House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon. J. B. Hockey MP)

Chapter 3 - US Force Posture Initiatives

Outline of chapter

3.1 Schedule 3 to this Bill provides an exemption from Australian tax on income derived by certain entities engaged by the Government of the United States of America (US) in connection with Force Posture Initiatives in Australia.

Context of amendments

The US Force Posture Agreement

3.2 The Force Posture Initiatives were first announced in 2011 by the then Prime Minister of Australia and the US President. The Force Posture Initiatives in Australia currently involve annual rotational US Marine Corps deployments and enhanced aircraft cooperation activities with the US Air Force in northern Australia.

3.3 On 12 August 2014, the Government of Australia and the Government of the US signed The Force Posture Agreement between the Government of Australia and the Government of the United States of America (the Agreement).

3.4 The Agreement provides a legal, policy and financial framework to govern the Force Posture Initiatives in Australia and contains important protections and assurances for both jurisdictions. It requires, for example, respect for Australian sovereignty and the laws of Australia, and affirms that the Force Posture Initiatives will occur at Australian facilities. It also provides certainty around the conditions for US access to Australian owned facilities as well as the types of activities that US forces will be able to conduct under the Force Posture Initiatives.

3.5 The Agreement also provides an exemption from Australian income tax for Australian source income derived by US contractors in connection with the Force Posture Initiatives. In particular, paragraphs (3) and (4) of Article XVII of the Agreement provides the following:

Income derived wholly and exclusively from performance in Australia of any contract with the United States in connection with activities under this Agreement by any person (who is not a national of nor ordinarily resident in Australia) or company (other than a company incorporated in Australia) being a United States Contractor, who is in or is carrying on business in Australia solely for the purpose of such performance, shall be deemed not to have been derived in Australia, provided that it is not exempt, and is taxed, under the taxation laws of the United States. Such contractors will not be subject to Australian tax in respect of income derived from sources outside Australia.

Where the legal incidence of any form of taxation in Australia depends upon residence or domicile, periods during which such United States Contractors are in Australia solely in connection with activities under this Agreement shall not be considered as periods of residence therein, or as creating a change of residence or domicile, for the purposes of such taxation.

3.6 A legislative amendment to the Income Tax Assessment Act 1936 (ITAA 1936) is required to give effect to this aspect of the Agreement.

Overview of the Current Law

3.7 Subsection 23AA(5) of the ITAA 1936 currently provides for an income tax exemption for income derived by US contractors wholly and exclusively from the performance of prescribed contracts in connection with approved projects.

3.8 Under the current law, prescribed contracts relate to contracts with the US Government, and related subcontracts. As such, this explanatory memorandum uses the term 'US contractor' in lieu of the legislative concept of 'foreign contractor'.

3.9 Section 23AA was introduced in 1963 to provide an exemption from Australian tax for services performed in Australia in relation to a contract with the US Government in connection with the establishment, operation or maintenance of the Naval Communication Station at North West Cape. The exemption in section 23AA has been expanded over time to cover further projects.

3.10 Under the existing section 23AA, the exemption from income tax extends to a number of entities in Australia in connection with an approved project, including certain:

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members of the US armed forces;

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civilians accompanying US forces;

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employees of US Government;

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contractors and subcontractors of the US;

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employees of contractors; and

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dependents of the above.

3.11 A condition for the exemption from Australian income tax is that the income is not exempt from income tax in the US (see paragraphs 23AA(5)(b) and (6)(b)).

Summary of new law

3.12 Schedule 3 to this Bill provides that income derived by US contractors wholly and exclusively from the performance of contracts in connection with the Force Posture Initiatives will be deemed to have been derived from sources outside Australia and will be exempt from Australian tax, provided that the income is not exempt from income tax in the US.

3.13 This amendment gives effect to paragraphs (3) and (4) of Article XVII of the Agreement.

3.14 In addition, the exemption will extend to the other entities listed at paragraph 3.10 that are in Australia in connection with the Force Posture Initiatives.

Comparison of key features of new law and current law

Detailed explanation of new law

Exemption from Australian income tax

3.15 Schedule 3 to this Bill amends subsection 23AA(1) of the ITAA 1936 to include the Force Posture Initiatives in the definition of an 'approved project'. [Schedule 3, item 1, subsection 23AA(1)]

3.16 As a result of this amendment, income derived by US contractors and certain other entities in connection with the Force Posture Initiatives will be deemed to have been derived from sources outside Australia and will be exempt from Australian income tax.

3.17 The exemption is subject to the existing framework established in section 23AA, which requires, for example, that the income not be exempt from income tax in the US.

Definition of a Force Posture Initiative

3.18 A Force Posture Initiative has the same meaning as in the Agreement. [Schedule 3, item 2, subsection 23AA(1)]

3.19 The Agreement's exemption from Australian tax is modelled on the provisions contained in Article 6 of the Agreement between the Government of Australia and the Government of the United States of America relating to the Operation of and Access to an Australian Naval Communication Station at North West Cape in Western Australia [2011] ATS 36, which entered into force 24 November 2011.

3.20 The Agreement defines 'force posture initiatives' as the initiatives jointly announced by the then Prime Minister of Australia and the US President on 16 November 2011, and other initiatives as mutually agreed.

3.21 Currently, there are two announced Force Posture Initiatives in Australia: one concerns annual rotational US Marine Corps deployments, and the other concerns enhanced aircraft cooperation activities with the US Air Force in northern Australia. Additional initiatives may be covered under the Agreement where both parties mutually agree that they are Force Posture Initiatives.

3.22 Provision for the Agreement and related tax exemptions to apply to future Force Posture Initiatives is consistent with the regime under the Agreement with the Government of the United States of America concerning the Status of United States Forces in Australia, and Protocol [1963] ATS 10, which entered into force on 9 May 1963, and which provides for tax exemptions for certain defined classes of people in connection with agreed activities. The Australian and US governments of the day determine what activities are agreed on and are conducted in Australia pursuant to that agreement.

Consideration by the Joint Standing Committee on Treaties (JSCOT)

3.23 It is current practice that JSCOT be given sufficient time, either 15 or 20 joint Parliamentary sittings, to consider and report on all treaty actions before legislation to give effect to the treaty is introduced into Parliament.

3.24 In exceptional circumstances, where national interest reasons dictate that this is not possible, JSCOT may agree to a request from the relevant Minister that legislation giving effect to the treaty be introduced into Parliament.

3.25 JSCOT has not yet reported on the Agreement. However, on 25 August 2014, JSCOT agreed that Schedule 3 to this Bill could be introduced into Parliament, notwithstanding that it has not yet reported on the Agreement.

3.26 JSCOT concurred with this course of action following advice from the Minister for Defence that the Agreement contains important protections and assurances, and that it was in Australia's national interest for the Agreement to enter into force as soon as is practicable.

Application and transitional provisions

3.27 The amendments in Schedule 3 commence on the day this Bill receives Royal Assent.

3.28 In effect, the application of the income tax exemption is contingent on the Agreement coming into force [Schedule 3, item 2, subsection 23AA(1) definition of 'Force Posture Agreement']. Paragraph 1 of Article XXI generally provides for the entry into force of the Agreement on the date that Australia and the US exchange diplomatic notes confirming that each party has completed its domestic requirements to give effect to the Agreement.

3.29 On entry into force of the Agreement, the amendments in Schedule 3 apply to the 2014-15 income year and later income years. [Schedule 3, item 3]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

US Force Posture Initiatives

3.30 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

3.31 Schedule 3 to this Bill provides an exemption from Australian tax on income derived by certain entities engaged by the Government of the United States of America in connection with the Force Posture Initiatives in Australia.

Human rights implications

3.32 This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

3.33 This Schedule is compatible with human rights as it does not raise any human rights issues.