtue of sub-section (3.) of section 125, however, the tax imposed by the section is not payable where the interest-paying company establishes that the foreign owner of the interest can enforce payment of it without any deduction under the section. It has become common practice for loan contracts to be so drawn that the paying company is obliged to pay the interest free of any deduction of Australian tax.
It is proposed that section 125 will be repealed with effect from 1st January, 1968. Interest payable to non-residents on or after that day will be subject to withholding tax. The withholding tax will not, however, apply to interest payable under contracts which had been negotiated before 5th May, 1967 on the basis that the interest would be subject to the protection provided by the provisions of sub-section (3.) of section 125 and thus free of Australian tax. Interest paid under contracts which, at 4th May, 1967, were being negotiated on the basis that the interest would be subject to this statutory protection will also be outside the scope of the withholding tax - see notes on clause 17 later in this memorandum.
Clause 15: Interest Paid by a Company on Bearer Debentures.
Clause 16: Rebate or Refund of Tax Paid by Company.
These two clauses are also bound up with the proposal to impose a withholding tax on interest paid to non-residents. Their broad purpose is to provide that a person who is established to be a non-resident holder of a bearer debenture is not subject to tax on interest on the debenture at a higher rate than the general interest withholding tax rate on interest paid to non-residents.
To achieve this, amendments to sections 126 and 127 of the Principal Act are proposed.
Section 126 of the Principal Act provides that, where a company has issued debentures payable to bearer and the names and addresses of the holders are not disclosed to the taxation authorities, the company is liable to pay tax on the interest on the debentures at a rate which, currently, represents about 43.45 per cent flat of the gross interest. The company may deduct the tax from the interest. At this point, it is appropriate to mention that it is proposed by the Income Tax (Non-resident Dividends and Interest) Bill that the general withholding tax rate on interest paid to non-residents will be 10 per cent flat of the amount of the interest.
In broad terms, section 127 of the Principal Act provides that where a company has paid tax under section 126 and the interest is included in the assessment of the holder of a bearer debenture the tax paid by the company is to be deducted from the tax payable by the holder.
It is mentioned that section 126 is designed to prevent tax evasion and compel holders of bearer debentures to furnish their names and addresses to the taxation authorities so that appropriate tax on the interest can be ascertained. The amendments proposed will not change this. However, the amendments will provide, in effect, that where -
- (a)
- a bearer debenture holder is established to be a non-resident, and
- (b)
- the company paying interest on the debenture has actually deducted tax under section 126 from the interest and paid it to the taxation authorities,
The amendments proposed by the two clauses will operate as from 1st January, 1968, i.e., the proposed commencement date of the interest withholding tax.
Clause 17: Dividends and Interest Paid to Non-residents.
This clause is designed to impose a withholding tax on interest to operate on the same broad lines as the withholding tax on dividends that has applied since 1960.
For this purpose it is proposed by clause 17 to repeal Division 11A of Part III. of the Principal Act and replace it with a new Division. At present, Division 11A imposes withholding tax on dividends paid by Australian companies to non-residents and it will continue in operation for that purpose until 31st December, 1967. As proposed to be re-enacted to apply as from 1st January, 1968, the Division will impose withholding tax on dividends in much the same manner as at present and will also impose withholding tax on interest derived from Australia by non-residents.
As to dividends, the repeal and re-enactment of Division 11A will alter the existing system in only one substantial respect. As from 1st January, 1968, foreign superannuation funds and other bodies, such as foreign charities, are to be exempt from withholding tax on dividends only if the income is exempt from tax in their home countries. This is consistent with what is proposed for the withholding tax on interest.
As to interest, the withholding tax will, like that imposed on dividends, be a final tax on the income to be deducted by the payer and borne by the recipient. Interest subject to it will not be included with other assessable income of a recipient in making an assessment.
Broadly stated, interest derived by a non-resident of Australia on or after 1st January, 1968 will, with certain specific exceptions, be liable for withholding tax where it is paid by an Australian resident, the Commonwealth or a State government, or an authority of the Commonwealth or a State, unless it is an expense incurred in carrying on a business through a permanent establishment overseas. Interest will also be subject to withholding tax if, on or after 1st January, 1968, it is paid to a non-resident by another non-resident and is an expense incurred in a business conducted through a permanent establishment in Australia.
Interest falling within the following broad categories will be exempt from withholding tax :
- Interest earned in Australia by foreign superannuation funds and by overseas institutions of a charitable, educational, scientific or religious nature, provided that the home country of the fund or institution also exempts the interest from tax.
- Interest payable by companies on loans that, by 4th May, 1967, had been or were being negotiated on terms that would have secured to the interest the statutory freedom from tax afforded section 125(3.) of the Principal Act.
It is proposed also, to exclude some classes of interest from the withholding tax where it would be more appropriate to determine the liability to tax under ordinary assessment procedures. Examples of such exclusions from withholding tax are :
- Interest derived from a business conducted by a non-resident through a permanent establishment in Australia, e.g., an overseas bank carrying on banking business through branches in Australia.
- Certain interest derived by trust estates, where the trustee is liable to be assessed on that interest.
- Interest payable on government loans issued before 1st January, 1968 in respect of which a 10% rebate of tax is allowable on assessment.
The procedures for collecting withholding tax on interest are to be substantially similar to those that apply at present in the collecting of dividend withholding tax. Very broadly, any person in Australia who pays interest to a non-resident is required to deduct the withholding tax and remit the amount deducted to the Commissioner of Taxation. Where interest is received in Australia by a nominee, trustee or other representative on behalf of a non-resident, the trustee, nominee or representative is required to deduct the withholding tax on that interest and remit the amount to the Commissioner, unless the tax has previously been deducted by the payer.
Section 128A : Interpretation.
Sub-section (1.) includes definitions of three terms used in Division 11A.
- "Dividend" is defined, as it is in the existing Division, so as to ensure that the Division applies to income consisting of part of a dividend in the same way as it applies to the whole of a dividend.
- "Interest" as the term is used in the Division is defined to include an amount that is in the nature of interest, e.g., discount fees on Bills of Exchange. It does not, however, include earnings on seasonal securities of the Commonwealth or other Commonwealth stock or securities that do not bear interest.
- A "non-resident" does not, for the purposes of the Division, include a resident of a Territory of the Commonwealth. The effect of this definition will be to exclude dividends and interest paid to residents of the territories from the scope of the withholding taxes.
Sub-section (2.) provides, in effect, that interest shall be deemed to have been paid to a person if it has been dealt with on his behalf or at his direction in such a way that he would be regarded as having derived that interest in pursuance of section 19 of the Principal Act. That section provides -
"Income shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs".
Sub-section (3.) applies when a beneficiary in a trust estate is presently entitled to a dividend or to interest that is included in the estate's income.
Under the general provisions of the Principal Act, beneficiaries in trust estates are subject to tax on the share of the trust income to which they are presently entitled. The purpose of sub-section (3.) is to maintain a corresponding principle in relation to withholding tax for dividends or interest paid to non-resident beneficiaries. In effect, a non-resident beneficiary will be liable to withholding tax on the proportion of the dividend and interest income of an estate to which he is presently entitled.
Sub-section (4.) is a drafting provision relating to the words "income tax" and "tax" that are defined in section 6 of the Principal Act. These expressions occur in a number of provisions of that Act and mean, in effect, income tax assessed under the Principal Act.
Where the words "income tax" or "tax" occur in general assessment provisions that have no application to withholding tax, it is not appropriate that they should be read as including the withholding tax payable by non-residents.
It is proposed, however, that certain sections relating to the collection of tax, the furnishing of information, arrangements to avoid tax and the granting of relief from payment of tax in cases of serious hardship should apply to withholding tax as well as to income tax payable on assessment. The sections concerned are enumerated in sub-section (4.) and in these sections the words "income tax" and "tax" will be taken to include withholding tax. In all other sections of the Principal Act the quoted words will not refer to withholding tax.
Sub-sections (5.), (6.) and (7.) determine the circumstances in which a place of business in a country is to be regarded as a "permanent establishment" through which a person carries on business in that country. The concept of a permanent establishment is of importance in the taxation of dividends and the proposals for taxation of interest paid from Australia to non-residents.
As under the present law, the withholding tax will not be payable on dividends derived by non-resident shareholders carrying on business through a permanent establishment in Australia. These dividends will continue to be taxed on an ordinary assessment basis. Nor will withholding tax be payable on interest derived by a non-resident in the course of carrying on a business in Australia through a permanent establishment in this country. Interest derived in these circumstances will continue to be taxed on the ordinary assessment basis. Interest derived by a non-resident carrying on business in Australia, and which is not attributable to a business carried on through a permanent establishment here, will, however, be subject to withholding tax.
Interest derived by a non-resident which is paid by a resident of Australia will be liable for withholding tax unless it is incurred by him in carrying on a business through a permanent establishment in a country outside Australia. If the interest is paid to a non-resident by another non-resident, it will be liable for withholding tax if it is incurred by the payer in carrying on a business in Australia through a permanent establishment here.
The proposed provisions is sub-sections (5.), (6.) and (7.) are similar in substance to the definition of "permanent establishment" used in double taxation agreements entered into by Australia and, in their practical operation, will apply with the same general effects as the existing provisions of sub-sections (4.) and (5.) of section 128A of the Principal Act. These sub-sections, which it is now proposed to repeal, specify the circumstances in which a non-resident of Australia is deemed to be engaged in carrying on business through a permanent establishment in Australia for the purposes of the dividend withholding tax.
Broadly, a permanent establishment will mean any place of business at or through which a person carries on business in a country. It includes a place where a person carries on business through an agent, or where he is engaged in a construction project or is using or installing substantial equipment or machinery.
The permanent establishment of a person engaged in selling goods that are manufactured, assembled, processed, packed or distributed in a country by an associated enterprise will be the place in the country where the associated enterprise is engaged in those activities.
A person who is not otherwise engaged in business in a country will not be regarded as having a permanent establishment there merely by reason of the fact that -
- (a)
- he maintains a place of business in that country solely for the purchasing of goods or merchandise;
- (b)
- he engages in business transactions in that country through a commission agent or broker receiving commission at the rate customary for that class of business; or
- (c)
- he conducts business through an agent who does not regularly fill orders from a stock of goods in that country or who does not habitually exercise authority to negotiate or conclude contracts on his behalf.
Section 128B : Liability to Withholding Tax.
This section establishes the liability to withholding tax.
Sub-section (1.) provides that, subject to the specific exemptions provided in sub-section (3.), the section applies to dividends paid by resident companies on or after the 1st January, 1968 to a non-resident, other than a non-resident engaged in business through a permanent establishment in Australia.
By sub-section (2.), the section applies also to interest paid to a non-resident on or after the 1st January,
1968 that is -
- (a)
- paid by the Commonwealth, a State, a governmental authority or an Australian resident, provided that the interest is not wholly incurred by the payer in a business carried on outside Australia through a permanent establishment; or
- (b)
- paid by a non-resident and the interest is, wholly or in part, incurred by the payer in carrying on business in Australia through a permanent establishment.
Sub-section (3.) lists the classes of income that are exempt from withholding tax.
Paragraph (a) refers to income derived by a number of institutions, associations, etc. whose income is not subject to tax by assessment. These organisations include religious, scientific, charitable and public education institutions, public hospitals and non-profit organisations such as friendly societies and other societies established to encourage music, art, science, literature or the promotion of athletic games and sports in which human beings are the sole participants. It also refers to income derived by a foreign superannuation fund.
Income derived by such non-resident organisations will be exempt from withholding tax if the country in which the organisation is established also exempts the income from its own income tax. Where income consisting of interest, or dividends from Australian companies, received by such an organisation is taxable in its home country, withholding tax will be payable in Australia. Generally, that tax will be allowable as a credit against tax imposed on the organisation in its home country.
Paragraph (b) confers an exemption from withholding tax on income derived by prescribed international organizations. These bodies, which include the United Nations and some of its organizations, the International Monetary Fund, the International Labour Organization and others, are already exempt from tax by assessment under the provisions of section 23(x) of the Principal Act and are also exempt from dividend withholding tax. A corresponding exemption from withholding tax on interest is proposed. This paragraph also continues the present exemption from withholding tax of dividends paid wholly and exclusively out of exempt profits arising from the sale of gold produced in Australia or the The Territory of Papua and New Guinea.
Paragraph (c) continues the existing exemption from withholding tax of dividends that are exempt from tax by assessment under sections 44(2.) and 107 of the Principal Act. These include -
- Dividends in the form of bonus shares distributed wholly and exclusively out of profits arising on the revaluation of capital assets.
- Dividends paid wholly and exclusively out of mining profits which are not themselves liable to tax, e.g., dividends paid out of profits arising from the mining of gold.
- Dividends paid, through an interposed company, out of dividends paid to it before 1st January, 1965 by a private company that had earned the income used to service the dividends before 1st July, 1951 and had paid undistributed profits tax on that income.
Under paragraphs (d) and (e) the withholding tax will not apply to dividends or interest received in certain circumstances by trust estates, where the trustee is liable to pay tax by assessment on the income of that estate.
Paragraph (f) excludes from the scope of withholding tax income derived by a provident, benefit, superannuation or retirement fund that is not a foreign superannuation fund.
In general, the income of a superannuation fund is either wholly or partially exempt from tax if the fund complies with tests prescribed in section 23(jaa), 23(ja), 23F or 79 of the Principal Act. A fund will continue to be subject to these tests if it does not qualify as a foreign superannuation fund. Where, for example, a fund is controlled by Australian residents, the beneficiaries or members of a fund are residents of this country, or contributions are made to a fund by Australian taxpayers, the fund will be exempt from withholding tax on the dividend and interest income derived from Australia and subject to the ordinary assessment provisions.
The special position of a foreign superannuation fund has been referred to in the notes relating to paragraph (a) of this section. Briefly stated, these are funds whose only connexion with Australia consists of the investment here of moneys of the fund. Such funds, if exempt from tax on dividends and interest in their home country, will be exempt from Australian tax also. If, however, dividends or interest derived from Australia by the fund are to be taxed in the country in which the fund is established, the income will be subject to withholding tax which, in the generality of cases, will be allowable as a credit against the fund's home-country tax.
Under paragraph (g) interest derived by non-residents from government and semi-government loans raised before 1st January, 1968 will be exempt from withholding tax if the interest is subject to the 10 per cent rebate of tax on assessment authorised by section 160AB of the Principal Act. The effect of the paragraph is to preserve the existing assessment basis and the ten per cent rebate of tax allowance for interest on loans raised before the withholding tax on interest commences to operate.
Paragraph (h) prescribes an exemption from withholding tax in respect of four distinct classes of interest.
Interest payable to a non-resident by an Australian bank on moneys deposited outside Australia with the bank will not be liable to withholding tax, e.g., where the principal sum has been deposited with an ex-Australian branch of the bank.
Interest derived by a non-resident in the course of carrying on business in Australia through a permanent establishment here will not be liable to withholding tax. This interest will be included in an assessment of the non-resident in respect of the whole of his income in Australia. Interest derived by the non-resident in Australia which is not attributable to the business carried on through the permanent establishment will, however, be subject to withholding tax and not liable for tax by assessment.
Interest paid or credited on bearer debentures, and which has borne tax under section 126 of the Principal Act, will not be liable also to withholding tax (see notes relating to clauses 15 and 16).
Interest payable on loans that had been or were being negotiated by 4th May, 1967 will be exempt from withholding tax in certain circumstances. Broadly stated, these are loans which, prior to the announcement of the proposal to introduce a withholding tax on interest, had been, or were being, negotiated on terms that would have given the lender the statutory protection of the freedom from Australian tax on the interest provided by section 125(3.) of the Principal Act. The circumstances in which the interest will qualify for exemption from withholding tax are stated in the proposed section 128E which is explained in detail in the notes on that section later in this memorandum.
Sub-section (4.) formally provides that income tax is payable on dividends to which the new section 128B applies. As mentioned in the notes relating to clause 4, a proposed amendment to section 6 of the Principal Act provides that the term "withholding tax" means the income tax payable under section 128B.
Sub-section (5.) is complementary to sub-section (4.) and formally provides that income tax is payable on interest to which section 128B applies. The operation of this provision is, however, subject to sub-sections (6.) and (7.) which are explained below.
Sub-section (6.) is designed to meet the case where interest is paid by a resident to a non-resident on moneys some of which are used in carrying on a business through a permanent establishment of the resident in another country. It will exclude from the withholding tax the part of the interest that is attributable to the business carried on by the resident overseas.
Sub-section (7.) applies where interest paid by a non-resident is only partially attributable to an Australian business carried on by that non-resident through a permanent establishment in Australia. In these circumstances, only the part of the interest that is incurred in carrying on the Australian business of the non-resident will be liable for withholding tax.
Sub-section (8.) will ensure that the operation of section 128B to impose withholding tax on dividends or interest derived by a non-resident will not affect his liability, if any, to pay tax under other provisions of the Principal Act on other income derived by him.
Section 128C : Payment of Withholding Tax.
It is proposed that the existing section 128C of the Principal Act, which now provides for the payment of withholding tax on dividends, shall be re-enacted in substantially similar terms to extend its operation to the payment of withholding tax on interest.
Sub-section (1.) of the new section 128C provides that withholding tax shall be due and payable twenty-one days after the end of the month in which the income is paid. This will be the same date as that on which amounts withheld from dividends or interest are due for payment to the Commissioner of Taxation.
The Commissioner will have power, in special circumstances, to extend the time for payment of the withholding tax.
Sub-section (2.) formally provides that withholding tax is a debt due to the Crown on behalf of the Commonwealth and that it is payable to the Commissioner of Taxation.
Sub-section (3.) applies where withholding tax is not paid within a period of sixty days after the due date for payment. In these circumstances, additional tax at the rate of ten per cent per annum from the end of that period will be payable on the unpaid amount.
As the tax is to be deducted from dividends or interest at the time the income is paid, this provision is likely to apply only in isolated circumstances, e.g., where an insufficient amount is deducted from a dividend.
Sub-section (4.) will empower the Commissioner to remit, wholly or in part, the additional tax imposed by sub-section (3.).
Sub-section (5.) will enable legal action to be taken by the Commissioner or a Deputy Commissioner for the recovery of unpaid withholding tax.
Sub-section (6.) ensures that the ascertainment of an amount of withholding tax payable is not treated as an assessment for the purposes of the Principal Act.
Where an assessment is made, the Commissioner is required by the law to issue a notice of assessment. An important feature of a withholding tax is, however, that notices of assessment are unnecessary. The proposed sub-section (6.) will remove the need to issue notices of assessment in relation to withholding tax.
Although a non-resident will not receive a notice of assessment for withholding tax, he will be entitled under section 221YS of the Principal Act to a credit for the tax withheld from dividends or interest. If he considers the amount withheld to be in excess of the withholding tax imposed by the law, it will be open to him, under section 221YT of the Principal Act, to take action, if necessary, in the courts for the allowance of the appropriate credit and the making of a refund.
Sub-sections (7.) and (8.) are machinery provisions to facilitate the collection of unpaid withholding tax. In the generality of cases, this tax will be collected at the time a dividend or an amount of interest is paid. There may, however, be isolated instances in which an appropriate deduction is not made.
Where withholding tax is unpaid, sub-section (7.) will authorize the Commissioner to issue a notice stating the amount of withholding tax payable and the date on which that amount became due and payable. Should it become necessary for the Commissioner to take legal action for the recovery of the tax, sub-section (8.) will permit this notice, or a certified copy of it, to be produced as evidence that the amount shown became due on the date stated in the notice.
The production of the notice, or a certified copy of it, will not, of course, be conclusive evidence of liability.
Section 128D : Certain Income Not Included in Assessable Income.
This section provides that income upon which withholding tax is payable shall not be included in the assessable income.
The withholding tax on dividends is a final tax. As mentioned previously, it is proposed that the withholding tax on interest shall also be a final tax. Non-resident taxpayers who derive income of other kinds from sources in Australia are, generally speaking, liable to tax by assessment on that other income. Section 128D will ensure that dividends and interest from which withholding tax has been deducted will not be taxed again by assessment.
The section provides also that income will not be included in assessable income if it would have been subject to withholding tax but for the provisions of section 128B(3.)(h)(iii). In broad terms, this means that if tax has been paid under section 126 of the Principal Act on bearer debenture interest derived by a non-resident, the interest will not be included in an assessment. As already explained, amendments to sections 126 and 127 of the Principal Act proposed by clauses 15 and 16 of the Bill will provide machinery, in cases where non-resident holders of bearer debentures have borne section 126 tax, for the section 126 tax to be reduced to an amount equivalent to withholding tax at the general rate.
Section 128E : Interest Paid by Companies to Non-residents on Certain Moneys.
The proposed new section 128E is designed to ensure that interest payable under loan agreements already negotiated in reliance on the provisions of section 125 of the Principal Act, and, in particular, on the protection provided in sub-section (3.) of that section, will not be affected by the proposed repeal (by clause 14) of that section.
Very broadly the effect of the new section 128E will be to preserve freedom from Australian tax in the case of interest that was not taxable under section 125 by reason of section 125(3.). The freedom from Australian tax will continue to apply to interest payable under contracts that had been entered into on this basis by 4th May, 1967, i.e. the day on which the decision to introduce a withholding tax on interest was announced. It will also apply where it is established that negotiations for a loan were being conducted at 4th May, 1967 on the basis that section 125(3.) would have relieved the borrowing company from liability to Australian tax on the interest. Safeguards are proposed to ensure that the freedom from tax is afforded only to interest payable under contractual obligations entered into or under negotiation by 4th May, 1967.
Sub-section (1.) of new section 128E is the substantive provision of the section. It states that interest meeting the various tests prescribed in the five paragraphs of the sub-section will not be subject to the provisions under which withholding tax is imposed.
Paragraph (a) limits the operation of the section to interest paid by a company on or after 1st January, 1968, i.e. the date on and from which it is proposed that withholding tax will be payable on interest derived by non-residents.
Paragraph (b) requires that the principal sum upon which the interest is paid must have been either -
- (i)
- lent to the company before 5th May, 1967 (the "prescribed date" for the purposes of the section); or
- (ii)
- lent to the company on or after that day under a contract entered into before 5th May, 1967; or
- (iii)
- lent to the company on or after 5th May, 1967 under a contract entered into on or after that day as a result of negotiations between the parties that had commenced before that day.
In the case of contracts merely under negotiation and not formalised before 5th May, 1967, the Commissioner is required to be satisfied that -
- (a)
- the negotiations were in train as at 4th May, 1967;
- (b)
- they were then being conducted as between the lender and the borrower on the basis that the protection provided in section 125(3.) of the Principal Act would operate to free the interest from Australian tax.
Under paragraph (c) the exemption from withholding tax will not be available if the interest rate on the loan is increased on or after 5th May, 1967, or anything else is done on or after that day which increases the amount of interest in respect of the loan. However, variations in the terms of a contract in existence at 4th May, 1967 which affect the interest payable on a loan will not disturb the exemption from withholding tax if they are made under a contractual obligation entered into on or before that date, or if negotiations were in train as at that date for the purpose of making the particular variations in the contract.
Paragraph (d) requires that section 125 of the Principal Act would, but for the provisions of sub-section (3.) of that section, have operated to expose the interest to tax under that section. The paragraph provides, however, that the section may apply also where moneys have been lodged at interest abroad on terms and conditions that indicate that the parties to the contract were relying on the protection afforded by section 125(3.) of the Principal Act to free the interest from Australian tax.
Paragraph (e) relates only to interest on moneys lent either before 5th May, 1967, or subsequently but under a contract entered into by 4th May, 1967. The purpose of the paragraph is to ensure that an exemption from withholding tax is not obtained under section 128E if the terms of the loan contract are varied after 4th May, 1967 so that the statutory protection of section 125(3.) of the Principal Act would free the interest from Australian tax.
Sub-section (2.) is a drafting measure which formally states that the reference in the section to the Income Tax Assessment Act refers to the Income Tax Assessment Act 1936 as amended and in force as at 4th May, 1967.
Sub-section (3.) provides that an extension of the period for which moneys have been lent shall be treated as being a fresh loan of the moneys concerned on the day from which the extended period applies. The exemption from withholding tax under section 128E is intended to apply to interest payable according to the terms of the loan that were settled or under negotiation as at 4th May, 1967 on the basis of the protection afforded under section 125(3.) of the Principal Act. Where, after that day, there is an extension of the contracted period of a loan to which section 128E applies, sub-section (3.) will have the effect that the interest becomes subject to the withholding tax as from the day on which the extended period for the loan starts to run.
The clause proposes an amendment to section 160AE of the Principal Act which relates to credits in respect of tax paid under the Income Tax Ordinances of the Territory of Papua and New Guinea.
Sub-section (3.) of section 160AE at present provides that, for the purposes of credits against Australian tax for tax imposed by the Territory of Papua and New Guinea on income derived from a source in the Territory, dividends shall be treated as having a Territory source to the extent that they are paid out of profits from sources in the Territory.
The amendment proposed to the sub-section will not disturb this position in relation to a dividend derived directly from a company by a shareholder. It will ensure that this principle also applies to cases in which a dividend paid out of Territory-source profits is derived indirectly through a trustee or other person. This amendment is complementary to the amendment proposed by clause 5 which specifies the circumstances in which an amount of income is to be treated as being attributable to a dividend - see notes on that clause. It will have effect as from the date of introduction of the Bill into Parliament.
This clause effects a drafting amendment in section 161 of the Principal Act which requires taxpayers to furnish annual returns of their income.
It is unnecessary, under the present law, to include in these returns dividends that are subject to withholding tax. Under the amendment proposed, neither dividends nor interest upon which withholding tax is payable need be included in these returns.
Clause 20: Amendment of Assessments.
Clause 20 proposes amendments to section 170 of the Principal Act which contains the general provisions governing the power of the Commissioner of Taxation to amend assessments.
Sub-clause (1.) of clause 20 will insert in sub-section (10.) of section 170 a reference to section 221YRA.
Sub-section (10.) of section 170 provides that nothing in the section shall prevent the amendment of an assessment at any time for the purpose of giving effect to specified sections of the Principal Act.
By clause 31 it is proposed to insert in the Principal Act a new section - section 221YRA - that is related to the collection of withholding tax on interest paid by a non-resident to another non-resident. In broad terms, the section will provide that the interest will not be an allowable deduction for Australian income tax purposes unless the withholding tax has been paid. If a deduction has been disallowed in pursuance of section 221YRA and the withholding tax is subsequently paid, the section will restore the taxpayer's entitlement to the deduction.
The inclusion in sub-section (10.) of section 170 of a reference to section 221YRA will ensure that the Commissioner has the necessary authority to amend an assessment to allow a deduction for interest paid by a non-resident if the withholding tax on the interest is subsequently paid.
Sub-clause (2.) of clause 20 will also amend sub-section (10.) of section 170 and, in addition, will insert a new sub-section - sub-section (12.) - in that section.
Paragraph (a) of sub-clause (2.) will include in sub-section (10.) of section 170 a reference to sub-section (2B.) of section 47.
By clause 10 it is proposed to insert that sub-section in section 47 of the Principal Act. Very broadly, the sub-section is designed as a safeguard where an informal winding-up of a company is not completed within a reasonable time and, in consequence, tax has been avoided on a distribution.
The amendment proposed in sub-section (10.) of section 170 will authorise the Commissioner to amend an assessment at any time for the purpose of giving effect to the safeguarding provisions of section 47(2B.).
Paragraph (b) of sub-clause (2.) proposes the insertion in section 170 of a new sub-section - sub-section (12.). This sub-section will give the Commissioner the power to amend an assessment to treat a distribution out of a share premium account as a dividend where it becomes known that the distribution has been made under an agreement or arrangement covered by the proposed new sub-section (4.) to be inserted in section 6 of the Principal Act by clause 4. An amendment of an assessment for this purpose may be made within three years after the date upon which the tax became due and payable under the assessment being amended.
Clause 21: Remuneration of Members.
Clause 21 proposes a machinery amendment to section 182 of the Principal Act. In essence, that section provides that the Chairman and each member of a Taxation Board of Review is to receive such remuneration and travelling allowances as the Governor-General determines. It also provides that the Consolidated Revenue Fund is appropriated to the extent necessary for payment of the amounts determined under the section.
Since the very early days of Commonwealth income tax it has been the practice to state in the section an upper monetary limit on the appropriation of the Consolidated Revenue Fund, though this serves no purpose of any significance and is not done in other legislation dealing with the remuneration of statutory officers. The express reference to an upper limit has occasioned frequent amendments to the section over the years and, to avoid this position in the future, it is now proposed to omit the reference. Its omission will not affect the way in which the salary and travelling allowances of the officers concerned are determined.
Clause 22: Provisional Tax to be Credited Against Tax Assessed.
This clause proposes a drafting amendment to section 221YE of the Principal Act relating to the credit of provisional tax paid by a taxpayer. The amendment proposed will substitute the words "withholding tax" for the words "dividend (withholding) tax" at present appearing in paragraph (c) of the section. The amendment is consequential upon the change in the name of the tax effected by clause (4.) and will not affect the operation of this section.
Clauses 23 to 34 : Collection of Withholding Tax.
These clauses propose amendments in Division 4 of Part VI. of the Principal Act which at present provides machinery for the collection of the withholding tax on dividends paid by Australian companies to non-residents. The amendments will extend the operation of the Division to the collection of the proposed withholding tax on interest paid to non-residents.
As in the case of dividends, it is proposed that the withholding tax on interest will be collected by means of deductions from the interest at the time it is paid. These deductions will be made by persons paying interest to non-residents. Where interest is paid by the payer to an Australian resident on behalf of a non-resident, the Australian resident will make a deduction from the interest. Amounts deducted from interest will be remitted to the Commissioner of Taxation in payment of the withholding tax on the same basis as now applies for the withholding tax on dividends.
With one exception, the amendments will have effect in respect of interest and dividends derived by non-residents on and after 1st January, 1968. The exception is the amendment proposed by sub-clause (2.) of clause 25 which is consequential upon the amendments to section 47 of the Principal Act proposed by clause 10. This amendment will have effect as from the day after the date of introduction of the Bill into Parliament.
This clause proposes a drafting amendment to alter the heading to Division 4 of Part VI. of the Principal Act. The Division, which is at present concerned with the collection of dividend withholding tax will, on and from 1st January, 1968, operate for the collection of withholding tax on both interest and dividends. The heading to the Division is to be altered so that it reflects the new position.
Clause 24: Object of Division.
This clause proposes a drafting amendment in section 221YJ of the Principal Act which will substitute the words "withholding tax" for the existing words "dividend (withholding) tax". The section is a formal provision stating the object of Division 4 of Part VI. of the Principal Act. As amended, it will state that this object is to facilitate collection of withholding tax on dividends and interest paid to non-residents.
This clause proposes to amend section 221YK of the Principal Act which contains definitions of words used in Division 4 of Part VI. of the Principal Act relating to the collection of withholding tax.
Paragraph (a) of sub-clause (1.) of clause 25 proposes to omit sub-section (1.) of the section and to replace it with a new sub-section which will include also a definition of "interest". This term will have the same meaning as it has in sub-section (1.) of section 128A to be inserted in the Principal Act by clause 17 - see notes on that clause.
By paragraph (b) of sub-clause (1.) of clause 25 a new sub-section - sub-section (3.) - is to be added to section 221YK of the Principal Act. This sub-section will state the circumstances in which interest is to be regarded as having been paid, or as being payable, for the purposes of the Division. In effect, interest is to be treated as having been paid to a person, although not actually paid over to him where it is credited or otherwise dealt with on his behalf or as he directs and in such a way that he would be regarded as having derived that interest under the general provisions of the Principal Act. A corresponding meaning is given to interest that is payable to a person.
Sub-clause (2.) of clause 25 will effect a drafting amendment in sub-section (2.) of section 221YK of the Principal Act which is consequential upon the amendment to section 47 of the Principal Act as proposed by clause 10 of the Bill.
Sub-section (2.) of section 221YK at present ensures that provisions under which Australian companies are obliged to deduct tax from dividends paid to non-residents apply also to the liquidator of a company who distributes amounts that are deemed by section 47 of the Principal Act to be dividends. The amendment to section 47 proposed by clause 10 will require distributions in an informal winding-up of a company to be treated as if they had been distributions by a liquidator. Sub-section (2.) of section 221YK is being re-expressed to place on the person who distributes amounts that are treated as dividends in an informal winding-up of a company the same obligations as are placed on a liquidator for withholding tax purposes.
Clause 26: Deductions from Dividends and Interest.
This clause proposes a number of amendments to section 221YL of the Principal Act which specifies the circumstances in which deductions of withholding tax are to be made from dividends. The purpose of the amendments is to extend the operation of the section to the proposed withholding tax on interest.
Paragraph (a) of clause 26 proposes to omit the present provision in sub-section (1.) of section 221YL relating to the penalty for non-compliance with the sub-section. This matter is dealt with in a proposed new sub-section (4A.) which will exclude the Commonwealth and State governments and their authorities from any liability to the penalty.
Paragraphs (b), (c) and (d) of clause 26 will amend sub-section (2.) of section 221YL which applies where a dividend is paid to a person in Australia who receives the dividend either wholly or in part on behalf of a non-resident. In these circumstances, the liability to make the prescribed deduction from the dividend falls upon the person in Australia who receives it.
The person so liable is required to make the prescribed deduction as soon as the dividend is paid to him. The obligation to make the deduction exist whether the person in Australia retains the dividend at the direction of the non-resident or remits it to him. A penalty of $200 is provided for non-compliance with the sub-section.
The amendments proposed by paragraphs (b) and (c) of clause 26 will make it clear that the Commonwealth or a State government, or an authority of these governments is required to deduct withholding tax from dividends received by them on behalf on non-residents. Paragraph (d) of clause 26 will omit the reference to a penalty as this matter is to be dealt with in the proposed new sub-section (4A.). That sub-section will exclude the Commonwealth and State governments and their authorities from the scope of the penalty.
Paragraph (e) of clause 26 will omit the present sub-section (3.) of section 221YL, which operates to relieve a company or person from the obligation to deduct dividend withholding tax in certain circumstances, and insert four new sub-sections - sub-sections (2A.), (2B.), (3.) and (3A.).
Sub-section (2A.) will specify the general circumstances in which deductions are to be made where interest subject to withholding tax is payable by a borrower, including the Commonwealth and State governments and authorities of these governments. The general effect of this sub-section is, however, modified by sub-sections (3.) and (3A.), and by section 221YM.
Under sub-section (2A.), a borrower is liable to make deductions for withholding tax from interest if the interest is payable to a person who, in relation to the transaction giving rise to the interest, is shown in the records of the borrower as having an address outside Australia. A deduction is similarly required if the person to whom the interest is payable directs that it be paid at a place outside Australia.
As in the case of the withholding tax on dividends, it is provided that the deductions be made at or before the time that the interest is paid and the amount of the deductions will be prescribed by regulation.
Sub-section (2B.) will apply where interest is paid to a person in Australia who receives the amount, or part thereof, on behalf on a non-resident. In these circumstances the liability to make the prescribed deduction will be placed, by the sub-section, upon the person in Australia to whom the interest is paid.
That person is required to make the prescribed deduction as soon as he receives the interest. The obligation to make this deduction will exist whether the person in Australia remits the interest to the non-resident or retains it on his behalf.
Sub-section (3.) will operate, in certain circumstances, to relieve a person from an obligation to make a deduction for withholding tax.
Under paragraph (a) of sub-section (3.), a deduction is not required where withholding tax is not payable on the particular dividend or interest. This provision would apply where the income falls within the specific exemptions afforded by sub-section (3.) of section 128B. Also, where a banker, trustee or attorney had before 1st January, 1968, received interest on behalf of a non-resident, he will not be required to make a deduction for withholding tax even though the income is paid over to the non-resident after 1st January, 1968.
Paragraph (b) of the sub-section will avoid a duplication of deductions, by providing that a deduction of withholding tax is not required if the correct amount of that tax has already been deducted from the dividend or interest by a company or other person through whose hands the dividend or interest has already passed.
Sub-section (3A.) is a drafting measure which is designed to ensure that a person is not required to make a deduction under section 221YL of an amount greater than the withholding tax payable on the particular income.
The provision may be of particular relevance where interest that is payable to a non-resident is, in part only, subject to withholding tax. An example would be interest paid by a resident that was, in part, an expense of a business he carried on overseas through a permanent establishment abroad. In these circumstances, the deduction to be made from the whole of the interest is not required to exceed the withholding tax payable on that part of the interest that is subject to the tax.
Paragraph (f) of clause 26 will insert in section 221YL of the Principal Act a new sub-section - sub-section (4A.) - which provides a maximum penalty of $200 on conviction for an offence under the section by a person other than the Commonwealth, a State or an authority of the Commonwealth or a State.
Clause 27: Exemptions and Variations.
Clause 27 proposes an amendment to section 221YM of the Principal Act which at present empowers the Commissioner, in special circumstances, to grant an exemption from an obligation to make deductions from dividends as required by section 221YL. Alternatively, he may vary the amount otherwise deductible.
This authority is necessary in cases where a trustee resident abroad receives dividends on behalf of an Australian resident beneficiary. Other cases arise where Australian residents arrange for their dividends to be remitted overseas during a temporary absence from this country. Australian residents are subject to assessment under the general provisions of the law and, as the withholding tax provisions do not apply to income derived by them, an exemption from the liability to make deductions may be granted.
The amendment proposed to section 221YM will extend the operation of the provision so that a similar exemption or variation may be authorised in regard to deductions from interest.
Clause 28: Deductions to be Forwarded to Commissioner.
This clause will amend section 221YN of the Principal Act which places obligations on persons and companies making deductions on account of withholding tax from dividends to remit the amount of the deduction to the Commissioner and to furnish a statement showing details of the deductions.
Paragraph (a) of clause 28 proposes an amendment to sub-section (1.) of this section, the effect of which will be to impose an obligation to remit the amount of deductions from interest to the Commissioner, and to furnish him with details of those deductions. The obligation will correspond with the present requirements in relation to dividends.
Paragraph (b) of the clause is designed to amend sub-sections (2.) and (3.) of the section to make it clear that the penalties imposed by those provisions, for non-compliance with the section, do not apply to the Commonwealth, a State, or a government authority. However, the late payment penalty imposed by sub-section (4.) will continue to apply to all persons, companies or other bodies. This penalty, which may be wholly or partly remitted in appropriate circumstances, is payable at the rate of 10 per cent per annum in respect of deductions not forwarded to the Commissioner by the due date.
Clause 29: Dividends not in Money not to be Paid until Payment made to Commissioner on account of Tax.
By this clause it is proposed to amend section 221YP of the Principal Act which applies where dividends liable to withholding tax are not paid in money. In these circumstances, section 221YL of the Principal Act does not require a deduction to be made from the dividend. This type of situation would occur where a dividend is satisfied by the issue of bonus shares in the company paying the dividend.
Section 221YP of the Principal Act provides that the payment or transfer of such a dividend is not to be made until an amount equal to the withholding tax has been lodged with the Commissioner. A maximum penalty of $200 is provided for failure to comply with this condition.
Paragraphs (a) and (d) of clause 29 will omit the present references to a penalty for a failure to comply with the section. Provision in relation to this penalty is proposed in the new sub-section - sub-section (4.) - to be inserted in section 221YP by paragraph (e) of this clause.
Paragraphs (b) and (c) of clause 29 are designed to amend sub-section (2.) of section 221YP to make it clear that governments and government authorities (including bankers), who receive dividends in a form other than money on behalf of a non-resident, are required to defer the transfer of those dividends until the withholding tax has been paid.
Paragraph (e) of clause 29 will insert in section 221YP a new sub-section - sub-section (4.) - providing a penalty of $200 for a failure to comply with the section. The penalty will not, however, be imposed on the Commonwealth, a State or an authority of the Commonwealth or a State.
Clause 30: Liability of a Person who Fails to Make Deductions, etc.
This clause proposes amendments to section 221YQ of the Principal Act which places certain liabilities on companies or other persons who fail to make appropriate deductions from dividends. These amendments are consequential upon the introduction of withholding tax on interest.
Paragraph (a) and (b) of clause 30 will amend sub-section (1.) of the section to provide that, where deductions from interest in respect of withholding tax have not been properly made, the company or person responsible will be liable to pay to the Commissioner the amount of the unpaid withholding tax in addition to any late payment penalty that may have been incurred. A similar liability exists under the section where deductions from dividends have not been properly made.
Paragraphs (c) and (d) of this clause propose amendments to sub-sections (2.) and (3.) of section 221YQ to substitute the words "withholding tax" for the words "dividend (withholding) tax". Sub-section (2.) authorises a company or a person who has made a payment to the Commissioner under sub-section (1.) in respect of dividend (withholding) tax to recover that amount from the non-resident liable for the tax. Sub-section (3.) provides that an amount paid to the Commissioner under section 221YQ will be allowed as a credit against the withholding tax due. The amendments proposed will extend the operation of the sub-sections to the proposed withholding tax on interest.
Clause 31: Interest Payable by Non-resident Not Allowable Deduction until Payment Made to Commissioner on Account of Tax.
This clause proposes to insert in the Principal Act a new section - section 221YRA. The section is designed to assist in the collection of withholding tax where interest subject to the tax is payable by a non-resident to another non-resident.
It may happen in such cases that the actual payment of interest is made outside Australia and in circumstances where collection of the tax under ordinary procedures may be difficult, particularly where no person in Australia holds money from which a withholding of tax may be made.
To ensure that tax is collected in these cases, it is proposed that a deduction for the interest shall not be allowable to the non-resident payer of the interest unless and until the withholding tax is paid to the Commissioner.
Sub-section (1.) will operate where a person, not being a resident, has failed to make a deduction in respect of withholding tax from interest payable by him. It also operates where, a deduction having been made by that person, he fails to remit the amount to the Commissioner. The sub-section provides that, in either of these events, the interest is not to be an allowable deduction in the assessment of the payer.
Sub-section (2.) applies where the amount of the withholding tax on interest is subsequently paid to the Commissioner, and provides that the interest may then be allowable as a deduction. If the tax is paid after the issue of an assessment, in which a deduction for the interest has been disallowed pursuant to sub-section (1.) of section 221YRA, the combined effect of sub-section (2.) and section 170(10.) of the Principal Act, as amended by clause 20, will be to authorise an amendment to the assessment to allow the interest as a deduction.
Sub-section (3.) deals with the case where interest is payable by a partnership of which each or any of the partners is a non-resident of Australia. It provides in effect that, if the withholding tax on that interest has not been paid, the proportion of the interest borne by any non-resident partners will not be deducted in ascertaining the share of the partnership income, or loss, to be carried into the assessments of the non-resident partners.
Clause 32: Credits in Respect of Deductions Made from Dividends or Interest.
The amendment to section 221YS of the Principal Act proposed by this clause will extend the credit system now applied by the section to amounts deducted from dividends derived by non-residents so that it applies also to amounts deducted from interest derived by non-residents.
As amended, section 221YS will, in broad terms, authorise the allowance of a credit for an amount deducted from dividends or interest derived by a non-resident against the liability for withholding tax imposed in respect of the dividends or interest. In the generality of cases, the deduction made will be equal to the liability for the withholding tax and the allowance of credit for the deduction will accordingly extinguish that liability.
Clause 33: Liability of Trustee to pay Deductions to Commissioner.
The amendment to section 221YU of the Principal Act proposed by clause 33 will extend the operation of that section to amounts deducted in respect of withholding tax on interest.
Section 221YU has application where the property of a person who has made deductions from dividends has been vested in, or come under the control of, a trustee, including the liquidator of a company. Where payment of the amount deducted from dividends has not been made, the trustee or liquidator is required to pay that amount to the Commissioner of Taxation. As amended, the section will also require the trustee or liquidator to pay to the Commissioner outstanding amounts deducted from interest.
Clause 34: Persons Discharged from Liability in respect of Deductions.
This clause proposes an amendment to section 221YV of the Principal Act which protects a company or person making a deduction from a dividend, in respect of withholding tax, against legal action by a non-resident for payment in full of the dividend. Under the proposed amendment, similar protection will be afforded to persons who are required to make deductions from interest in respect of withholding tax.
Clause 35: Saving Provisions in relation to Dividend (Withholding) Tax.
This clause does not amend the Principal Act. It contains provisions designed to ensure that the relevant provisions of the Principal Act will continue to apply in the collection of withholding tax payable on dividends derived before 1st January, 1968.
Sub-section (1.) is a drafting measure, and defines four terms that are used in this clause.
- The "commencing date", 1st January, 1968, is the date on and from which both interest and dividends paid will be subject to withholding tax.
- "Dividend (withholding) tax" and "non-resident dividend income"
- are defined so that these terms will continue to have the meaning they have under the present law.
- "Withholding tax" is given the meaning it will have under the law as from 1st January, 1968, i.e. income tax payable under section 128B of the Principal Act as that section will then apply.
Sub-section (2) provides, in effect, that the present provisions of the law relating to the imposition and collection of withholding tax on dividends paid before 1st January, 1968 will continue in force after that date.
Sub-section (3.) is designed to ensure that, notwithstanding the amendments proposed by the Bill, the provisions of the law relating to the collection of tax, the supply of information, arrangements to avoid tax and the granting of relief from payment of tax in hardship cases will continue to be effective in connexion with dividend withholding tax.
Sub-section (4.) provides that the references to income subject to withholding tax in sections 80 and 161 of the Principal Act shall, as from 1st January, 1968, be construed as if references to income subject to dividend (withholding) tax were included.
These sections deal respectively with deductions for losses and lodgment of returns and the provision is intended to ensure that the change in the name of the tax does not result in the reduction of deductions under section 80, or in the imposition of an obligation under section 161 to declare dividends subject to dividend withholding tax in an annual return.
Sub-section (5.) is designed to maintain the present position under which a credit for provisional tax may be offset against an unpaid liability for withholding tax on dividends derived before 1st January, 1968.
Clause 36: Calculation of Provisional Tax of Non-resident in respect of Year of Income Commencing 1st July, 1968 where Income includes Interest.
This clause, which will not amend the Principal Act, is a transitional provision, the need for which arises out of the proposal to impose withholding tax on interest derived from Australia by non-residents on or after 1st January, 1968. As a result of this proposal, such interest derived after that date will not be subject to tax by assessment.
The purpose of the clause is to provide that, in the calculation of provisional tax based on income derived during the year of income ending on 30th June, 1968, any interest earned by a non-resident up to 31st December, 1967 will be disregarded where it would have been subject to withholding tax if derived after that date.
In effect, a taxpayer will not be called upon to pay provisional tax for the 1968-1969 income year in respect of interest that will be subject to the proposed withholding tax.
Clause 37: Transitional Provisions Relating to Certain Offences with respect to Dividends.
This clause provides that, in certain circumstances, a person is not to be convicted of an offence for failure to comply with provisions of the Principal Act governing the collection of dividend withholding tax.
Under amendments proposed by clauses 4(2.) and 10 of the Bill, certain distributions to shareholders of a company that do not now qualify as a "dividend" for income tax purposes will, as from the day after the date of introduction of the Bill into Parliament, be treated as a "dividend". If any such dividends are paid to non-residents before the Bill receives the Royal Assent, but without withholding tax deductions being made, or before the withholding tax is paid, clause 37 will ensure that the Bill does not retrospectively make a person liable to be convicted of an offence against the collection provisions concerned - sections 221YL and 221YP of the Principal Act.
INCOME TAX (INTERNATIONAL AGREEMENTS) BILL (NO. 2) 1967
The purpose of this Bill is to make two drafting changes in the Income Tax (International Agreements) Act 1953-1967, consequential upon the proposed change in the name of the withholding tax payable by non-residents.
Clause 1: Short Title and Citation.
This clause formally provides for the short title and citation of the Amending Act and the Income Tax (International Agreements) Act 1953-1967 as amended.
By this clause the Amending Act will come into operation on 1st January, 1968 which is the same day as the withholding tax provisions of the Income Tax Assessment Bill (No. 4) 1967 explained earlier in this memorandum become effective.
Clause 3: Ascertainment of Australian Tax on Dividend.
This clause proposes a drafting change to section 16(8.) of the Income Tax (International Agreements) Act 1953-1967. That provision relates to the ascertainment of the amount of Australian tax on dividends. In this context "Australian tax" means the tax imposed under the annual Act imposing rates of tax but does not refer to withholding tax payable on dividends.
The amendment proposed will not alter the present meaning of "Australian tax" as defined in section 16(8.).
By this clause it is proposed to make a drafting amendment to section 17A of the Income Tax (International Agreements) Act 1936-1967. The section operates where the withholding tax payable in respect of a dividend would, but for the section, be greater than the amount to which Australia is bound, by a double taxation agreement, to limit its tax on the dividend. In these circumstances, section 17A applies to allow a rebate to reduce the tax on dividends to the amount adopted in the relevant agreement.
The amendment proposed will not affect the operation of this section.
This clause is designed to ensure that, in the interpretation of the provisions of the Income Tax (International Agreements) Act 1936-1967, any reference to withholding tax on dividends will, where appropriate, include a reference to the dividend (withholding) tax payable on dividends derived before 1st January, 1968.
INCOME TAX (NON-RESIDENT DIVIDENDS AND INTEREST) BILL 1967.
This Bill relates to the imposition of withholding tax on dividends and interest derived from Australia by non-residents on or after 1st January, 1968.
The Bill will operate to declare, as from 1st January, 1968, the rates at which withholding tax will be payable on dividends and interest. It will also repeal the existing Act under which the rate of dividend withholding tax is declared.
The general rate of dividend withholding tax will not be changed by the Bill. This will remain at 30 percent of the amount of the dividend. The rate that is proposed to be declared for interest is 10 per cent of the amount of the interest.
Clause 1: Short Title and Citation.
This clause formally provides for the short title and citation of the new Act.
By this clause it is proposed that the new Act will come into operation on 1st January, 1968, i.e., the day on which the withholding tax provisions embodied in the Income Tax Assessment Bill (No. 4) 1967 commence to apply. Under that Bill the existing provisions in the Assessment Act that create a liability for dividend (withholding) tax are to be replaced by provisions imposing a withholding tax on dividends and interest and it is necessary that both measures should come into operation at the same time.
This clause will repeal the existing Act (the Income Tax (Non-resident Dividends) Act 1965) that declares the rate of dividend (withholding) tax.
The clause provides however that, notwithstanding its repeal, that Act and the Income Tax and Social Services Contribution (Non-resident Dividends) Act 1959 will continue to apply in relation to dividend (withholding) tax payable on dividends derived by non-residents before the new Act comes into operation.
This is a drafting measure to define, as "the Assessment Act", the Income Tax Assessment Act 1936-1967.
This clause will incorporate the Act imposing withholding tax with the Assessment Act and will enable both Acts to be read as one.
This clause formally imposes income tax that is payable in accordance with section 128B of the Assessment Act. As mentioned in page 6 of this memorandum, "withholding tax" is defined in section 6 of the Assessment Act to mean the tax payable in accordance with section 128B.
The new section 128B of the Assessment Act will come into operation as from 1st January, 1968 and will apply in respect of dividends from Australian companies and interest derived by non-residents on or after that day.
Paragraph (a) of this clause provides that the rate of tax in respect of dividend income, to which sub-section (4.) of section 128B of the Assessment Act applies, shall be 30 per cent. This is the rate currently declared in the Act being repealed. It will apply in respect of dividends derived from the commencement of this Act.
It is relevant to observe that, as in the past, the rate of tax on dividends may be modified in certain respects under double taxation agreements that have been concluded with the United Kingdom, the United States of America, Canada and New Zealand. Each agreement includes provisions relating to the rate of tax payable on dividends paid by Australian companies to residents of the other country.
These provisions are given the force of law by the Income Tax (International Agreements) Act 1953-1967. The provisions of that Act, and of the Agreements, apply even though this Bill does not make a direct reference to them. By reason of the provisions mentioned a rate of withholding tax of 15 per cent on dividends derived by residents of any of these countries will be imposed in the same circumstances as apply under the present law.
Paragraph (b) declares that the rate of tax in respect of interest derived by non-residents to which sub-section (5.) of section 128B of the Assessment Act applies shall be 10 per cent of the gross interest.
Clause 8: Sections 104 and 221YB of the Assessment Act.
This clause is a drafting measure related to the additional tax on undistributed income payable by private companies and to provisional tax payable by other taxpayers.
Section 104 of the Assessment Act imposes additional tax on a private company that has not, within a prescribed period, made a sufficient distribution of its income to shareholders. The additional tax is payable at the rate declared by the Act declaring the general rates of tax for the particular year.
Section 221YB of the Assessment Act provides that provisional tax is not payable for a year of income unless the Act imposing the general rates of tax for that year provides that provisional tax is payable. The present Act proposes to declare only the rates of withholding tax to apply on and from 1st January, 1968 and does not affect the general rates of tax which are declared from year to year.
Clause 8 is therefore a formal provision to ensure that the Act imposing the withholding tax on dividends and interest is not regarded, either for the purposes of sub-section (1.) of section 104 or sub-section (3.) of section 221YB of the Assessment Act, as the Act declaring the rates of tax for any financial year.
PAY-ROLL TAX ASSESSMENT BILL (NO. 2) 1967
This is the fourth measure explained in this memorandum. Its purpose has been mentioned earlier in the memorandum and the following notes relate to each clause of the Bill.
Clause 1: Short Title and Citation.
This clause formally provides for the short title and citation of the Amending Act and of the Principal Act as amended.
Section 5(1A.) of the Acts Interpretation Act 1901-1966 provides that every Act shall come into operation on the twenty-eighth day after the day on which the Act receives the Royal Assent, unless the contrary intention appears in the Act.
Under clause 2, the provisions of the Amending Act are to be deemed to have come into operation on 28th August, 1964, the date of the Agreement between the Governments of the United States of America and Australia under which the Australian-American Educational Foundation (to which this Bill relates) was established.
This clause proposes that the exemption from pay-roll tax in section 15(h) of the Principal Act in respect of the United States Educational Foundation in Australia be omitted and an exemption in respect of the Australian-American Educational Foundation be inserted in its stead.
The relationship between these two organisations, and the purpose of the exemption being continued by the proposed amendment, have been explained in the notes at page 15 of this memorandum in relation to the amendment proposed to section 23(za) of the Income Tax Assessment Act by clause 6(3.) of the Income Tax Assessment Bill (No. 4) 1967.
This is a formal drafting provision which does not amend the Principal Act. Its practical effect is to preserve, in respect of the period from 28th August, 1964 to the date on which the Bill receives the Royal Assent, the exemption provided for the United States Educational Foundation in Australia.
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