House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon. P.J. Keating, M.P.)

Notes on Clauses

Clause 1: Short title, etc.

This clause formally provides for the short title of the amending Act and refers to the Income Tax (International Agreements) Act 1953 as the Principal Act.

Clause 2: Commencement

Under section 5(1A) of the Acts Interpretation Act 1901, unless the contrary intention appears, every Act is to come into operation on the twenty-eighth day after the day on which it receives the Royal Assent. By this clause the amending Act will come into operation on the day on which it receives the Royal Assent, thus enabling early implementation of the agreement with Malta and the protocol with Belgium.

Clause 3: Interpretation

This clause will amend section 3 of the Principal Act which contains a number of definitions for the more convenient interpretation of the Act.

Paragraph (a) of sub-clause (1) will substitute a new definition of the term "the Belgian agreement", and add a definition of the term "the Belgian protocol". As the Belgian protocol will amend the existing Belgian agreement, the term the "Belgian agreement" is being re-defined to mean the agreement (a copy of which is set out in Schedule 13 to the Principal Act) as amended by the Belgian protocol. The Belgian protocol is, by clause 8 of the Bill, being incorporated as Schedule 13A to the Principal Act.

Paragraph (b) of sub-clause (1) will insert in sub-section 3(1) of the Principal Act a definition of the term "the Maltese agreement". This agreement is, by clause 8 of the Bill, to be incorporated as Schedule 24 to the Principal Act.

Paragraph (c) of sub-clause (1) proposes the insertion in section 3 of the Principal Act of two new sub-sections - sub-sections (11) and (12) - which will clarify Australia's right to tax a share of business income, originally derived by a trustee of a trust estate (including a unit trust) from the carrying on in Australia of a business, which is distributed to a beneficiary (or unit holder) resident in an agreement partner country. In other words the amendment will ensure that such distributions of business income will be subject to tax in Australia in accordance with the principles contained in the articles of Australia's comprehensive taxation agreements that relate to the taxing of income that may generally be described as "business profits".

The effect of these business profits articles, which are basically in accordance with the OECD model double taxation convention, is that, on a reciprocal basis, Australia can only tax business profit income derived by a resident of an agreement partner country if the profit is attributable to a permanent establishment (that is, broadly, a substantial business presence) of the overseas resident in Australia. Proposed new sub-section 3(11) will deem an overseas beneficiary to have the necessary permanent establishment in Australia so as to ensure Australia's taxing right under the business profits article.

The primary conditions for the operation of proposed sub-section 3(11) are contained in paragraph (a). The conditions are that -

•

the beneficiary is a resident of a country with which Australia, at the date of commencement of sub-section (11), has signed a comprehensive taxation agreement;

•

the beneficiary is presently entitled to a share of trust income;

•

the trust is not a corporate unit trust (a term which is defined in proposed sub-section (12)); and

•

the trust income concerned is derived from the carrying on of a business in Australia by the trustee through a permanent establishment (a term which is also defined in proposed sub-section (12) in Australia).

A safeguarding measure is also contained in paragraph (a) to prevent the intended effect of the proposed amendment being circumvented by the interposing of one or more trusts between the business trust and the ultimate beneficiary.

Paragraph (b) of new sub-section (11) identifies the particular article of a comprehensive taxation agreement under which the taxing of income of an enterprise that carries on business in an agreement country is dealt with. The relevant article of each agreement is referred to as the "business profits article".

So that the beneficiary's share of business profits income may be taxed in accordance with the principles contained in the business profits article of each of Australia's agreements, paragraph (c) deems the beneficiary to carry on in Australia, through a permanent establishment in Australia, the Australian business carried on by the trustee of the trust estate. Paragraph (d) attributes to the Australian permanent establishment of the overseas beneficiary, as established by paragraph (c), the beneficiary's share of trust income derived from business operations carried on in Australia.

Proposed new sub-section (12) contains definitions of certain expressions used in sub-section (11). These are -

"Contracting State" is a drafting measure to facilitate identification, under new paragraph 11(b) discussed above, of the business profits article in each of Australia's concluded comprehensive taxation agreements;

"corporate unit trust" is defined to mean a corporate unit trust for the purposes of Division 6B of Part III of the Income Tax Assessment Act;

"income" is defined to specifically include profit. The effect of this is to equate the income derived by a trust estate with the profit referred to in the business profits article of the various taxation agreements; and

"permanent establishment" is to have the same meaning as that term has in a comprehensive taxation agreement.

By sub-clause (2), which will not amend the Principal Act, the amendments made by paragraph (c) of sub-clause (1) will apply to any distributions of trust income to which a beneficiary became presently entitled on and after 20 August 1984.

Clause 4: Protocol with the Kingdom of Belgium

This clause will insert a new section - section 11CA - in the Principal Act which will give the force of law in Australia to the protocol with Belgium with effect from the dates set out in the protocol - see later notes on Article V of the Belgium protocol.

By sub-section (1) of proposed section 11CA, the Belgian protocol, when it enters into force, will have effect in Australia, in relation to income of any year of income commencing on or after 1 July in the calendar year immediately following that in which the protocol enters into force.

Sub-section (2) provides for the date on which the protocol enters into force to be notified in the Gazette as soon as practicable thereafter. This will provide a readily available and authoritative source from which persons may ascertain the fact and date of entry into force of the protocol. Because, under the terms of the protocol, it will enter into force after an exchange of notes, it is not possible to indicate in this Bill the date of entry into force.

Clause 5: Agreement with Malta

This clause proposes the insertion in the Principal Act of a new section - section 11N - which will give the force of law in Australia to the comprehensive taxation agreement with Malta with effect from the dates set out in Article 27 of the Maltese agreement - see later notes on that Article.

By sub-section (1) of proposed section 11N, the Maltese agreement will, when it enters into force, have effect as regards Australian tax -

(a)

in respect of dividends or interest subject to withholding tax that are derived on or after 1 January in the calendar year next following that in which the agreement enters into force; and

(b)

in respect of other income, for any year of income beginning on or after 1 July in the calendar year next following that in which the agreement enters into force.

Sub-section (2), which provides for the dates on which the agreement enters into force to be notified in the Gazette as soon as practicable thereafter, corresponds to sub-section (2) of proposed section 11CA to be inserted by clause 4. (See notes on that section).

Sub-section (3) provides for the publication in the Gazette of details of any variation which is agreed in an exchange of letters between the Treasurer of Australia and the Minister responsible for finance in Malta in accordance with paragraph (2) of Article 14 of the agreement. That paragraph provides that the amount specified in sub-paragraph (1)(c) of Article 14 may be varied in accordance with the particulars contained in the exchange of letters described above. Sub-paragraph (1)(c) of Article 14 relates to one of the conditions which operate whereby income from independent personal services may be taxed in the country where those services are performed rather than in the country of residence of the person performing those services. (See notes on Article 14 of the agreement).

By sub-section (4) provision is made for publication in the Gazette of a notice specifying particulars of those provisions that are agreed in an exchange of letters through the diplomatic channel between Australia and Malta to be of a substantially similar character to the provisions of the Maltese Aids to Industries Ordinance 1959 referred to in sub-paragraph (3)(a) of Article 23 of the agreement. Paragraphs (3) and (4) of that Article provide details of the "tax sparing" provisions contained in the Maltese agreement. (See also the notes on Article 23 of the agreement).

Sub-section (5) provides for publication in the Gazette of a notice specifying any date agreed to by Australia and Malta in letters exchanged in accordance with the provisions of paragraph (4) of Article 23 of the agreement. That paragraph provides that the "tax sparing" provisions referred to in paragraph (3) of Article 23 shall not apply after 30 June 1989 unless the two countries agree on a later date. It is this later date which is referred to in sub-section (5).

Clause 6: Provisions relating to certain income derived from sources in certain countries

The primary purpose of this clause is to apply the credit method of relief of double taxation to interest and royalties that are derived by residents of Australia from Malta and in respect of which, under the agreement, the source country's rate of tax is limited. Section 12 of the Principal Act, which is to be amended by this clause, already achieves a corresponding result for interest and royalties derived by residents of Australia from other countries with which Australia has concluded comprehensive double taxation agreements and in which the rate of foreign tax on such income is limited.

Section 23(q) of the Income Tax Assessment Act 1936 (the "Assessment Act") confers relief from double taxation in the form of an exemption from Australian tax in respect of foreign source income (other than dividends) of Australian residents that is not exempt from income tax in the country where it is derived. Section 12 of the Principal Act gives effect to a policy that this exemption method of relief is not to apply to interest or royalties derived, either directly or as a beneficiary in a trust estate, from another country where the double taxation agreement with that country limits the tax it may charge. Once the exempting provision is, by section 12, made inapplicable, interest and royalties that are taxed in the country of source become assessable income for the general purposes of the Assessment Act, but in each case the agreement requires Australia to credit against its tax the limited tax of the other country. Sections 14 and 15 of the Principal Act govern the allowance of the credit.

By clause 6, this policy will apply, as was indicated when signature of the agreement was announced, to interest and royalties derived by Australian residents from Malta after the dates identified in the provisions being inserted by the clause. Article 23 is the relevant credit article in the agreement.

Paragraph (a) of clause 6 will affect a formal drafting amendment consequent upon the addition to section 12(1) of the Principal Act of new paragraph (at).

Paragraph (b) will insert the new paragraph in section 12(1) of the Principal Act. This section formally sets out classes of income to which the exemption under section 23(q) of the Assessment Act is not to apply.

The new paragraph (at) will ensure that interest and royalties derived by a resident of Australia from Malta, the Maltese tax on which is expressly limited to 15 per cent of the gross amount of the interest and 10 per cent of the gross amount of the royalties, will not be exempt from Australian tax. Paragraph (at) will apply to such income derived in income years which commence on 1 July in the calendar year next following that in which the agreement enters into force.

Clause 7: Source of dividends

This clause proposes a technical amendment to section 18 of the Principal Act to reflect the fact that the Maltese agreement and the Belgian protocol which are to be given force of law in Australia by this Bill are "country-to-country" agreements as distinct from "government-to-government" agreements. However, the amendment in no way affects the substantive operation of section 18 which will continue to ensure that a dividend paid by a company resident in a country with which an agreement has been made, but not resident in Australia, shall, for the purposes of the particular agreement, be deemed to be from a source in that country.

Clause 8: Schedules 13A and 24

This clause will add the protocol with Belgium and the agreement with Malta as Schedules 13A and 24 respectively to the Principal Act.