House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

Chapter 1 - Alienation of real property through interposed entities

Overview

1.1 The amendment to the International Tax Agreements Act 1953 (the Agreements Act) will ensure that the taxing right afforded to Australia under the relevant provision of a double taxation agreement (DTA) over income, profits or gains arising from the alienation of Australian real property, including mining rights, is fully effective.

Summary of the Amendments

Purpose of the amendments

1.2 This amendment will insert new section 3A into the Agreements Act. [Item1]

1.3 The purpose of the amendment is to ensure that Australia is able to maintain its taxing right over alienations of Australian real property in situations where it is owned by non-residents either directly or through a chain of interposed entities and it is one of these entities which is alienated, rather than the real property being directly alienated. It will overcome the decision in 1997 of the Full Federal Court in Commissioner of Taxation v. Lamesa Holdings BV (1997)77 FCR 597.

1.4 The change to the Agreements Act will signal that the relevant provisions of the DTAs are to be interpreted in accordance with their anti-avoidance intention of maintaining Australia's taxing rights over effective alienations of real property situated in Australia.

Date of effect

1.5 Income, profits or gains from the relevant alienation of shares or interests occurring after 12 noon Australian Eastern Standard Time on 27 April 1998 will be affected by the amendment.

Background to the legislation

1.6 The Full Federal Court in Commissioner of Taxation v. Lamesa Holdings BV (1997) 77 FCR 597 held that the relevant provisions of the Alienation of Property Article in the Australia/Netherlands Double Tax Agreement did not extend to an effective alienation of Australian real property held by a non-resident through a chain of companies that was achieved by the sale of shares in one of those companies. This result is inconsistent with the anti-avoidance purpose of provisions of this type, as is evidenced by the Commentary on the comparable provision of the United Nations Model Tax Convention.

Explanation of the amendments

1.7 New subsection 3A(1) identifies the circumstances in which the section will apply. First, the treaty must make provision for income, profits or gains from the alienation or disposition of shares or comparable interests in companies or of interests in other entities, whose assets consist wholly or principally of real property. Secondly, the provision in the DTA must have been given the force of law by the Agreements Act before 27 April 1998.

1.8 The amendment will apply in relation to the following DTAs:

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United States Convention - Article 13

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New Zealand Agreement - Article 13

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Singapore Agreement - Article 10A

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Netherlands Agreement - Article 13

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French Agreement - Article 12

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Belgian Agreement - Article 13

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Philippine Agreement - Article 13

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Swiss Agreement - Article 13

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Swedish Agreement - Article 13

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Danish Agreement - Article 13

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Irish Agreement - Article 14

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Italian Agreement - Article 13

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Korean Convention - Article 13

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Norwegian Convention - Article 13

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Maltese Agreement - Article 13

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Finnish Agreement - Article 13

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Austrian Agreement - Article 13

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Chinese Agreement - Article 13

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Papua New Guinea Agreement - Article 13

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Thai Agreement - Article 13

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Sri Lankan Agreement - Article 13

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Fijian Agreement - Article 13

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Hungarian Agreement - Article 13

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Kiribati Agreement - Article 13

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Indian Agreement - Article 13

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Polish Agreement - Article 13

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Indonesian Agreement - Article 13

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Vietnamese Agreement - Article 13

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Spanish Agreement - Article 13

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Czech Agreement - Article 13

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Taipei Agreement - Article 13.

1.9 New subsection 3A(2) then explains how the relevant provision in each of those articles is to be understood. Because of the wide variety of structures available internationally, the amendment will give a broad coverage of interests and of entities in which there is an interest. Specifically the alienation or disposition of shares or comparable interests in companies, or of interests in other entities' is to be taken to cover:

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shares in companies; or

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other interests in companies; or

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interests in any other entity.

1.10 The subsection provides for a wide examination of the assets held by such entities for the purpose of determining whether their value is wholly or principally attributable to real property, without being limited by the corporate veil'. This will ensure that the holding of real property through a chain of companies (such as bodies corporate) or other entities, including mixed chains of bodies corporate and various forms of other entities, will not facilitate the avoidance of Australian taxation in relation to what is effectively an alienation of Australian real property.

1.11 New subsection 3A(3) clarifies the connection with Australia in that the real property must be physically located in Australia for section 3A to apply. This reflects the purpose of the section.

1.12 New subsection 3A(4) provides that section 3A will no longer apply in relation to an affected DTA once a new or amended relevant Article comes into force in that DTA. Thus, this amendment is designed as an interim measure, pending the renegotiation of the relevant provision in existing DTAs.

1.13 New subsection 3A(5) deals with the definition of entity' to be applied. The definition in the Income Tax Assessment Act 1997 applies but for the purposes of new section 3A an individual in his or her personal capacity is not included in the meaning of entity'.

Application

1.14 The amendment will apply in relation to relevant alienations or dispositions of shares or other interests effected after the time of the Treasurer's Press Release No. 39 of 27 April 1998. [Item 2]