Explanatory Statement

STATUTORY RULES 2003 No. 74

Issued by authority of the Minister for Revenue and Assistant Treasurer

Income Tax Assessment Act 1936

Taxation Administration Amendment Regulations 2003 (No. 1)

Section 266 of the Income Tax Assessment Act 1936 (the Act) provides that the Governor-General may make regulations prescribing matters required to give effect to the Act.

The amendments to the Regulations are required to allow the lower rates of withholding tax agreed to in the Timor Sea Treaty to override the domestic law rates specified in the regulations. The effect of this is to provide the same treatment to the Timor Sea Treaty as is given to double tax agreements under the withholding tax regulations in Division 4 of Part 5 of the Taxation Administration Regulations 1976.

The Timor Sea Treaty is an agreement between Australia and East Timor dividing up revenue from the exploration and exploitation of petroleum in an area of the Timor Sea between Australia and East Timor. It was signed in Dili on 20 May 2002 by the Minister for Foreign Affairs and by the Prime Minister of East Timor. The Treaty has effect from 20 May 2002.

The Timor Sea Treaty is different to Australia's standard double tax agreements because it applies to an area over which Australia and East Timor claim joint sovereignty. As a result the Treaty is not included as a Schedule to the International Tax Agreements Act 1953 where Australia's standard double tax agreements are located. Instead, the Treaty is incorporated into Australia's domestic legislation by the Petroleum (Timor Sea Treaty) Act 2003.

Regulations 39 to 42 of the Taxation Administration Regulations 1976 stipulate the Australian domestic rate of withholding tax for dividends, interest and royalties. When Australia agrees to lower these rates of withholding tax with another country in a double tax agreement, the regulations allow the domestic rate to be overridden by the rates specified in the relevant double tax agreement. The Timor Sea Treaty, however, does not fall within the definition of a double tax agreement.

The amending Regulations ensure that Regulations 39 to 42 also apply to the Timor Sea Treaty. This allows the lowered rates of withholding tax agreed to in the Treaty to override the domestic rates of withholding tax.

In the case that Australia enters into similar agreements to that of the Timor Sea Treaty in the future, the generic reference of "international tax sharing treaty" is used in the regulations rather than referring to the specific name of the Timor Sea Treaty. This approach was also taken for definitional purposes in the consequential amendments made to the Income Tax Assessment Act 1936 which are contained in the Petroleum (Timor Sea Treaty) (Consequential Amendments) Act 2003.

Minor changes to the structure and language were also made to the amending Regulations in order to modernise and simplify the regulations.

A detailed explanation of the amendments is attached.

The Regulations commenced retrospectively from 20 May 2002.

ATTACHMENT

Details of amending Regulations

Regulation 1

Regulation 1 substitutes the previous Regulations 39 and 40 with new Regulations 39, 39A, 39B and 40.

New Regulation 39 retains the previous definitions of dividend, double tax agreement and interest. Four new terms are added and defined in new Regulation 39, these terms are double tax country, international tax sharing treaty, other party and tax sharing country. The meanings given to the terms double tax country and tax sharing country are contained in new Regulations 39A and 39B respectively. The term international tax sharing treaty refers to an agreement Australia has with another country which shares tax revenues from activities undertaken in area identified under the agreement, for example the Timor Sea Treaty. The term other party refers to the country or the Government of a country with which Australia has a double tax agreement or international tax sharing treaty.

New Regulation 39A provides a detailed definition of the term double tax country. A double tax country is essentially a country with which Australia has a double tax agreement which contains a provision that has the force of law that relates to a withholding tax payment on income or dividends, or which limits the Australian tax payable with respect to dividends. This definition is essentially the same as the meaning given to the term prescribed country in the previous Subregulations 39(2) and 39(4). This change simplifies the regulation by removing the unnecessary overlap in the previous two Subregulations and by modernising the language used.

New Regulation 39B provides a detailed definition of the term tax sharing country. A tax sharing country is essentially a country with which Australia has an international tax sharing treaty which contains a provision that has the force of law that relates to a withholding tax payment on income or dividends, or which limits the Australian tax payable with respect to dividends.

The previous Regulation 40 ensured that where Australia agreed to lower the rate of withholding tax for dividends in a double tax agreement with another country that rate would override the domestic law rate of withholding for dividends contained in the regulations. New Regulation 40 continues to override the domestic law rate for the rate contained in such provisions in double tax agreements, but also extends this rule to similar dividend withholding provisions contained in international tax sharing treaties.

Regulation 2

Regulation 2 substitutes the previous Regulation 42 with a new Regulation 42. Previous Regulation 42 ensured that where Australia agreed to lower the rate of withholding tax for royalties in a double tax agreement with another country that rate would override the domestic law rate of withholding for royalties contained in the regulations. New Regulation 42 continues to override the domestic law rate for the rate contained in such provisions in double tax agreements, but also extends this rule to similar royalty withholding provisions contained in international tax sharing treaties.