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2008-2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
international tax agreements amendment bill (no. 2) 2009
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary 5
General outline and financial impact 7
Chapter 1 Dual listed company arrangement 17
Chapter 2 The Australia-New Zealand Convention 21
Chapter 3 The Second Protocol with Belgium 133
Chapter 4 The Australia-Jersey Agreement 141
Chapter 5 Regulation impact statement for New Zealand and Jersey 151
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|Agreements Act 1953 |International Tax Agreements |
| |Act 1953 |
|AIL |approved issuer levy |
|ATO |Australian Taxation Office |
|CER |Australia New Zealand Closer |
| |Economic Relations Trade |
| |Agreement |
|CGT |capital gains tax |
|Commissioner |Commissioner of Taxation |
|DLC |dual listed company |
|existing Belgian |Agreement between Australia |
|Agreement |and the Kingdom of Belgium |
| |for the Avoidance of Double |
| |Taxation and the Prevention |
| |of Fiscal Evasion with |
| |Respect to Taxes on Income |
| |signed at Canberra on |
| |13 October 1977 as amended by|
| |the Protocol signed at |
| |Canberra on 20 March 1984 |
|existing New Zealand|Agreement between the |
|Agreement |Government of Australia and |
| |the Government of New Zealand|
| |for the Avoidance of Double |
| |Taxation and the Prevention |
| |of Fiscal Evasion with |
| |Respect to Taxes on Income |
| |that was signed in Melbourne |
| |on 27 January 1995, and the |
| |Protocol Amending the |
| |Agreement between the |
| |Government of Australia and |
| |the Government of New Zealand|
| |for the Avoidance of Double |
| |Taxation and the Prevention |
| |of Fiscal Evasion with |
| |Respect to Taxes on Income |
| |that was signed in Melbourne |
| |on 15 November 2005 |
|FBTAA 1986 |Fringe Benefits Tax |
| |Assessment Act 1986 |
|GATS |General Agreement on Trade in|
| |Services |
|GST |goods and services tax |
|ITAA 1936 |Income Tax Assessment Act |
| |1936 |
|ITAA 1997 |Income Tax Assessment Act |
| |1997 |
|MITs |managed investment trusts |
|OECD |Organisation for Economic |
| |Co-operation and Development |
|OECD Model |OECD Model Tax Convention on |
| |Income and on Capital |
|OECD Model |OECD Commentary to the OECD |
|Commentary |Model |
|Second Protocol |Second Protocol amending the |
| |Agreement between Australia |
| |and the Kingdom of Belgium |
| |for the Avoidance of Double |
| |Taxation and the Prevention |
| |of Fiscal Evasion with |
| |Respect to Taxes on Income |
| |signed at Canberra on 13 |
| |October 1977 as amended by |
| |the Protocol signed at |
| |Canberra on 20 March 1984 |
|the Convention |Convention between Australia |
| |and New Zealand for the |
| |Avoidance of Double Taxation |
| |with respect to Taxes on |
| |Income and Fringe Benefits |
| |and the Prevention of Fiscal |
| |Evasion |
|the Jersey Agreement|Agreement between the |
| |Government of Australia and |
| |the Government of Jersey for |
| |the Allocation of Taxing |
| |Rights with Respect to |
| |Certain Income of Individuals|
| |and to Establish a Mutual |
| |Agreement Procedure in |
| |Respect of Transfer Pricing |
| |Adjustments |
|the Jersey |Agreement between the |
|Information Exchange|Government of Australia and |
|Agreement |the Government of Jersey for |
| |the Exchange of Information |
| |with Respect to Taxes |
|UK |United Kingdom of Great |
| |Britain and Northern Ireland |
|US |United States of America |
General outline and financial impact
DUAL LISTED COMPANY ARRANGEMENT
This Bill amends the Income Tax Assessment Act 1997 to align the
definition of a dual listed company arrangement with the
2009 Australia-New Zealand Convention.
Date of effect: This amendment applies to capital gains tax events
happening on or after this Bill receives Royal Assent.
Proposal announced: This measure was announced in the
Assistant Treasurer's Media Release No. 078 of 22 October 2009.
Financial impact: The financial impact of this amendment is
unquantifiable, however it is expected to be minimal.
Compliance cost impact: This amendment is expected to have a low
overall compliance cost impact, comprised of a low implementation
impact and a low decrease in ongoing compliance costs.
THE AUSTRALIA-NEW ZEALAND CONVENTION
What will this Bill do?
This Bill amends the International Tax Agreements Act 1953
(Agreements Act 1953) to give the force of law in Australia to the
Convention between Australia and New Zealand for the Avoidance of
Double Taxation with Respect to Taxes on Income and Fringe Benefits
and the Prevention of Fiscal Evasion (the Convention) that was
signed in Paris on 26 June 2009.
The Convention is Australia's fourth comprehensive tax treaty with
New Zealand. It will modernise the tax relationship between the
two countries and will serve to facilitate trade and investment
between Australia and New Zealand. The Convention will replace the
Agreement between the Government of Australia and the Government of
New Zealand for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income that was signed
in Melbourne on 27 January 1995, and the Protocol Amending the
Agreement between the Government of Australia and the Government of
New Zealand for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income that was signed
in Melbourne on 15 November 2005 (together referred to as 'the
existing New Zealand Agreement').
Who will be affected by this Bill?
Persons who are residents of Australia and/or New Zealand and who
derive income, profits, gains or fringe benefits from Australia or
New Zealand will be affected by this Bill.
How is the legislation structured?
The Agreements Act 1953 gives the force of law in Australia to
Australia's tax treaties which appear as Schedules to that Act.
The provisions of the Income Tax Assessment Act 1936 (ITAA 1936),
the Income Tax Assessment Act 1997 (ITAA 1997) and the Fringe
Benefits Tax Assessment Act 1986 (FBTAA 1986) are incorporated into
and read as one with the Agreements Act 1953. The provisions of
the Agreements Act 1953 (including the terms of the tax treaties)
take precedence over inconsistent provisions of the:
. ITAA 1936 (other than the general anti-avoidance rules
under Part IVA);
. ITAA 1997; and
. FBTAA 1986 (other than section 67 which is an anti-
avoidance rule).
In what way does this Bill change the International Tax Agreements Act
1953?
The Agreements Act 1953 is amended to insert the text of the
Convention as a Schedule to that Act. Australia's tax treaties
appear as Schedules to the above Act, which gives them the force of
law in Australia.
When will the Convention enter into force, and from what date will the
Convention have effect?
The Convention will become law from the date of Royal Assent.
Further, the Convention will enter into force after the date of the
last notification by diplomatic notes and once the domestic
processes to give the Convention the force of law in the respective
countries have been completed. In Australia, enactment of this
Bill giving the force of law to the Convention, along with tabling
the Convention in Parliament, are prerequisites to such
notification.
Once it enters into force the Convention will apply as follows
Application in Australia
For withholding taxes, on income derived:
. on or after the first day of the second month next
following the date on which the Convention enters into
force.
For fringe benefits tax, on fringe benefits provided:
. on or after 1 April next following the date on which the
Convention enters into force.
For other Australian taxes, on income, profits or gains:
. of any year of income beginning on or after 1 July next
following the date on which the Convention enters into
force.
Application in New Zealand
For withholding taxes, on income, profits or gains derived:
. on or after the first day of the second month next
following the date on which the Convention enters into
force.
For other New Zealand taxes:
. for any income year beginning on or after 1 April next
following the date on which the Convention enters into
force.
The financial impact of this Bill
The impact of the first round effects on the forward estimates has
been estimated as unquantifiable.
Identifiable costs to revenue associated with reductions in the
rates of withholding tax and the change in taxing rights for
pensions have been estimated as $142 million over the forward
estimates. However, reductions in New Zealand withholding taxes
can be expected to result in an increase in the amount of
Australian tax revenue through reduced Foreign Income Tax Offsets
claimed and increases in Australian taxable income.
Given the bilateral flows between Australia and New Zealand, the
current features of the Australian and New Zealand tax systems, and
the impact of the changes in the arrangements under the Convention,
the revenue costs are expected to be broadly offset by revenue
gains.
Compliance costs
No significant compliance costs will result from the entry into
force of the Convention.
Summary of regulation impact statement
Regulation impact on business
Impact: Low.
Main points:
. The Convention is expected to have an impact on Australian
residents doing business with New Zealand, including
Australian investors, banks, suppliers of technology,
consultants and exporters; Australian employees working in
New Zealand; and Australian residents receiving pensions
from New Zealand. The Convention will also impact on the
Australian Government and the Australian Taxation Office
(ATO).
. While source country tax on interest will generally
continue to be limited to 10 per cent, there will be no
withholding tax charged on interest derived by a financial
institution that is resident in the other country.
However, in the case of interest derived from New Zealand,
the zero rate will only apply where the interest is paid
by a person who has paid New Zealand's Approved Issuer
Levy. The zero rate will also apply to interest derived
by governments, their political subdivisions and local
authorities (including government investment funds). No
tax is payable on dividends in the source country where
the dividend recipient is a company that holds directly or
indirectly at least 80 per cent of the voting power of the
company paying the dividends. The zero dividend
withholding tax rate also applies where the beneficial
owner of the dividends is a government, political
subdivision or local authority (including a government
investment fund) and they hold no more than 10 per cent of
the voting power of the company paying the dividends. A
5 per cent rate limit applies to other dividends where the
dividend recipient is a company that holds directly at
least 10 per cent of the voting power of the company
paying the dividend. A 15 per cent limitation applies to
other dividends. The general limit for royalties will be
reduced from 10 per cent to 5 per cent.
. The Convention will assist the bilateral relationship by
updating an important treaty in the network of commercial
treaties between the countries and provides for greater
cooperation between tax authorities to prevent fiscal
evasion and tax avoidance.
THE SECOND PROTOCOL WITH BELGIUM
This Bill amends the International Tax Agreements Act 1953 to give
the force of law in Australia to a Second Protocol amending the
Agreement between Australia and the Kingdom of Belgium for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with Respect to Taxes on Income signed at Canberra on 13 October
1977 as amended by the Protocol signed at Canberra on 20 March 1984
(Second Protocol), which was signed in Paris on 24 June 2009.
Date of effect: 1 January 2010.
Proposal announced: This measure was announced in the
Assistant Treasurer and Minister for Trade's joint Media Release
No. 007 of 25 June 2009.
Financial impact: Treasury has estimated the revenue impact of the
Second Protocol which updates the Exchange of Information Article
in the tax treaty as unquantifiable. As the Article seeks to
expand the scope of taxpayer information available to the
Commissioner of Taxation, the proposal is expected to improve
taxpayer compliance and increase tax revenue.
Compliance cost impact: This proposal is expected to result in a
low overall compliance cost impact, comprised of a low
implementation impact and no change in ongoing compliance costs
relative to the affected group.
THE AUSTRALIA-JERSEY AGREEMENT
What will this Bill do?
This Bill amends the International Tax Agreements Act 1953
(Agreements Act 1953) to give the force of law in Australia to the
Agreement between the Government of Australia and the Government of
Jersey for the Allocation of Taxing Rights with Respect to Certain
Income of Individuals and to Establish a Mutual Agreement Procedure
in Respect of Transfer Pricing Adjustments (the Jersey Agreement),
which was signed in London on 10 June 2009.
This Agreement contains Articles that are based on corresponding
Articles contained in Australia's bilateral tax treaties.
The Jersey Agreement is the third agreement of its type signed
between Australia and a low-tax jurisdiction and was signed in
conjunction with the Agreement between the Government of Australia
and the Government of Jersey for the Exchange of Information with
Respect to Taxes (the Jersey Information Exchange Agreement), which
was signed in London on 10 June 2009.
Who is affected by this Bill?
The amendments made by this Bill will impact:
. individuals who are residents of Australia and/or Jersey
who derive income from pensions or retirement annuities or
the provision of government services, or receive payments
in their capacity as visiting students or business
apprentices; and
. residents of Australia or Jersey that wish to contest a
transfer pricing adjustment made by the Australian or
Jersey tax authorities.
How the legislation is structured
The Agreements Act 1953 gives the force of law in Australia to
Australia's tax treaties which appear as Schedules to that Act.
The provisions of the Income Tax Assessment Act 1936 (ITAA 1936),
the Income Tax Assessment Act 1997 (ITAA 1997) and the Fringe
Benefits Tax Assessment Act 1986 (FBTAA 1986) are incorporated into
and read as one with the Agreements Act 1953. The provisions of
the Agreements Act 1953 (including the terms of the tax treaties)
take precedence over inconsistent provisions of the:
. ITAA 1936 (other than the general anti-avoidance rules
under Part IVA);
. ITAA 1997; and
. FBTAA 1986 (other than section 67 which is an anti-
avoidance rule).
In what way does this Bill change the International Tax Agreements Act
1953?
The Agreements Act 1953 is amended to insert the text of the Jersey
Agreement as a Schedule to that Act, which will give it the force
of law.
When will these changes take place?
The amendments made by this Bill will take effect from the date of
Royal Assent.
When will the Agreement enter into force, and from what date will it have
effect?
The Jersey Agreement will enter into force on the date of the last
exchange of diplomatic notes notifying that the domestic procedures
to give this Agreement the force of law have been completed. In
Australia, enactment of the legislation giving the Agreement the
force of law along with tabling this Agreement in Parliament are
prerequisites to the exchange of diplomatic notes.
Once it enters into force the Jersey Agreement will apply as follows
Application in Australia
In respect of any income year beginning on or after 1 July in the
calendar year next following the date on which the Agreement enters
into force.
Application in Jersey
In respect of any income year beginning on or after 1 January in
the calendar year next following the date on which the Agreement
enters into force.
The financial impact of this Bill
The impact of the Jersey Agreement on the forward estimates is
estimated to be negligible.
Compliance costs
No significant compliance costs are expected to result from the
entry into force of the Jersey Agreement.
Summary of regulation impact statement
Regulation impact on business
Impact: Minimal.
Main points:
. The Jersey Agreement is likely to have an impact on
recipients of Australian source pensions or retirement
annuities who reside in Jersey; individuals providing
services in Jersey to an Australian government (or
political subdivision or local authority); Australian
students and business apprentices temporarily residing in
Jersey for education or training purposes; the Australian
Government and the ATO.
. The Jersey Agreement will also have an impact on
Australian residents (including non-individuals) that wish
to contest a transfer pricing taxation adjustment made by
the Jersey tax authorities.
. The Jersey Agreement will promote a closer bilateral
relationship between Australia and Jersey by eliminating
double taxation of certain income derived by individuals,
specifically pension recipients, government employees,
students and business apprentices.
. In conjunction with the Jersey Information Exchange
Agreement, the Jersey Agreement will provide for greater
cooperation between tax authorities to prevent tax
avoidance and evasion.
. No material costs to taxpayers have been identified as
likely to arise from the Jersey Agreement but there is
likely to be a small, unquantifiable administration cost.
Chapter 1
Dual listed company arrangement
Outline of chapter
1. This Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to
align the definition of a dual listed company (DLC) arrangement
with the 2009 Australia-New Zealand Convention.
Context of amendments
2. The New Business Tax System (Consolidation, Value Shifting,
Demergers and Other Measures) Act 2002 inserted the definition of a
'DLC arrangement' into subsection 125-60(4) of the ITAA 1997. The
explanatory memorandum to the Bill noted that the definition would
be refined following tax treaty discussions with other countries
and industry representatives.
3. To be defined as a 'DLC arrangement' in subsection 125-60(4) of the
ITAA 1997, the DLC must have the appointment of common (or almost
identical) boards of directors. However, in certain circumstances
there is a regulatory restriction (such as an industry regulation)
that requires an Australian company to have at least two-thirds of
its board of directors to be Australian citizens. If the foreign
company also has a similar set of regulatory restrictions in its
home country, it becomes impossible to satisfy the requirement of
the appointment of common (or almost identical) boards of
directors.
4. By failing to be defined as a DLC arrangement, the shareholders of
the DLC must take into account the DLC voting share when
determining whether they meet the requirements for capital gains
tax (CGT) demerger relief. Often, it is difficult to ascribe a
market value to such shares, as they do not carry rights to
financial entitlements (except in certain situations) and it is
also difficult to assess how the DLC voting share affects the
proportion of interests of all shareholders.
Summary of new law
5. The amendment modifies the definition of DLC arrangement in
subsection 125-60(4) of the ITAA 1997, ensuring that companies will
not be required to have the appointment of common or almost
identical boards of directors, where the effect of relevant
regulatory requirements prevents this from occurring.
Comparison of key features of new law and current law
|New law |Current law |
|To be defined as a DLC |To be defined as a DLC |
|arrangement, the DLC must|arrangement, the DLC must|
|have, amongst other |have, amongst other |
|things, common (or almost|things, common (or almost|
|identical) boards of |identical) boards of |
|directors, except where |directors. |
|the effect of relevant | |
|regulatory requirements | |
|prevents this. | |
Detailed explanation of new law
6. Subsection 125-60(4) of the ITAA 1997 sets out various, cumulative
criteria by which arrangements can be identified as a DLC
arrangement. The first criterion that must apply is the
appointment of common (or almost identical) boards of directors.
7. This criterion is modified and will not be required to be satisfied
where the effect of relevant regulatory requirements prevents the
appointment of common (or almost identical) boards of directors.
8. The relevant regulatory requirements must be imposed by
legislation, statutory instrument, mandatory code of a regulatory
authority, or similar regulatory requirement. Therefore, the
agreement that is entered into to create the DLC will not be a
relevant regulatory requirement for the purposes of satisfying the
definition.
1.
Assume provisions regulating an Australian industry require
that at least two-thirds of the directors of a company
operating in that industry be Australian citizens. Suppose
a company covered by those regulations sought to enter into
a DLC arrangement with a New Zealand company that under
New Zealand corporations law was also required to maintain
at least two-thirds of its directors as New Zealand
citizens.
As the statutory requirements in each country prevent the
appointment of common boards of directors, the DLC would not
be required to satisfy this requirement in order to be
defined as a DLC arrangement for the purposes of the
Australian demerger rules.
Application and transitional provisions
9. These amendments apply to CGT events happening on or after this
Bill receives Royal Assent.
Chapter 2
The Australia-New Zealand Convention
Outline of chapter
10. This Bill amends the International Tax Agreements Act 1953
(Agreements Act 1953). This chapter explains the rules that apply
in the 2009 Convention between Australia and New Zealand for the
Avoidance of Double Taxation with Respect to Taxes on Income and
Fringe Benefits and the Prevention of Fiscal Evasion (the
Convention).
Context of amendments
11. The Convention was signed in Paris on 26 June 2009.
12. Once in force, the Convention will replace the Agreement between
the Government of Australia and the Government of New Zealand for
the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income that was signed in
Melbourne on 27 January 1995, and the Protocol Amending the
Agreement between the Government of Australia and the Government of
New Zealand for the Avoidance of Double Taxation and the Prevention
of Fiscal Evasion with Respect to Taxes on Income that was signed
in Melbourne on 15 November 2005 (together referred to as 'the
existing New Zealand Agreement').
Summary of new law
Main features of the Convention
13. The main features of the Convention are as follows:
. Income from real property (including the profits of an
enterprise from agriculture, forestry or fishing) may be
taxed by the country in which the property is situated.
Income from real property includes natural resource
royalties [Article 6].
. Business profits (including income derived from
professional services or other activities of an
independent nature) are generally to be taxed only in the
country of residence of the recipient unless they are
derived by a resident of one country through a branch or
other prescribed permanent establishment in the other
country, in which case that other country may tax the
profits. These rules also apply to business trusts
[Article 7].
. Profits derived from the operation of ships and aircraft
in international traffic are generally to be taxed only in
the country of residence of the operator [Article 8].
. Profits of associated enterprises may be adjusted for tax
purposes where transactions have been entered into on
other than arm's length terms [Article 9].
. Dividends, interest and royalties may generally be taxed
in both countries, but there are limits on the tax that
the country in which the dividend, interest or royalty is
sourced may charge on such income flowing to residents of
the other country who are the beneficial owners of the
income [Articles 10 to 12].
. In the case of dividends:
- no source country tax is payable on intercorporate
dividends where the beneficial owner of those dividends
is a company that holds, directly or indirectly, at
least 80 per cent of the voting power, subject to
certain conditions [Article 10, paragraph 3];
- no source country tax is payable on dividends where the
beneficial owner of those dividends holds directly no
more than 10 per cent of the voting power of the company
paying the dividend, and the beneficial owner is a
Contracting State, a political subdivision or a local
authority thereof [Article 10, paragraph 4];
- a 5 per cent limitation applies to intercorporate
dividends where the beneficial owner of those dividends
is a company that holds directly at least 10 per cent of
the voting power of the company paying the dividends
[Article 10, subparagraph 2a)]; and
- a 15 per cent limitation applies to all other dividends
[Article 10, subparagraph 2b)];
. Source country taxation on interest is limited to
10 per cent [Article 11, paragraph 2]. However,
exemptions from source country taxation have been provided
for interest paid to:
- certain government bodies and banks performing central
banking functions [Article 11, subparagraph 3a)]; and
- financial institutions that are unrelated and dealing
wholly independently with the payer, subject to certain
conditions [Article 11, subparagraph 3b)].
. The rate limit on source country taxation of royalties is
5 per cent [Article 12, paragraph 2].
. The definition of 'royalty' has been amended to include
payments or credits in respect of the use of, or right to
use, some or all of the radiofrequency spectrum specified
in a spectrum licence and to exclude payments or credits
in respect of the use of, or right to use, industrial,
commercial or scientific equipment [Article 12, paragraph
3].
. Income, profits or gains from the alienation of real
property may be taxed by the country in which the property
is situated. Subject to that rule and other specific
rules in relation to business assets and shares or other
interests in land-rich entities (which may be taxed by the
country in which the property is situated), all other
capital gains will be taxable only in the country of
residence [Article 13].
. Income from employment (that is, employees' remuneration)
will generally be taxable in the country where the
services are performed. However, where the services are
performed during certain short visits to one country by a
resident of the other country, the income will be exempt
in the country visited [Article 14].
. Fringe benefits that would otherwise be subject to tax in
both countries will be taxable only in the country which
would have the primary taxing right in respect of salary
or wages to which the benefit relates [Article 15].
. Directors' remuneration may be taxed in the country in
which the company of which the person is a director is a
resident for tax purposes [Article 16].
. Income derived by entertainers and sportspersons may
generally be taxed by the country in which the activities
are performed. However, income derived by sportspersons
as a member of a recognised team playing in a league
competition conducted in both countries shall be taxable
under the normal business income or employment income
rules [Article 17].
. Pensions (including government pensions) may be taxed only
in the country of residence of the recipient. However,
pensions arising in the other country will not be subject
to tax in the residence country to the extent they would
not be subject to tax in the other country if the
recipient were a resident of that other country. Certain
specified lump sums are only subject to tax in the country
in which they arise [Article 18].
. Income from government service will generally be taxed
only in the country that pays the remuneration. However,
the remuneration will be taxed only in the other country
where the services are rendered in that other country by a
resident of that other country who is a national of that
other country, or did not become a resident of that other
country for the purpose of rendering the services [Article
19].
. Payments made from abroad to visiting students or business
apprentices for the purposes of their maintenance,
education or training will be exempt from tax in the
country visited [Article 20].
. Other income (that is, income not dealt with by other
Articles) may generally be taxed in both countries, with
the country of residence of the recipient providing double
tax relief [Article 21].
. Source rules in the Convention prescribe, for domestic law
and treaty purposes, that income, profits or gains derived
by a resident of one country, which under the provisions
of the treaty may be taxed in the other country, will be
treated as having a source in that other country [Article
22].
. Double taxation relief for income which, under the
Convention, may be taxed by both countries, is required to
be provided by the country of which the taxpayer is a
resident under the terms of the Convention as follows:
- in Australia, by allowing a credit for the New Zealand
tax against Australian tax payable on income derived by
a resident of Australia from sources in New Zealand
[Article 23, paragraph 1];
- in New Zealand, by allowing a credit for the Australian
tax against New Zealand tax payable on income derived by
a resident of New Zealand from sources in Australia
[Article 23, paragraph 2]; and
- in the case where an item of income is taxed in a
country in the hands of an entity that is treated as
'fiscally transparent' by the other country, and also
taxed in the hands of a resident of that other country
as a participant in that entity, by that other country
allowing a credit of the tax imposed by the first
country [Article 23, paragraph 3].
. In the case of Australia, effect will be given to the
double tax relief obligations arising under the Convention
by application of the general foreign income tax offset
provisions of Australia's domestic law, or the relevant
exemption provisions of that law where applicable.
. Rules in the Convention will protect nationals and
businesses from tax discrimination in the other country
and gives them private rights of appeal. However, Article
24 does not restrict either country from applying
provisions designed to prevent avoidance or evasion of
taxes (for Australia such measures include thin
capitalisation, dividend stripping, transfer pricing and
controlled foreign companies measures), rebates or credits
for dividends paid by resident companies, research and
development concessions, consolidation rules or capital
gains deferral rules [Article 24].
. The Convention provides for consultation between the two
taxation authorities and a mechanism that allows for other
forms of dispute resolution, including binding dispute
resolution [Article 25].
. The Convention provides for exchange of information
between the two taxation authorities. It authorises and
requires Australia to exchange information where the
information relates to federal taxes administered by the
Commissioner of Taxation (Commissioner) [Article 26].
. The Convention ensures the integrity of the tax system by
providing for the mutual assistance in the collection of
tax debts. This would allow the Australian Taxation
Office (ATO), in certain circumstances, to seek assistance
from the New Zealand tax administration to collect
Australian taxation debts in respect of all Australian
federal taxes administered by the Commissioner, and vice
versa [Article 27].
Comparison of key features of new law and current law
|New law |Current law |
|Updates all Articles, |Not applicable. |
|having regard to | |
|Australian, New Zealand | |
|and the Organisation for | |
|Economic Co-operation and| |
|Development (OECD) tax | |
|treaty developments since| |
|the existing New Zealand | |
|Agreement was entered | |
|into. | |
|Deals specifically with |No equivalent. |
|items of income | |
|(including profits or | |
|gains) derived by or | |
|through a fiscally | |
|transparent entity under | |
|the laws of either | |
|Australia or New Zealand.| |
|Such items of income will| |
|be considered to be | |
|derived by a resident of | |
|a country to the extent | |
|that the item is treated | |
|under the taxation laws | |
|of that country as income| |
|of a resident. | |
|Provides for relief of | |
|double taxation in | |
|respect of such income. | |
|Provides for mutual |Resident status in |
|agreement procedures to |respect of persons other |
|determine residence in |than individuals |
|respect of persons other |determined solely by |
|than individuals, where |reference to place of |
|place of effective |effective management. |
|management does not | |
|provide an outcome. | |
|Includes specific rules |No specific rules for |
|for determining treaty |dual listed companies. |
|residence of dual listed | |
|companies. |No specific rules for |
|Includes specific rules |MITs. |
|to provide treaty | |
|benefits to income | |
|derived through | |
|Australian managed | |
|investment trusts (MITs).| |
|Limits the treaty |No equivalent. |
|benefits that Australia | |
|is obliged to provide | |
|where income, profits or | |
|gains of transitional | |
|residents are exempted | |
|from tax in New Zealand. | |
|Updates the meaning of |An enterprise is deemed |
|'permanent establishment'|to be a 'permanent |
|in Article 5 (Permanent |establishment' if: |
|Establishment). In |it carries on activities |
|particular, under the |connected with the |
|Convention an enterprise |exploration for or |
|is deemed to have a |exploitation of natural |
|permanent establishment |resources or standing |
|in a country if: |timber; |
|it provides services in |it carries on supervisory|
|that country for a period|activities for more than |
|or periods exceeding in |six months in connection |
|the aggregate 183 days in|with a building site, or |
|any 12-month period. |construction, |
|However, services |installation or assembly |
|provided through |project; or |
|employees for periods not|substantial equipment is |
|exceeding five days are |being used by, for or |
|generally disregarded for|under contract with the |
|this purpose; |enterprise. |
|it carries on activities |Professional services |
|(including the operation |provided by an individual|
|of substantial equipment)|who is present in the |
|in the exploration for or|other country for a |
|exploitation of natural |period or periods |
|resources for a period or|exceeding in the |
|periods exceeding in the |aggregate 183 days in any|
|aggregate 90 days in any |12-month period may be |
|12-month period; or |taxed in that country. |
|it operates substantial | |
|equipment (including in | |
|natural resource | |
|activities) for a period | |
|or periods exceeding in | |
|the aggregate 183 days in| |
|any 12-month period. | |
|Treats certain business |Business profits from |
|profits, such as profits |agriculture, forestry and|
|from agriculture, |fishing are dealt with in|
|forestry and fishing, as |Article 7 (Business |
|income from real |Profits). |
|property, and ensures | |
|that arms' length profits| |
|are taxed on a net basis.|The definition of 'real |
| |property' covers land, |
| |and rights relating to |
|Extends the definition of|exploration for or |
|'real property' to |exploitation of natural |
|include natural resources|resources. |
|(including living | |
|resources) and standing | |
|timber. | |
|Aligns the treatment of |Income from independent |
|income from independent |personal services is |
|personal services to that|treated under a separate |
|of business profits under|Article - Article 14 |
|Article 7 (Business |(Independent Personal |
|Profits). |Services) - where a fixed|
| |base is regularly |
| |available or a person is |
| |present for a period or |
| |periods exceeding in the |
| |aggregate 183 days in any|
| |12-month period. |
|No equivalent. |No profits are |
| |attributable to a |
| |permanent establishment |
| |by reason of mere |
| |purchase. |
|No equivalent. |Profits attributed to the|
| |permanent establishment |
| |should be determined by |
| |the same method year by |
| |year. |
|Transfer pricing |No equivalent. |
|adjustments are generally| |
|limited to seven years. | |
|Source taxation of |Source taxation of |
|shipping and airline |profits from all domestic|
|profits is limited to |shipping and airline |
|income from domestic |activities (including |
|transport. |non-transport |
| |activities). |
|Dividend withholding tax |Dividend withholding tax |
|is limited to: |is limited to 15 per cent|
|zero for intercorporate |for all dividends. |
|dividends on | |
|non-portfolio holdings of| |
|more than 80 per cent, | |
|subject to certain | |
|conditions; | |
|zero for dividends | |
|beneficially owned by a | |
|State, political | |
|subdivision or local | |
|authority where they have| |
|direct holdings of no | |
|more than 10 per cent; | |
|5 per cent for | |
|intercorporate dividends | |
|on other non-portfolio | |
|holdings; and | |
|15 per cent in all other | |
|cases. | |
|Reduces the rate of |No equivalent exemptions.|
|interest withholding tax | |
|from a maximum of | |
|10 per cent to zero where| |
|interest is paid to: | |
|government bodies or | |
|central banks; or | |
|financial institutions, | |
|provided, in the case of | |
|interest paid from | |
|New Zealand, that the | |
|2 per cent approved | |
|issuer levy (AIL) has | |
|been paid. A 'most | |
|favoured nation' | |
|provision applies if | |
|New Zealand subsequently | |
|provides better treatment| |
|in respect of such | |
|interest in another | |
|treaty. | |
|Reduces the rate of |The rate of royalty |
|royalty withholding tax |withholding tax is |
|to a maximum of |limited to 10 per cent of|
|5 per cent of the gross |the gross payment. |
|royalty payment and |The definition of |
|extends the meaning of |'royalty' includes |
|royalty to include |payments for use of |
|spectrum licences. |industrial, scientific |
|Leasing of industrial, |and commercial equipment.|
|commercial or scientific | |
|equipment will no longer | |
|constitute a royalty. | |
|Allocates taxing rights |Residual capital gains |
|over residual capital |are taxable in accordance|
|gains to the country of |with domestic law. |
|residence of the | |
|alienator. However, | |
|Australia may continue to| |
|tax capital gains of | |
|former residents in | |
|accordance with domestic | |
|law. | |
|Employment income paid in|No equivalent. |
|respect of certain short | |
|term visits are taxable | |
|only in the country of | |
|residence of the employee| |
|where the remuneration is| |
|borne by a permanent | |
|establishment of the | |
|employer in the | |
|employee's country of | |
|residence, or is paid in | |
|respect of a secondment. | |
|Pensions that are exempt |Pensions are taxable only|
|in the country of source |in the country of |
|will also be exempt in |residence of the |
|the country of residence.|recipient. |
| |Lump sums may be taxed in|
|Lump sums are taxable |both countries. |
|only in the country of | |
|source. | |
|Includes a comprehensive |No equivalent. |
|article preventing tax | |
|discrimination under tax | |
|laws. | |
|Provides for access to |No equivalent. |
|arbitration if mutual | |
|agreement on issues of | |
|fact is not reached | |
|within two years. | |
Detailed explanation of new law
Article 1 - Persons Covered
Scope
14. This Article establishes the scope of the application of the
Convention by providing for it to apply to 'persons' (defined to
include individuals, trusts, partnerships, companies and any other
body of persons) who are residents of one or both of the countries.
It generally precludes extra-territorial application of the
Convention. [Article 1]
15. The Convention also applies to third country residents in relation
to Article 24 (Non-Discrimination) in its application to nationals
of one of the treaty countries, Article 25 (Mutual Agreement
Procedure) so far as the person is a national of one of the treaty
countries, and in relation to the exchange of information under
Article 26 (Exchange of Information) and the assistance in
collection of tax debts under Article 27 (Assistance in the
Collection of Taxes).
16. The application of the Convention to persons who are dual residents
(that is, residents of both countries) is dealt with in Article 4
(Resident).
Application of the Convention to fiscally transparent entities
17. Paragraph 2 addresses special issues arising in relation to income
that is derived by or through entities, such as certain
partnerships and trusts, that are fiscally transparent with respect
to that income; that is, where the participants in the entity are
liable to tax on the income, rather than the entity itself. The
provision is intended to apply where one or more fiscally
transparent entities is interposed between the income and the
participant who is ultimately liable to tax on the income.
18. As different countries frequently take different views as to when
an entity is fiscally transparent, the risk of both double taxation
and double non-taxation of income derived by or through such
entities is increased. The intention of paragraph 2 is to ensure
that treaty benefits are available to residents who are
participants in these entities where income derived through such
entities is allocated to those members for tax purposes. The
provision also prevents the use of such entities to claim treaty
benefits in respect of income arising in one country in
circumstances where the person investing through such an entity is
not a resident of, or is not liable to tax on the income in, the
other country.
19. While this paragraph covers a broader range of transparent entities
than partnerships, its application is intended to be consistent
with the OECD conclusions on the application of the OECD Model Tax
Convention on Income and on Capital (OECD Model) to partnerships.
It is also intended to eliminate a number of technical problems
which might have prevented participants in such entities from
claiming treaty benefits, even though the income derived through
such entities is allocated to them under the relevant tax laws such
that they are subject to tax on that income. Further, the
inclusion of the words 'with respect to that item of income' is
included to ensure that this rule will apply appropriately to
income derived through entities such as certain trusts, where some
items of income may be allocated to the beneficiary or participant
and taxed in that person's hands, while other items of income are
taxed at the entity level.
20. The provision refers to a 'person' that is fiscally transparent.
Partnerships and trusts are specifically included in the definition
of 'person' in subparagraph j) of paragraph 1 of Article 3
(General Definitions), however other fiscally transparent entities
may also be encompassed by the term as the definition is inclusive.
21. The paragraph also refers to income derived 'by or through' such a
person. This is to take account of the fact that the same income
may be regarded as derived by the entity in one country, while the
other country considers that, notwithstanding that it is received
by the entity, it is derived by the participants.
22. Paragraph 2 of Article 1 (Persons Covered) applies to all forms of
income, including amounts taxable on a net profit basis or, in the
case of Australia, as a capital gain.
23. In general, paragraph 2 relates to particular items of income of
entities that are fiscally transparent under the laws of one or
other country. Entities falling under this description in
Australia and New Zealand include certain partnerships and trusts.
In the case of Australia it includes partnerships subject to
Division 5 of Part III of the Income Tax Assessment Act 1936 (ITAA
1936) (but not corporate limited partnerships subject to Division
5A of Part III), and trusts which are subject to Division 6 of Part
III where the beneficiary of the trust is presently entitled to the
income and assessable accordingly (but not a corporate unit trust
or public trading trust subject to Division 6B or 6C of Part III).
In the case of New Zealand, it includes partnerships, complying
trusts and foreign trusts.
24. Under paragraph 2, an item of income derived by such entities will
be considered to be derived by a resident of a country if a
resident is treated under the taxation laws of that country as
deriving the item of income. In particular, the paragraph ensures
that treaty benefits will apply in three situations:
. where income (including profits or gains) is derived from
sources in one country through an entity organised in the
other country which is treated as fiscally transparent in
that other country (that is, income derived through that
entity is taxed in the hands of the beneficiaries, members
or participants of the entity);
. where income (including profits or gains) is derived from
sources in one country through an entity that is organised
in the other country and is treated as a taxable entity
under the taxation laws of that country and fiscally
transparent under the laws of the source country; and
. where income (including profits or gains) is derived from
sources in one country through a third country entity
which is treated as fiscally transparent in the other
country (that is, income derived through that entity is
taxed in that other country in the hands of the
beneficiaries, members or participants of the entity).
25. In the first situation above, treaty residents who participate in
the entity will be eligible for treaty benefits in respect of items
of income (including profits or gains) derived from the source
country through that entity, to the extent that the other country
treats the income as 'flowed-through' to those participants.
Resident participants in the entity will be treated as having
derived the income directly and may be entitled to treaty benefits.
Treaty benefits in respect of such items of income (including
profits or gains) will be granted where:
. the beneficiaries, members or participants are residents
of the other country; and
. other conditions in the Convention (such as the specific
anti-avoidance measures and limitation of relief) are
satisfied.
26. Non-resident participants in the entity may not claim a benefit
under the Convention in respect of such items of income, because
they are not treaty residents for purposes of claiming benefits
under this treaty. If, however, the country of which they are a
resident for tax purposes has a tax treaty with the source country,
they may be entitled to claim a benefit under that treaty.
27. It is irrelevant whether the source country sees the income,
profits or gains as the income, profits or gains of the entity
itself or of the beneficiaries, members or participants under the
tax law of that country.
1.
[pic]
In the above diagram, dividend income is paid to an
Australian partnership from New Zealand. The Australian
partnership includes Australian partners (Y and Z Co) who
are residents of Australia for the purposes of the treaty.
Under Australian law, the income is treated as the income of
the partners.
As such, in this example, the dividend income paid to the
partnership will be considered, for purposes of the treaty,
to be derived by the Australian resident partners as they
are assessable under Australian income tax law. Therefore
the Australian partners would be eligible for the benefits
of the Convention. To the extent that the Australian
partners owned only a share of the income, then only the
share of the income attributable to the Australian partners'
interest would be eligible for the benefits of the
Convention.
Treaty relief will not apply to income derived by any
partners that are not residents of Australia for purposes of
the Convention (in this example, X Co).
Eligibility for the treaty benefits will also be subject to
the application of the respective anti-avoidance measures
contained in the specific Article (in this example,
paragraph 9 of Article 10 (Dividends)).
28. An example of the second situation would be where dividend income
is derived from sources in one country through an entity that is
organised in the other country and is treated as a taxable entity
under the tax law of that other country and fiscally transparent
under the laws of the source country. In these circumstances, the
Convention provides that the income will be treated as derived by
the entity for purposes of determining whether treaty benefits
apply. Treaty benefits will be granted where:
. the entity is a resident of the other country; and
. other conditions in the Convention (such as the specific
anti-avoidance measures and limitation of relief) are
satisfied.
29. The same outcome arises irrespective of whether the source country
sees the income, profits or gains as the income, profits or gains
of the entity itself or of the beneficiaries, members or
participants under the tax law of that country.
1.
[pic]
In the above diagram, dividend income arising in New Zealand
is paid to an Australian Corporate Limited Partnership which
is subject to Division 5A and is resident in Australia under
that Division. The Australian Corporate Limited Partnership
includes Australian partners (Y and Z Co) who are residents
of Australia for the purposes of the treaty, and a third
State resident partner (X Co). The Australian Corporate
Limited Partnership is effectively treated as a company that
is a resident of Australia for Australian tax purposes.
As such, in this example, the dividend income would be
eligible for the benefits of the Convention. This will be
the case, notwithstanding that one or more of the
participants in the corporate limited partnership is not a
resident of Australia and irrespective of whether New
Zealand, under its domestic law, would tax the income in the
hands of the Australian corporate limited partnership or in
the hands of the partners. Even if New Zealand would treat
the partnership as fiscally transparent under its domestic
law, the income will be considered to be derived by an
Australian resident for purposes of the Convention in
accordance with paragraph 2 of Article 1 (Persons Covered),
since the income is treated for purposes of Australian tax
law as the income of a resident (that is, the Australian
corporate limited partnership).
Eligibility for the treaty benefits will also be subject to
the application of the respective anti-avoidance measures
contained in the specific Article.
30. The third situation deals with cases where income is derived from
sources in one country through a third country entity which is
treated as fiscally transparent in the other country. In these
circumstances, the Convention provides that the income will be
treated as derived by the participants and eligible for such treaty
benefits as would be granted to the beneficiary, member or
participant. Treaty benefits in respect of such income will be
granted where:
. the beneficiary, member or participant is a resident of
the other country; and
. other conditions in the Convention (such as the specific
anti-avoidance measures and limitation of relief) are
satisfied.
31. This outcome will arise irrespective of whether the source country
sees the income, profits or gains as the income, profits or gains
of the beneficiary, member or participant under the tax law of that
country. It is also irrelevant whether the entity is treated as
fiscally transparent or not in the third country where it is
organised.
1.
[pic]
In the above diagram, a New Zealand entity pays royalty
income to a United States Limited Liability Company. The
United States Limited Liability Company includes Australian
partners (X Co and Y) who are residents of Australia for the
purposes of the treaty.
As the United States Limited Liability Company is treated as
a partnership for US tax law purposes, it is also treated as
a partnership for Australian tax law purposes under
Australia's foreign hybrid rules.
In this example, the royalty income derived through the
United States Limited Liability Company on which the
Australian resident partners are assessable under Australian
income tax law would be eligible for the benefits of the
Convention.
Treaty relief under the Convention will not apply to income
derived by any partners that are not residents of Australia
for purposes of the Convention (in this example, Z Co).
Eligibility for the treaty benefits will also be subject to
the application of the respective anti-avoidance measures
contained in the specific Article (in this example,
paragraph 7 of Article 12 (Royalties)).
32. On the other hand, if a country regards the income as derived by an
entity which it regards as a company, but not a resident, for tax
purposes, then income derived from the other country will not be
entitled to the benefits of the Convention, even if the
shareholders of that company are residents of the first country.
1.
[pic]
In the above diagram, a New Zealand resident pays interest
income to a third State entity that is treated as a company
for Australian tax purposes.
In this case, the interest income will not be eligible for
the benefits of the Convention. In this example it would
not matter if under the tax law of New Zealand, the third
State entity were treated as fiscally transparent or as a
company. If New Zealand also treats the third State legal
entity as a company for its tax purposes, paragraph 2 of
Article 1 (Persons Covered) would not apply but the outcome
would still be the same; that is, no benefits under the
Convention.
33. Income derived from a country through an entity organised in that
country will not be eligible for treaty benefits if the income is
treated as derived by that entity under the tax laws of the other
country.
1.
[pic]
In the above diagram, a New Zealand resident pays interest
income to another New Zealand entity, NZ Co. Aus Co, an
Australian resident shareholder holds shares in NZ Co.
Australia treats NZ Co as a company for tax purposes and as
the entity that derives the interest income.
In this example, the interest income would be ineligible for
the benefits of the Convention. Australia does not treat
the interest income as income of an Australian resident.
Accordingly, paragraph 2 of Article 1 (Persons Covered) will
not apply to treat the income as derived by an Australian
resident for purposes of the Convention, even if New Zealand
regards NZ Co as a fiscally transparent entity.
34. Where the two countries allocate the income to different resident
persons (for example, where one country considers that the income
is derived by a resident entity, while the other country considers
that the same income is derived by a resident who is a participant
in that entity), both countries may tax the income in accordance
with this provision. Income derived from a country through an
entity organised in that country will not be eligible for treaty
benefits if the income is treated as derived by a resident entity
under the tax laws of that country. In such case, the income would
be regarded as domestic source income of a resident which, in
accordance with normal treaty principles, would not be limited by
the Convention. During negotiations, the two delegations noted
that:
'It is understood that (this) paragraph shall not affect the
taxation by a Contracting State of its residents.'
1.
The facts are the same as Example 2.5 except that New
Zealand regards NZ Co as a company and resident there, while
Australia regards NZ Co as a fiscally transparent
partnership. In this case, New Zealand would not be
required to extend source tax reductions on the interest
income under Article 11 (Interest) of the Convention.
35. Where the same income is taxed in the hands of different persons
under this provision, paragraph 3 of Article 23 (Elimination of
Double Taxation) ensures that relief from double taxation is
provided.
36. The examples above deal with entities that are wholly fiscally
transparent or alternatively taxed as a taxable entity such as a
company on all their income. As noted above, paragraph 2 of
Article 1 applies on an item of income basis. This is illustrated
by the following examples which are variations on some of the
examples above.
1.
[pic]
Royalty income arising in New Zealand is paid to an
Australian resident trust. The Australian resident
beneficiaries are presently entitled to half of the royalty
income and are taxed in Australia under section 97 of the
ITAA 1936. A non-resident of Australia is presently
entitled to the other half of the royalty income. The trust
also derives Australian source income to which no
beneficiary is presently entitled and that income is taxed
to the trustee under section 99A of that Act.
In this example, the royalty income paid to the trust on
which the Australian resident beneficiaries are assessable
under Australian income tax law would be eligible for the
benefits of the Convention. As the Australian beneficiaries
are only entitled to half of the income, only the half of
that royalty income attributable to the Australian resident
beneficiaries would be eligible for the benefits of the
Convention.
Treaty relief will not apply to income derived by any
beneficiaries that are not residents of Australia for
purposes of the Convention.
Eligibility for the treaty benefits will also be subject to
the application of any anti-avoidance measures contained in
the specific income Article (in this example, paragraph 7 of
Article 12 (Royalties)).
The fact that the trustee is taxable in Australia on other
items of income of the trust does not affect the fact that
the trust is fiscally transparent with respect to the
royalty income.
If the trustee is a resident of Australia, it is entitled to
treaty benefits in relation to the income in respect of
which the trustee is liable to tax under section 99A of the
ITAA 1936 as a resident of Australia.
37. The same result is obtained even if New Zealand regarded the trust
or trustee as taxable on the income rather than the beneficiaries.
38. Relief under the Convention will not apply to a beneficiary who is
presently entitled to the royalty income but who is not an
Australian resident for purposes of the Convention.
39. No treaty benefits are available under the Convention where the
income is exempt from tax in New Zealand on the basis that it is
derived by a transitional resident of New Zealand. [Article 4,
paragraph 4]
40. Where dividends, interest or royalties arising in one country are
derived through a trust and are taxed in the other country in the
hands of the trustee, paragraph 4 of Article 3 (General
Definitions) provides that such income will be deemed to be
beneficially owned by a resident of the latter country.
Accordingly, that income will be treated for the purposes of the
Convention as income derived by a resident of that country, even if
the source country would treat the trust as fiscally transparent.
1.
The facts are the same as Example 2.7 except that no
beneficiary is presently entitled to the royalty income and
the trustee is taxed on that income in Australia under
section 99A of the ITAA 1936.
In this example, the royalty income would prima facie be
eligible for treaty benefits. As the trustee is assessable
on the income for Australian tax purposes, the trust is not
fiscally transparent in Australia with respect to the
royalty income.
Note however to the extent that the Australian tax paid by
the trustee is subsequently refunded to a non-resident
beneficiary, the income will not be regarded as beneficially
owned by an Australian resident (see the explanation on
paragraph 4 of Article 3 (General Definitions) in paragraphs
2.66 to 2.71).
Eligibility for the treaty benefits will be subject to the
application of any anti-avoidance measures contained in the
specific income Article (in this example, paragraph 7 of
Article 12 (Royalties)).
41. The same result is obtained even if New Zealand regarded the
beneficiaries as taxable on the income rather than the trust or
trustee.
42. In the case of Australian managed investment trusts, an exception
to the discussion here is created by paragraph 7 of Article 4
(Resident) (see paragraphs 2.89 to 2.96).
Article 2 - Taxes Covered
43. This Article specifies the existing taxes of each country to which
the Convention applies. These are, in the case of Australia, the
Australian income tax, the petroleum resource rent tax and the
fringe benefits tax.
44. The term 'income tax' includes Australian income tax imposed on
capital gains.
45. Although Australia considers the petroleum resource rent tax to be
encompassed by the term 'income tax', a specific reference to this
has been included in the Convention to put beyond doubt that it is
a tax covered.
46. As with the existing New Zealand Agreement, the Convention
generally does not cover Australia's goods and services tax (GST),
customs duties, state taxes and duties and estate tax and duties.
47. However, paragraph 7 of Article 24 (Non-Discrimination) provides
that that Article applies to all federal and state taxes (but not
local taxes). Similarly, paragraph 1 of Article 26 (Exchange of
Information) and paragraph 2 of Article 27 (Assistance in the
Collection of Taxes) provide that all federal taxes administered by
the Commissioner are covered by those Articles. [Article 24,
paragraph 7, Article 26, paragraph 1 and Article 27, paragraph 2]
48. For New Zealand, the Convention applies to income tax, including
the fringe benefits tax. However, paragraph 7 of Article 24 (Non-
Discrimination) provides that that Article applies to all
New Zealand taxes apart from any taxes that may be imposed by local
authorities. Similarly, paragraph 1 of Article 26 (Exchange of
Information) and paragraph 2 of Article 27 (Assistance in the
Collection of Taxes) provide that all taxes imposed under
New Zealand's tax laws are covered by those Articles. [Article 24,
paragraph 7, Article 26, paragraph 1, and Article 27, paragraph 2]
Identical or substantially similar taxes
49. The application of the Convention (including Articles 26 and 27)
will be automatically extended to any identical or substantially
similar taxes which are subsequently imposed by either country in
addition to, or in place of, the existing taxes.
Notification of changes to the tax laws
50. The competent authorities (that is, the Commissioner in the case of
Australia and the Commissioner of Inland Revenue in the case of
New Zealand, or their authorised representatives) are required to
notify each other in the event of a significant change in the
taxation law of the respective countries, within a reasonable
period of time after those changes. [Article 2, paragraph 2]
Article 3 - General Definitions
51. This Article provides general definitions and rules of
interpretation applicable throughout the Convention. In
particular, paragraph 1 defines a number of basic terms used in the
Convention. The introduction to paragraph 1 makes clear that these
definitions apply for all purposes of the Convention, unless the
context requires otherwise.
Definition of Australia
52. As in Australia's other modern tax treaties, Australia is defined
to include certain external territories and the continental shelf.
The Convention also refers specifically to the 'exclusive economic
zone'. Although the exclusive economic zone is considered to be
covered by the definition used in Australia's other modern tax
treaties, it is specifically included in the Convention for
additional clarity. By reason of this definition, Australia
preserves its taxing rights, for example, over mineral exploration
and mining activities carried on by non-residents on the seabed and
subsoil of the relevant continental shelf areas (under section 6AA
of the ITAA 1936, certain sea installations and offshore areas are
to be treated as part of Australia). [Article 3, subparagraph 1a)]
Definition of New Zealand
53. The definition is similar to that under the existing New Zealand
Agreement. New Zealand covers the territory of New Zealand but
does not include Tokelau. Unlike the definition in the existing
New Zealand Agreement, no specific mention is made of the Cook
Islands and Niue. These jurisdictions are self-governing states
and are not covered by the definition of New Zealand. It includes
any area beyond the territorial sea under New Zealand legislation
and in accordance with international law as an area in which
New Zealand may exercise sovereign rights with respect to natural
resources. [Article 3, subparagraph 1b)]
Definitions of business and enterprise
54. The terms enterprise of a Contracting State and enterprise of the
other Contracting State are defined as an enterprise carried on by
residents of the respective countries. [Article 3, subparagraph
1g)]
55. The term enterprise is stated to apply to the carrying on of any
business. The term business is defined to include the performance
of professional services and other activities of an independent
character. Both these definitions are identical to the definitions
added to the OECD Model concurrently with the deletion of Article
14 (Independent Personal Services). The inclusion of the two
definitions is intended to clarify that income from the performance
of professional services or other activities of an independent
character is dealt with under Article 7 (Business Profits) and not
Article 21 (Other Income). [Article 3, subparagraphs 1c) and f)]
Definition of company
56. The definition of company in the Convention accords with the OECD
Model, and means any body corporate or any entity which is treated
as a body corporate for tax purposes.
57. The Australian tax law treats certain trusts (public unit trusts
and public trading trusts) and corporate limited partnerships
(limited liability partnerships) in the same way as companies for
income tax purposes. These trusts and partnerships are included as
companies for the purposes of the Convention. [Article 3,
subparagraph 1d)]
Definition of competent authority
58. The competent authority is the person or institution specifically
authorised to perform certain actions under the Convention. For
instance, the competent authority is required to give certain
notifications (for example, in paragraph 2 of Article 2 (Taxes
Covered), the competent authorities are required to notify each
other of any significant changes to the relevant tax laws of their
respective countries) and perform certain tasks (for example,
exchange tax information in accordance with Article 26 (Exchange of
Information)).
59. In the case of Australia, the competent authority is the
Commissioner or an authorised representative of the Commissioner.
In the case of New Zealand, the competent authority is the
Commissioner of Inland Revenue or an authorised representative of
the Commissioner. [Article 3, subparagraph 1e)]
Definition of international traffic
60. In the Convention, this term is of relevance for taxation of
profits from shipping and air transport operations (Article 8
(Shipping and Air Transport)), income, profits or gains from the
alienation of ships and aircraft (paragraph 3 of Article 13
(Alienation of Property)) and wages of crew (paragraph 3 of Article
14 (Income from Employment)).
61. The definition of international traffic covers international
transport by a ship or aircraft operated by an enterprise of one
country, as well as domestic transport within that country.
However, it does not include transport where the ship or aircraft
is operated solely between places in the other country; that is,
where the place of departure and the place of arrival of the ship
or aircraft are both in that other country, irrespective of whether
any part of the transport occurs in international waters or
airspace. For example, a 'voyage to nowhere' which begins and ends
in Sydney on a ship operated by a New Zealand enterprise would not
come within the definition of 'international traffic', even if the
ship travels through international waters in the course of the
cruise. [Article 3, subparagraph 1h)]
Definition of national
62. The Convention defines national by reference to an individual's
nationality or citizenship. A company, partnership or association
will be a national if it is created or organised under the laws of
Australia or New Zealand. For example, a company's nationality is
determined by where it is incorporated. [Article 3, subparagraph
1i)]
63. The concept of nationality is used in subparagraph c) of paragraph
2 of Article 4 (Resident), subparagraph b) of paragraph 1 of
Article 19 (Government Service) and Article 24 (Non-
Discrimination).
Definition of person
64. The definition of person in the Convention generally accords with
Australia's normal tax treaty practice and includes individuals,
companies and any other body of persons. However, a specific
reference to partnerships and trusts is included in the Convention.
The intention is for the term 'person' to be given a broad meaning
for the purposes of the Convention. During negotiations, the
delegations noted that a reference to 'a trust' was included in the
definition of the term 'person':
'...to ensure that trusts may be covered by a reference to
'a person that is fiscally transparent' in paragraph 2 of
Article 1 (Persons Covered) and for purposes of paragraph 7
of Article 4 (Resident) which refers to a managed investment
trust.'
[Article 3, subparagraph 1j)]
Definition of tax
65. For the purposes of the Convention, the term tax does not include
any amount of penalty or interest imposed under the respective
domestic tax law of the two countries. [Article 3, subparagraph
1k)]
66. In the case of a resident of Australia, any penalty or interest
component of a liability determined under the domestic taxation law
of New Zealand with respect to income that New Zealand is entitled
to tax under the Convention would not be a creditable New Zealand
tax for the purposes of paragraph 1 of Article 23 (Elimination of
Double Taxation). This is in keeping with the meaning of 'foreign
income tax' in subsection 770-15(1) of the Income Tax Assessment
Act 1997 (ITAA 1997). Accordingly, such a penalty or interest
liability would be excluded from calculations when determining the
Australian resident taxpayer's foreign income tax offset
entitlement under paragraph 1 of Article 23 (pursuant to Division
770 of the ITAA 1997 - Foreign Income Tax Offsets).
Definition of recognised stock exchange
67. The term is used in relation to withholding tax limits in
Article 10 (Dividends). No withholding tax will apply to a
dividend paid from an Australian resident company to a New Zealand
resident company which holds 80 per cent of the voting power of the
paying company where its principal class of shares is listed and
regularly traded on a recognised stock exchange.
68. The term recognised stock exchange is defined as:
. the Australian Securities Exchange and any other
Australian stock exchange recognised as such under
Australian law;
. the securities markets (other than the New Zealand debt
market) operated by the New Zealand Exchange Limited; and
. any other stock exchange agreed upon by the competent
authorities under the Convention.
[Article 3, subparagraph 1l)]
Definition of managed investment trust
69. The term managed investment trust is defined as a trust that is a
managed investment trust for the purposes of Australian tax. The
definition is relevant to paragraph 7 of Article 4 (Resident),
which in certain circumstances treats, for the purposes of the
Convention, a managed investment trust as an individual resident of
Australia and as the beneficial owner of the income it receives.
[Article 3, subparagraph 1m)]
70. Section 12-400 of Schedule 1 to the Taxation Administration
Act 1953 defines the term 'managed investment trust'. In general
terms, a trust is a managed investment trust in relation to an
income year if, at the time of the first fund payment is made:
. the trustee is an Australian resident, or the central
management and control of the trust is in Australia;
. the trust satisfies certain requirements under the
Corporations Act 2001 relating to the management of
investments; and
. the trust is either listed on an approved stock exchange
in Australia, or is widely held.
Definition of natural resources
71. The term natural resources is defined for the purposes of Articles
5 (Permanent Establishment) and 6 (Income from Real Property) as
meaning naturally occurring deposits or sources of materials and
substances, such as minerals, oils, gas and water. It also
includes forests and fish. During negotiations, the delegations
noted that:
'It is understood that the term 'naturally-occurring' in
(paragraph 2) refers to both forests and fish.'
[Article 3, paragraph 2]
Terms not specifically defined
72. Where a term is not specifically defined within the Convention,
that term (unless used in a context that requires otherwise) is to
be taken to have the same interpretative meaning as it has under
the domestic taxation law of the country applying the Convention at
the time of its application. In that case, the meaning of the term
under the taxation law of the country will have precedence over the
meaning it may have under other domestic laws.
73. The same term may have a differing meaning and a varied scope
within different Acts relating to specific taxation measures. For
example, GST definitions are sometimes broader than income tax
definitions. The definition more specific to the type of tax
should be applied in such cases. For example, where the matter
subject to interpretation is an income tax matter, but definitions
exist in either the ITAA 1936 or the ITAA 1997 and the A New Tax
System (Goods and Services Tax) Act 1999, the income tax definition
would be the relevant definition to be applied.
74. If a term is not defined in the Convention, but has an
internationally understood meaning in tax treaties and a meaning
under the domestic law, the context would normally require that the
international meaning be applied. [Article 3, paragraph 3]
Dividends, interest or royalties derived by or through trusts
75. For the purposes of Articles 10 (Dividends), 11 (Interest) and
12 (Royalties), dividends, interest or royalties arising in a
country and derived by or through a trust are deemed to be
beneficially owned by a resident of the other country where such
income is subject to tax in that other country in the hands of a
trustee of that trust.
76. This provision accords with New Zealand treaty practice and has a
similar effect to paragraph 2 of Article 3 of the existing New
Zealand Agreement. It ensures that the trustee is treated as the
beneficial owner of dividends, interest or royalties for the
purposes of obtaining benefits under the respective Articles, but
only where those dividends, interest or royalties are subject to
tax in the hands of the trustee. [Article 3, paragraph 4]
77. Where tax paid by a trustee is credited against the tax payable by
a beneficiary who is not a resident of Australia in accordance with
section 98A of the ITAA 1936, the trustee will not be regarded as
subject to tax on that income.
78. Furthermore, the trustee will not be regarded as subject to tax on
income derived through the trust where the tax is refunded. In the
course of negotiations, the two delegations noted that:
'It is understood that a trustee is not regarded as being
subject to tax to the extent that the trustee pays tax that
is subsequently refunded to a non-resident beneficiary.'
79. For example, where a trust derives foreign income to which no
beneficiary is presently entitled, the trustee is assessable on
that income if the trust is an Australian resident trust. The
later distribution of the income to a beneficiary may allow the
beneficiary to claim a refund of the tax paid by the trustee under
section 99D of the ITAA 1936 if the income is attributable to a
period in which the beneficiary was not an Australian resident. In
such cases, the trustee will not be regarded as subject to tax for
the purposes of paragraph 4 of Article 3. It follows that, where
the income comprises dividends, interest or royalties arising in
New Zealand, New Zealand will not be limited by Articles 10, 11
and 12 of the Convention.
80. Where dividends, interest or royalties arising in one country are
taxed in the hands of a beneficiary who is a resident of the other
country, it is intended that the beneficiary would generally be
treated as the beneficial owner of the income.
Article 4 - Resident
Residential status
81. This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of the Convention.
Residential status in one or other country is a necessary
condition for the provision of relief under the Convention. For
both Australia and New Zealand, 'resident' status is determined by
reference to the person's liability to tax as a resident under the
laws of the respective country.
82. The term 'liable to tax as a resident' is intended to capture those
persons who are subject to comprehensive taxation under a country's
domestic taxation laws. A person may be regarded as liable to tax
as a resident even where the country does not in fact impose tax.
For example, under Australian law charitable institutions are
exempt from income tax but only if they meet the requirements for
exemption. Such institutions are liable to tax for the purposes of
the Article and, therefore, are 'residents' under the Convention.
83. The second sentence of paragraph 1 of the Article deals with a
person who may be considered to be a resident of a country
according to its domestic laws but is only liable to taxation on
income from sources in that country, such as foreign diplomatic and
consular staff. In the Australian context, this also means, for
example, that Norfolk Island residents, who are generally subject
to Australian tax on Australian source income only, are not
residents of Australia for the purposes of the Convention.
Accordingly, New Zealand will not have to forgo tax in accordance
with the Convention on income derived by residents of Norfolk
Island from sources in New Zealand (which will not be subject to
Australian tax). [Article 4, paragraph 1]
Residency of governments
84. Article 4 follows the OECD Model in specifically providing that the
State, or a political subdivision, or local authority of the State,
are residents for the purposes of the Convention. This means that
the Australian Government, the state governments and local councils
of Australia will be residents for the purpose of the Convention.
This does not necessarily mean that income, profits or gains
derived by these bodies from sources in New Zealand will be subject
to tax in New Zealand as sovereign immunity principles may apply.
[Article 4, paragraph 1]
Dual residents
85. A set of tie-breaker rules is included for determining how
residency is to be allocated to one or other of the countries for
the purposes of the Convention if a taxpayer, whether an
individual, a company or other taxable unit, qualifies as a dual
resident; that is, as a resident of both countries in accordance
with paragraph 1 of the Article.
86. Notwithstanding that the Convention deems certain dual residents to
be a resident only of one country for treaty purposes, a dual
resident remains a resident for the purposes of Australian domestic
tax law. Accordingly, that person remains liable to tax in
Australia as a resident, insofar as the Convention allows.
Individuals
87. The tie-breaker rules for individuals apply certain tests, in a
descending hierarchy, for determining the residential status (for
the purposes of the Convention) of an individual who is liable to
tax as a resident of both countries under each country's domestic
law. These rules, in order of application, are:
. if the individual has a permanent home available to that
individual in only one of the countries, the person is
deemed to be a resident solely of that country for the
purposes of the Convention;
. if the individual has a permanent home available in both
countries or in neither, then the person's residential
status takes into account the person's personal or
economic relations with Australia and New Zealand, and the
person is deemed for the purposes of the Convention to be
a resident only of the country with which the person has
the closer personal and economic relations (centre of
vital interests);
. if the individual's centre of vital interests cannot be
determined, the individual shall be deemed to be a
resident of the country in which that individual has an
habitual abode; or
. if the individual has an habitual abode in both Australia
and New Zealand or in neither, the individual shall be
deemed to be a resident of the country of which they are a
national.
[Article 4, paragraph 2]
88. In the course of negotiations, the two delegations noted that:
'It is understood that, although the Convention does not
provide for mutual agreement as the final tie-breaker step
for individuals, it remains open to the competent
authorities to enter into mutual agreement procedure
discussions under Article 25 (Mutual Agreement Procedure) in
dual resident individual cases.'
Other persons
89. Where a person that is not an individual (such as a company) is a
resident of both countries in accordance with paragraph 1, the
person will be deemed to be a resident of the country in which its
place of effective management is situated.
90. In cases where the country in which the place of effective
management is situated cannot be determined, or the place of
effective management is situated neither in Australia or
New Zealand, the competent authorities are to endeavour to
determine by mutual agreement under Article 25 (Mutual Agreement
Procedure) the country of which the person shall be deemed to be a
resident for the purposes of the Convention.
91. In doing so, the competent authorities are to have regard to the
person's places of management, the place where it is incorporated
or otherwise constituted and any other relevant factors, such as
those listed in paragraph 24 of the 2008 OECD Commentary to the
OECD Model (OECD Model Commentary) on Article 4. In the absence of
agreement between the competent authorities, such a person shall
not be entitled to any relief or exemption from tax provided by the
Convention.
92. Such persons are not denied all of the benefits of the Convention,
only relief or exemption from tax. This means that Articles such
as Article 24 (Non-Discrimination) and 25 (Mutual Agreement
Procedure) still apply to them. [Article 4, paragraph 3]
Residency of participants in dual listed company arrangements
93. Paragraph 5 of the Article provides a specific rule for companies
who are participants in 'dual listed company arrangements' and
residents of both Australia and New Zealand. Instead of the tie-
breaker rule in paragraph 3 of the Article applying, the company
will be deemed to be the resident of the country in which it is
incorporated provided that it has its primary stock exchange
listing in that country. [Article 4, paragraph 5]
94. The term dual listed company arrangement is defined exhaustively to
refer to an arrangement consisting of two publicly listed companies
which, while retaining their status as separate legal entities,
seek to broadly operate as one company. While the companies retain
separate shareholdings and stock exchange listings the arrangement
provides for alignment of the strategic directions of the two
companies involved and the economic interests of their respective
shareholders. The treaty sets out various, cumulative criteria by
which such an arrangement can be identified.
95. The criteria are:
. the appointment of common (or almost identical) boards of
directors;
. unified management;
. provision for the payment of equalised distributions as
determined by an equalisation ratio (though this ratio may
change over time) and applying to distributions on winding
up of either company to this contractual arrangement;
. voting in effect as a single electorate on substantial
issues; and
. cross-guarantees or similar financial arrangements to
support each company's material ongoing financial
obligations under the dual listing arrangement.
96. The first criterion does not apply to dual listed company (DLC)
arrangements where the effect of relevant regulatory requirements
would otherwise prevent this. For example, provisions regulating
an Australian industry require that at least two-thirds of the
directors of an enterprise operating in that industry be Australian
citizens. If a company covered by those provisions sought to enter
into a DLC arrangement with a New Zealand company that under
New Zealand law was required to maintain a similar number of
New Zealand citizens as directors, the two companies could not have
common boards of directors. This would prevent them from being
able to access this tie-breaker test. The intention is that they
not be prohibited from doing so because other regulatory
requirements prevent it.
97. The final criterion does not apply to DLC arrangements where the
companies which are a party to the arrangement are prevented from
providing such guarantees or financial support under a regulatory
framework applicable to one or both companies; for example, if
providing such cross-guarantees would breach the Australian
Prudential Regulation Authority's capital adequacy standards for
approved deposit institutions. [Article 4, paragraph 6]
Managed investment trusts
98. The Convention also specifically provides that, notwithstanding any
other provisions of the Convention, trusts that are managed
investment trusts for Australian tax purposes and that receive
income (including profits and gains) arising in New Zealand, shall
be treated, for purposes of applying the Convention to that income,
as an individual resident of Australia and as the beneficial owner
of the income it receives, but only to the extent that residents of
Australia are the owners of the beneficial interests in the managed
investment trust.
99. However, if:
. the managed investment trust has its principle class of
units listed on the Australian Securities Exchange, or any
other Australian stock exchange recognised as such under
Australian law; and is regularly traded on one or more
recognised stock exchanges; or
. at least 80 per cent of the value of beneficial interests
in the managed investment trust is owned by Australian
residents,
the managed investment trust shall be treated as an individual
resident of Australia and as the beneficial owner of all the income
it receives. [Article 4, paragraph 7]
100. Paragraph 7 of Article 4 is designed to facilitate the claiming of
treaty benefits for New Zealand investments held by MITs. The
definition of MIT for this purpose is contained in subparagraph m)
of paragraph 1 of Article 3 (General Definitions) and is discussed
in paragraph 2.60. Generally under that definition a managed
investment trust will be directly or indirectly widely held.
101. It is often practically difficult for the many investors in widely
held MITs to individually claim treaty benefits in the source
country. This provision is designed to overcome that practical
difficulty.
102. The provision achieves this by treating the MIT as an individual
resident in Australia and the beneficial owner of the income for
purposes of applying the Convention to income received by the MIT,
where the MIT meets certain specified conditions. This allows the
MIT to claim treaty benefits directly under Articles 6 to 21 of the
Convention. As it is almost invariably the investors in the MIT
rather than the MIT who are taxed on that income on a fiscally
transparent basis, in the absence of this provision it would be
those investors who would normally have to claim treaty benefits
under paragraph 2 of Article 1 (Persons Covered). This provision
is thus an exception to this extent to the general operation of
paragraph 2 of Article 1 (Persons Covered).
103. Paragraph 7 of Article 4 (Resident) is designed to ensure that the
provision does not give rise to treaty shopping by third country
investors. The provision achieves this result in two different
ways. If the MIT is listed and regularly traded on one or more
recognised stock exchanges as defined in sub-subparagraph l)(i) of
paragraph 1 of Article 3 (General Definitions) or at least 80 per
cent by value of the beneficial interests in the MIT are owned by
residents of Australia, it is treated as entitled to treaty
benefits with respect to all of its income arising in New Zealand.
If neither of these tests is satisfied, the MIT is entitled to
treaty benefits only to the extent to which residents of Australia
are the owners of the beneficial interests in the MIT.
104. For these purposes, unitholders that are residents of Australia for
treaty purposes and are liable to tax in Australia on income
received by a MIT would be regarded as residents of Australia that
are owners of the beneficial interests in the MIT. Thus,
Australian resident individuals and companies that own units in the
MIT that are not held on trust will be treated as owners of the
beneficial interests in the MIT where the income received by them
is allocated to them for tax purposes. This will also be the case
for unitholders in the MIT that are life companies or
superannuation entities to which the MIT income is allocated for
tax purposes, where such entities are liable to tax in Australia on
their worldwide income. Where units in one MIT are held by another
MIT (investor MIT), the investor MIT will be regarded as an
Australian resident that is the owner of the beneficial interests
in the first MIT where the investor MIT satisfies the requirements
of paragraph 7 to be treated as an individual resident in Australia
with respect to all the income it receives.
105. Paragraph 7 of Article 4 (Resident) is not intended to prevent
either country from taxing income derived by its own residents
through a MIT. During negotiations, the delegations noted that:
'It is understood that ... paragraph 7 of Article 4
(Resident) shall not affect the taxation by a Contracting
State of its residents.'
[Article 4, paragraph 7]
Limitation of relief
106. The Convention also provides that where an individual is a
transitional resident of New Zealand and is, for that reason,
exempt from tax in New Zealand on certain income, profits or gains
in New Zealand, then Australia will not be required to provide any
relief specified in the Convention in respect of such income,
profits or gains.
107. 'Transitional resident' is a term under New Zealand law, and is
intended to equate to temporary residence. [Article 4, paragraph
4]
108. This provision only applies to transitional residents of
New Zealand. It is not intended that similar limitations on treaty
benefits apply to temporary residents of Australia.
Article 5 - Permanent Establishment
Role and definition
109. The application of various provisions of the Convention
(principally Article 7 (Business Profits)) is dependent upon
whether a person who is a resident of one country carries on
business through a permanent establishment in the other country,
and if so, whether income derived by that person is attributable
to, or assets of that person are effectively connected with, that
permanent establishment.
110. The definition of the term 'permanent establishment' in this
Article corresponds generally with definitions of the term in
Australia's more recent tax treaties, although the definition in
the Convention also includes a provision dealing specifically with
services. The term also fully encompasses the concept of 'fixed
base', which is used in the existing New Zealand Agreement in a
separate Article dealing with independent personal services. As
such services will now be dealt with under Article 7 (Business
Profits), it is intended that places that constitute a fixed base
for purposes of the existing New Zealand Agreement would come
within the meaning of permanent establishment for the purposes of
the Convention.
Meaning of permanent establishment
111. The primary meaning of permanent establishment is expressed as
being a fixed place of business through which the business of an
enterprise is wholly or partly carried on. To be a permanent
establishment within the primary meaning of that term, the
following requirements must be met:
. there must be a place of business;
. the place of business must be fixed (both in terms of
physical location and in terms of time); and
. the business of the enterprise must be carried on through
this fixed place.
[Article 5, paragraph 1]
112. Other paragraphs of this Article elaborate on the meaning of the
term by giving examples (by no means intended to be exhaustive) of
what may constitute a permanent establishment - for example:
. an office;
. a factory;
. a place of extraction of natural resources; or
. an agricultural, pastoral or forestry property.
113. As paragraph 2 of this Article is subordinate to paragraph 1, the
examples listed will only constitute a permanent establishment if
the primary definition in paragraph 1 is satisfied. [Article 5,
paragraph 2]
Building site or construction or installation project
114. A building site or construction or installation project constitutes
a permanent establishment only if it lasts more than six months.
In the course of negotiations, the two delegations noted:
'The delegations agreed that a permanent establishment will
exist where building sites or projects last for more than
six months regardless of whether or not the paragraph 1 test
has been satisfied. Sites or projects that last for less
than six months can never constitute a permanent
establishment.'
115. The phrase 'building site or a construction, installation or
assembly project' includes not only places used for the
construction of buildings but also for the construction of roads,
bridges or canals, the renovation (involving more than mere
maintenance or redecoration) of buildings, roads, bridges or
canals, the laying of pipelines and excavating and dredging.
Planning and supervision are considered part of the building site
if carried out by the construction contractor. However, planning
and supervision carried out by another unassociated enterprise will
not be taken into account in determining whether the construction
contractor has a permanent establishment in Australia. [Article 5,
paragraph 3]
Agricultural, pastoral or forestry property
116. Most of Australia's tax treaties include as a permanent
establishment an agricultural, pastoral or forestry property. This
reflects Australia's usual practice of providing for taxation of
profits from the exploitation of Australian land for the purposes
of primary production under Article 7 (Business Profits).
117. However, under the Convention, profits from agriculture, forestry
or fishing are dealt with under Article 6 (Income from Real
Property). This is reflected in the phrase 'including profits of
an enterprise from agriculture, forestry or fishing' in paragraph 1
of that Article.
118. Nevertheless, a fixed place of business that is used for primary
production purposes, such as a farm or forestry property, will
constitute a permanent establishment. This has significance for
Articles where the concept of permanent establishment is relevant,
for example, in determining the right of a country to tax income
(that is, income from employment under Article 14) or the country
in which income arises (for example, interest).
Deemed permanent establishment
Performance of services
119. Where an enterprise performs services through an individual who is
present in a country for a period exceeding 183 days in any 12-
month period, and more than 50 per cent of the gross revenues
attributable to active business activities of the enterprise during
this period are derived from those services, it will be deemed to
have in that country a permanent establishment through which those
activities are performed (unless the activities are of a type
described in paragraph 7 of this Article and are of a preparatory
or auxiliary nature). This provision will generally apply in the
case of self-employed persons or other small business enterprises
where the profits of the business are mainly derived from the
activities of one person. [Article 5, sub-subparagraph 4a)(i)]
120. Services are also deemed to be carried on through a permanent
establishment in a country where an enterprise performs services in
that country for a period exceeding 183 days in any 12-month
period, and those services are performed for the same project or
for connected projects through one or more individuals who are
present and performing such services in that country (unless the
activities are of a type described in paragraph 7 of this Article
and are of a preparatory or auxiliary nature). [Article 5, sub-
subparagraph 4a)(ii)]
121. For these purposes, an enterprise performs services mainly through
the activities of the entrepreneur or persons who are in a paid
employment relationship with the enterprise (personnel). These
personnel include employees and other persons receiving
instructions from the enterprise (for example, dependent agents).
122. Paragraph 5 of the Article provides further rules in respect of
services performed for the same project or connected projects
(those described in paragraph 2.111). Services performed by an
individual on behalf of one enterprise shall not be considered to
be performed by another enterprise through that individual unless
that other enterprise supervises, directs or controls the manner in
which these services are performed by the individual.
1.
Esky Co, an Australian resident, offers technical support
and advice to its clients over the telephone. It has
outsourced this function to Chilly Bin Co, a New Zealand
resident. Chilly Bin Co operates a call centre which
provides similar support for a number of companies as well
as Esky Co. For a period of twelve months, the employees of
Chilly Bin Co provide technical support to various clients
of Esky Co.
Since the employees of Chilly Bin Co are not under the
supervision, direction or control of Esky Co, Esky Co is not
considered to be performing services in New Zealand through
those employees for the purposes of sub-subparagraph a)(ii)
of paragraph 4 of Article 5.
123. Further, in calculating whether the 183 day period has been
exceeded for the purposes of sub-subparagraph a)(ii) of paragraph 4
of Article 5, paragraph 5 excludes services performed through an
individual who is present and performing such services in a country
for any period not more than five days. However, they will not be
so excluded if those services are performed by that individual on a
regular or frequent basis.
1.
Sushi Co, an Australian resident, provides training services
to apprentice sushi chefs. Itto, an employee of Sushi Co,
travels to New Zealand and remains there training
New Zealand apprentices for 180 days. Due to an unexpected
number of apprentices signing up for training, Bruce,
another employee of Sushi Co, travels to New Zealand and
spends four days assisting Itto. This is the only trip to
New Zealand that Bruce makes.
As Bruce is present and performing services for less than
five days, his four days in New Zealand are disregarded when
determining whether Sushi Co has a permanent establishment
in New Zealand.
However, if Bruce were to return to New Zealand for such
purposes once a month, the days that he is present and
performing the services would be counted in determining
whether Sushi Co has a permanent establishment in New
Zealand, notwithstanding that each visit may be for less
than five days.
[Article 5, paragraph 5]
Natural resource activities
124. Where an enterprise carries on activities (including the operation
of substantial equipment) in the exploration for, or exploitation
of, natural resources or standing timber within a country for a
period exceeding 90 days in any 12-month period, it will be deemed
to have in that country a permanent establishment through which
those activities are performed (unless the activities are of a type
described in paragraph 7 of this Article and are of a preparatory
or auxiliary nature). Any time during which the substantial
equipment was used for such purposes in that country is also
counted for the purpose of computing the number of days in this
paragraph. [Article 5, subparagraph 4b)]
Substantial equipment
125. If an enterprise operates substantial equipment in a country for
one or more periods which exceed, in the aggregate, 183 days in any
12-month period, the activity will be deemed to be performed
through a permanent establishment (unless the activities are of a
type described in paragraph 7 of this Article and are of a
preparatory or auxiliary nature). Any time during that 12-month
period when the substantial equipment is used in the exploitation
of or exploration for natural resources or standing timber in that
country is also counted for the purpose of computing the number of
days in this paragraph. [Article 5, subparagraph 4c)]
126. Subparagraphs b) and c) of paragraph 4 together reflect Australia's
reservation to the OECD Model concerning the use of substantial
equipment. Australia's experience is that the permanent
establishment provision in the OECD Model may be inadequate to deal
with high value mobile activities involving the use of such
equipment.
127. The words 'operation' and 'operates' have been included to clarify
that only active use of substantial equipment assets will be
captured by subparagraphs b) and c) of paragraph 4. This means
that an enterprise that merely leases substantial equipment to
another person for that other person's own use in a country, would
not be deemed to have a permanent establishment in that country
under these provisions.
128. For example, if a New Zealand enterprise itself operates a mobile
crane at an Australian port for more than 183 days in a 12-
month period, the New Zealand enterprise would be deemed to have a
permanent establishment in Australia under subparagraph c) of
paragraph 4. If, however, that New Zealand enterprise merely
leases the mobile crane to another person and that other person
operates the crane at an Australian port for its own purposes, the
New Zealand enterprise would not be deemed to have a permanent
establishment in Australia under subparagraph c) of paragraph 4.
However, if that other person operates the substantial equipment
for or on behalf of the enterprise, the enterprise would be
considered to operate the equipment in the country.
129. The meaning of the term 'substantial' depends on the relevant facts
and circumstances of each individual case. Factors such as the
size, quantity or value of the equipment, or the role of the
equipment in income producing activities, are relevant in
determining whether the equipment is substantial. However, some
examples of substantial equipment would include:
. industrial earthmoving equipment or construction equipment
used in road building, dam building or powerhouse
construction;
. manufacturing or processing equipment used in a factory;
or
. oil or drilling rigs, platforms and other structures used
in the petroleum, gas or mining industry.
Anti-avoidance provision
130. Given that Article 5 of the Convention contains certain timeframes,
an anti-avoidance rule is included to ensure that where associated
enterprises carry on connected activities, the periods will be
aggregated in determining whether an enterprise has a permanent
establishment in the country in which the activities are being
carried on. Activities will be regarded as connected where, for
example, different stages of a single project are carried out by
different subsidiaries within a group of companies or where the
nature of the work carried on by the associated enterprises in
respect of such project is the same.
131. This provision is an anti-avoidance measure aimed at counteracting
contract splitting for the purposes of avoiding the application of
the permanent establishment rules.
132. The OECD Model Commentary recognises that time thresholds in
Article 5 may give rise to abuses and notes that countries
concerned with this issue may adopt solutions in bilateral
negotiations to prevent such abuse.
133. The Convention provides that an enterprise shall be deemed to be
associated with another enterprise if one enterprise participates
directly or indirectly in the management, control or capital of the
other enterprise or the same persons participate directly or
indirectly in the management, control or capital of the
enterprises. It also provides that a period of concurrent
activities by such associated enterprises is only counted as one
period for aggregation purposes. [Article 5, paragraph 5]
1.
[pic]
In the above diagram, each of the subsidiaries may conduct
similar connected activities, for example, supervisory
activities at a single building site. In determining
whether the six-month time threshold has been met, the time
spent undertaking those activities by each of the
enterprises would be aggregated. However, any period during
which more than one of the subsidiaries were carrying on
activities concurrently would be counted only once. Where
the time threshold is met, each of the subsidiaries would be
deemed to have a permanent establishment through which its
activities with respect to the project are conducted. Only
the profits derived by each subsidiary from its own
activities would be attributed to each company's permanent
establishment.
Preparatory and auxiliary activities
134. Certain activities do not generally give rise to a permanent
establishment (for example, the use of facilities solely for
storage, display or delivery).
135. These activities are ordinarily of a preparatory or auxiliary
character and are unlikely to give rise to substantial profits.
The necessary economic link between the activities of the
enterprise and the country in which the activities are carried on
does not exist in these circumstances.
136. Unlike the OECD Model, which provides that the listed activities
are deemed not to constitute a permanent establishment, the
Convention provides that the activities will be deemed not to
constitute a permanent establishment only if the activities are, in
relation to the enterprise, of a preparatory or auxiliary
character. This is to prevent the situation where enterprises
structure their business so that most of their activities fall
within the exceptions with a view to avoiding taxation in that
country. It also means that where the listed activities are not
preparatory or auxiliary in relation to the enterprise, but instead
constitute core business activities of the enterprise, the
enterprise will not be excluded from having a permanent
establishment if it satisfies the primary meaning in paragraph 1.
[Article 5, paragraph 7]
Dependent agents
137. An enterprise of one country is deemed to have a permanent
establishment in the other country if a person acts on its behalf
in that other country where that person has and habitually
exercises an authority to conclude contracts on behalf of the
enterprise. Such people are referred to as dependent agents.
138. However, activities of a dependent agent will not give rise to a
permanent establishment where that agent's activities are limited
to the preparatory and auxiliary activities mentioned in paragraph
7. Agents of independent status (such as brokers or commission
agents) to whom paragraph 9 of Article 5 applies are also excluded.
[Article 5, paragraph 8]
Manufacturing or processing on behalf of others
139. Consistent with Australia's reservation to the OECD Model, where a
person acts on behalf of another in manufacturing or processing the
other's goods, this will give rise to a deemed permanent
establishment. An example is the situation where a mineral plant
refines minerals for a foreign enterprise at cost, so that the
plant operations produce no Australian profits. Title to the
refined product remains with the mining consortium and profits on
sale are realised mainly outside of Australia.
140. The refining activities performed for the enterprise through such a
plant are deemed to be carried on through a permanent establishment
of the enterprise because the manufacturing or processing activity
(which gives the processed minerals much of their value) is
conducted in Australia on behalf of the enterprise. Accordingly,
Australia should have taxing rights over the business profits
attributable to the processing activity carried on in Australia.
Subparagraph b) of paragraph 8 prevents an enterprise which carries
on substantial manufacturing or processing activities in a country
through an intermediary from escaping tax in that country.
141. The inclusion of this subparagraph is insisted upon by Australia in
its tax treaties and is consistent with Australia's policy of
retaining taxing rights over profits from manufacturing or
processing on behalf of others including, importantly, in the
exploitation of Australia's mineral resources. [Article 5,
subparagraph 8b)]
Independent agents
142. Business carried on through an independent agent will not, of
itself, give rise to a permanent establishment, provided that the
independent agent is acting in the ordinary course of that agent's
business as such an agent. [Article 5, paragraph 9]
Subsidiary companies
143. Generally, a subsidiary company will not be a permanent
establishment of its parent company. A subsidiary, being a
separate legal entity, would not usually be carrying on the
business of the parent company but rather its own business
activities. However, a subsidiary company gives rise to a
permanent establishment if the subsidiary permits the parent
company to operate from its premises such that the tests in
paragraph 1 of Article 5 are met, or the subsidiary acts as an
agent such that a dependent agent permanent establishment is
constituted. [Article 5, paragraph 10]
Other Articles
144. The principles set out in this Article are also to be applied in
determining whether a permanent establishment exists in a third
country or whether an enterprise of a third country has a permanent
establishment in Australia (or New Zealand) when applying the
source rule contained in:
. paragraph 7 of Article 11 (Interest); and
. paragraph 5 of Article 12 (Royalties).
[Article 5, paragraph 11]
Article 6 - Income from Real Property
Where income from real property is taxable
145. This Article provides that the income of a resident of one country,
from real property situated in the other country, may be taxed by
that other country. Thus, income from real property in Australia
will be subject to Australian tax laws.
146. Generally, Australia's tax treaties exclude profits of an
enterprise from agriculture, forestry or fishing from the operation
of this Article. Such profits are generally dealt with under
Article 7 (Business Profits) of Australian treaties. However,
under the Convention, the allocation of taxing rights over such
profits is determined by Article 6 (Income from Real Property).
Accordingly, profits from the relevant activities may be taxed in
Australia where the real property is situated in Australia,
irrespective of whether the enterprise has a permanent
establishment in Australia. [Article 6, paragraph 1]
147. In the case of agriculture and forestry activities, an enterprise
would in any event generally have a permanent establishment in the
country in which the property is situated. Inclusion of profits
from fishing within the scope of this Article reflects New
Zealand's reservation to Article 6 of the OECD Model.
Definition
148. Real property is primarily defined as having the meaning which it
has under the domestic law of the country where the property is
situated and also extends to:
. any natural resources, property accessory to real
property, rights to which the general law respecting real
property applies, and rights to standing timber;
. a lease of land and any other interest in or over land
(including exploration and exploitations rights over
natural resources); and
. royalties and other payments relating to the exploration
for or exploitation of natural resources.
Ships, boats and aircraft are excluded from the definition of 'real
property', therefore this Article does not cover income from their
use. [Article 6, paragraph 2]
149. The term 'natural resources' used in the definition of 'real
property' is defined in paragraph 2 of Article 3 (General
Definitions). The inclusion of rights to standing timber in the
definition reflects New Zealand's strong policy preference. The
outcome of including this reference in the definition is broadly
consistent with the existing treaty, which deems an enterprise to
have a permanent establishment where it performs any operations for
the felling, removal or other exploitation of standing timber.
Deemed situs
150. Under Australian law the place where an interest in land, natural
resources or standing timber, such as a lease, is situated (situs)
is not necessarily where the underlying property is situated.
Paragraph 3 puts the situation of the interest or right beyond
doubt by deeming the situs to be where the underlying real property
over which the lease or right is granted, is situated or where any
exploration may take place. [Article 6, paragraph 3]
Form of exploitation of real property
151. Paragraph 4 makes it clear that the general rule in paragraph 1
applies irrespective of the form of exploitation of the real
property. The Article applies to income derived from the direct
use, letting or use in any other form of real property. [Article
6, paragraph 4]
Real property of an enterprise
152. Paragraphs 1, 3 and 4 of Article 6 are extended to income derived
from the use or exploitation of real property of an enterprise.
153. Accordingly, this Article provides that the country in which the
real property is situated may impose tax on the income derived from
that property by an enterprise of the other country, irrespective
of whether or not that income is attributable to a permanent
establishment of such an enterprise situated in the first-mentioned
country.
154. However, paragraph 5 of this Article specifically provides that the
profits of the enterprise shall be determined in accordance with
the rules in paragraphs 2 and 3 of Article 7 (Business Profits) and
taxed as if they were attributable to a permanent establishment.
This clarifies that, notwithstanding that the profits are dealt
with under Article 6, and not Article 7 as is usually the case
under Australian treaties, such profits will be taxed on a net
basis. [Article 6, paragraph 5]
Article 7 - Business Profits
155. This Article is concerned with the taxation by one country of
business profits derived by an enterprise that is a resident of the
other country.
156. The taxing of these profits depends on whether they are
attributable to the carrying on of a business through a permanent
establishment in that country. If a resident of one country
carries on business through a permanent establishment (as defined
in Article 5 (Permanent Establishment)) in the other country, the
country in which the permanent establishment is situated may tax
the profits of the enterprise that are attributable to that
permanent establishment. [Article 7, paragraph 1]
157. If an enterprise which is a resident of one country derives
business profits in the other country that are not attributable to
a permanent establishment in that other country, the general
principle of this Article is that the enterprise will not be liable
to tax in the other country on such profits (except where paragraph
7 of this Article applies - see the explanation in paragraphs 2.156
and 2.157).
Determination of business profits
158. Profits of a permanent establishment are to be determined for the
purposes of this Article on the basis of arm's length dealings.
The provisions in the Convention correspond to international
practice and comparable provisions in Australia's other tax
treaties. [Article 7, paragraphs 2 and 3]
159. No deductions are allowed in respect of expenses which would not be
deductible if the permanent establishment were an independent
enterprise which incurred the expense. [Article 7, paragraph 3]
Application of domestic law
160. The domestic law of the country in which the permanent
establishment is situated (for example, Australia's Division 13 of
Part III of the ITAA 1936) may be applied to determine the tax
liability of a person, consistently with the principles stated in
this Article. This is of particular relevance where, due to
inadequate information, the correct amount of profits attributable
on the arm's length principle basis to a permanent establishment
cannot be determined, or can only be ascertained with extreme
difficulty. This is especially important where there is no data
available or the available data is not of sufficient quality to
rely on the traditional transaction methods for the attribution of
the arm's length profits.
161. Paragraph 4 explicitly recognises the right of each country to
apply its domestic law in these circumstances. This is consistent
with Australia's reservation to Article 7 (Business Profits) of the
OECD Model. [Article 7, paragraph 4]
Profits dealt with under other Articles
162. Where income or gains are specifically dealt with under other
Articles of the Convention, the effect of those particular Articles
is not overridden by this Article.
163. This provision lays down the general rule of interpretation that
categories of income or gains which are the subject of other
Articles of the Convention (for example, Article 8 (Shipping and
Air Transport), Article 10 (Dividends), Article 11 (Interest),
Article 12 (Royalties) and Article 13 (Alienation of Property)) are
to be treated in accordance with the terms of those Articles.
However, under certain articles, for example paragraph 7 of Article
10 (Dividends), where the asset in respect of which the income is
paid is effectively connected with a permanent establishment that
income will be dealt with under Article 7 (Business Profits).
[Article 7, paragraph 5]
Insurance with non-residents
164. Each country has the right to continue to apply any provisions in
its domestic law relating to the taxation of income from insurance
with non-resident insurers. An effect of this paragraph is to
preserve, in the case of Australia, the application of Division 15
of Part III of the ITAA 1936 (Insurance with Non-residents). This
is consistent with Australia's reservation to Article 7 (Business
Profits) of the OECD Model. In the course of negotiations, the two
delegations noted:
'With respect to taxation of income from insurance, it is
understood that the term 'insurance' includes reinsurance.'
[Article 7, paragraph 6]
Trust beneficiaries
165. The principles of this Article will apply to profits which are
derived by a resident of one of the countries (directly or through
one or more interposed trusts) as a beneficiary of a trust, except
where the trust is treated as a company for tax purposes. [Article
7, paragraph 7]
166. In accordance with this Article, Australia has the right to tax a
share of business profits, originally derived by a trustee of a
trust estate (other than a trust that is treated as a company for
tax purposes) from the carrying on of a business through a
permanent establishment in Australia, to which a resident of
New Zealand is beneficially entitled under the trust. Paragraph 7
of this Article ensures that such business profits will be subject
to tax in Australia where the trustee of the relevant trust has, or
would have if it were a resident of New Zealand, a permanent
establishment in Australia in relation to that business. The
principles of this paragraph will also apply where relevant to
other Articles of the Convention, such as Article 13 (Alienation of
Property) in its application to income, profits or gains arising
from the alienation of the assets of a permanent establishment or
the permanent establishment itself.
Time limitation
167. The Convention specifies a time limit for the adjustment of profits
attributable to a permanent establishment of the enterprise. A
country may not make an adjustment to the profits for a year of
income where a period of seven years has expired from the date on
which the enterprise completed the filing requirements for that
year of income in that country. However, the time limit does not
apply in the case of fraud, gross negligence, wilful default, or
where an audit into the profits of an enterprise was initiated by
that country within the seven-year period. [Article 7, paragraph
8]
168. The Article does not impose a time limit on conclusion of the audit
into the profits of the enterprise.
Article 8 - Shipping and Air Transport
Profits from international traffic
169. The main effect of this Article is that the right to tax profits
from the operation of ships or aircraft in international traffic,
including a share of profits attributable to participation in a
pool service or other profit sharing arrangement, is generally
reserved to the country in which the operator is a resident for tax
purposes. [Article 8, paragraphs 1 and 3]
170. The profits covered consist in the first place of the profits
directly obtained by the enterprise from the transportation of
passengers or cargo by ships or aircraft (whether owned, leased or
otherwise at the disposal of the enterprise) that it operates in
international traffic. However, as international transport has
evolved, shipping and air transport enterprises invariably carry on
a large variety of activities to facilitate or support their
international operations. Consistent with the OECD Model
Commentary on Article 8 (Shipping, Inland Waterways Transport and
Air Transport), paragraph 1 also covers profits from activities
directly connected with such operations as well as profits from
activities which are not directly connected with the operation of
the enterprise's ships or aircraft in international traffic but
which are ancillary to such operation. An example of such
ancillary profits would be profits derived by a ship operator in
the business of transport who undertakes a one-off bareboat lease
of one of their ships.
171. Transport activities will also include profits from the use,
maintenance and rental of containers (including trailers and
related equipment) used in the transport of goods, where directly
connected or ancillary to the operation of ships or aircraft in
international traffic. [Article 8, paragraph 4]
172. The definition of 'international traffic' refers only to transport
and accordingly limits the scope of paragraph 1 of Article 8 to
transport activities. Profits from the operation of ships or
aircraft for non-transport activities are treated under Article 7
(Business Profits) of the Convention in the same way as profits
derived from the use of other types of substantial equipment, such
as mining equipment and trucks. [Article 3, subparagraph 1h)]
Profits from internal traffic
173. Under the existing New Zealand Agreement, profits of an enterprise
of one country from the operation of ships and aircraft could, to
the extent that they related to operations that were confined
solely to places in the other country, be taxed in the other
country. This included all operations of ships and aircraft,
including non-transport activities such as dredging, surveying and
crop dusting.
174. In contrast, this Article confines the source taxing rights to
profits arising from transport activities of ships or aircraft in
that country, including where passengers or cargo are transported
between places in that country by a ship or aircraft that is
engaged in an international voyage or that is leased on a full
basis for purposes of providing the domestic transport. In the
course of negotiations, the two delegations noted:
'It is understood that the term 'leasing on a full basis'
means that the leased ship or aircraft is provided to the
lessee on a fully equipped, crewed and supplied basis.'
[Article 8, paragraph 2]
175. There is no specified limit on the amount of tax that can be
charged on profits from the operation of ships and aircraft in
internal traffic. However, for Australian tax purposes, Division
12 of Part III of the ITAA 1936, deems 5 per cent of the amount
paid in respect of the transport of passengers, livestock, mail or
goods shipped in Australia to be the taxable income of a ship
operator who has their principal place of business outside of
Australia.
1.
A ship operated by a New Zealand enterprise, in the course
of an international voyage from Wellington to Melbourne,
makes a stop in Hobart to pick up cargo. Profits derived
from the transport of the goods loaded in Hobart and
discharged in Melbourne would be profits from the carriage
of goods shipped in and discharged at a place in Australia
under paragraph 2 of Article 8. Australia would therefore
have the right to tax the profits relating to such
transport. Five per cent of the amount paid in respect of
the transport of those goods would be deemed to be taxable
income of the operator for Australian tax purposes pursuant
to Division 12 of Part III of the ITAA 1936.
2.
A New Zealand enterprise operates sightseeing flights over
the Southern Ocean. Passengers board the aircraft in Hobart
and disembark at the same airport later on the same day.
The profits from the carriage of the passengers shipped in
and discharged at a place in Australia would be covered by
paragraph 2 of Article 8, notwithstanding that the aircraft
passes through international airspace. Australia would
therefore have the right to tax the profits relating to the
carriage of these passengers.
Article 9 - Associated Enterprises
Reallocation of profits
176. This Article deals with associated enterprises (such as parent and
subsidiary companies and companies under common control). It
authorises the reallocation of profits between related enterprises
in Australia and New Zealand on an arm's length basis where the
commercial or financial arrangements between the enterprises differ
from those that might be expected to operate between unrelated
enterprises dealing wholly independently with one another.
177. This Article would not generally authorise the rewriting of
accounts of associated enterprises where it can be satisfactorily
demonstrated that the transactions between such enterprises have
taken place on normal, open market commercial terms. The term
'might be expected to operate' in paragraph 1 is included to
conform to Australia's treaty practice and allows adjustments where
it is not possible to determine the conditions that 'would have
been made or occurred' between the associated enterprises.
178. The broad scheme of the Australia's domestic law provisions
relating to international profit shifting arrangements under which
profits are shifted out of Australia, whether by transfer pricing
or other means, is to impose arm's length standards in relation to
international dealings. Where the Commissioner cannot ascertain
the arm's length consideration, it is deemed to be such an amount
as the Commissioner determines.
179. Each country has the right to apply its domestic law relating to
the determination of the tax liability of a person (for example,
Australia's Division 13 of Part III of the ITAA 1936) to
enterprises, including in cases where the available information is
inadequate, provided that such provisions are applied, so far as it
is practicable to do so, consistently with the principles of the
Article. This is of particular relevance where there is no data
available or the available data is not of sufficient quality to
rely on the traditional transaction methods for the attribution of
arm's length profits. This reflects Australia's reservation to
Article 9 (Associated Enterprises) of the OECD Model. [Article 9,
paragraph 2]
Correlative adjustments
180. Where a reallocation of profits is made (either under this Article
or, by virtue of paragraph 2, under domestic law) so that the
profits of an enterprise of one country are adjusted upwards,
economic double taxation (that is, taxation of the same income in
the hands of different persons) would arise if the profits so
reallocated continued to be subject to tax in the hands of an
associated enterprise in the other country. To avoid this result,
the other country is required to make an appropriate compensatory
adjustment to the amount of tax charged on the profits involved to
relieve any such double taxation.
181. It would generally be necessary for the affected enterprise to
apply to the competent authority of the country not initiating the
reallocation of profits for an appropriate compensatory adjustment
to reflect the reallocation of profits made by the other treaty
partner country. If necessary, the competent authorities of
Australia and New Zealand will consult with each other to determine
the appropriate adjustment. [Article 9, paragraph 3]
Time limitation
182. The treaty specifies a time limit for the adjustment of the profits
of the enterprise under paragraph 1 or 2 of this Article. A
country may not make an adjustment of the profits for a year of
income where a period of seven years has expired from the date on
which the enterprise completed the filing requirements for that
year of income in that country. However, the time limit does not
apply in the case of fraud, gross negligence, wilful default, or
where an audit into the profits of an enterprise was initiated by
that country within the seven-year period. [Article 9, paragraph
4]
183. The Article does not impose a time limit on conclusion of the audit
into the profits of the enterprise.
Article 10 - Dividends
184. This Article allocates taxing rights in respect of dividends
flowing between Australia and New Zealand. The Article provides
that:
. certain cross-border intercorporate dividends will be
either exempt from source taxation or subject to a maximum
5 per cent rate of tax in that country;
. a maximum 15 per cent rate of source country tax may be
applied on all other dividends;
. dividends beneficially owned by a State, or political
subdivision or a local authority will be exempt from
source taxation where they hold directly no more than
10 per cent of the voting power of the company paying the
dividends;
. dividends paid in respect of a holding which is
effectively connected with a permanent establishment are
to be dealt with under Article 7 (Business Profits); and
. the extra-territorial application by either country of
taxing rights over dividend income is not permitted.
185. However, no such relief is available in cases that have been
designed with a main purpose of taking advantage of this Article.
Permissible rate of source country taxation
Exemption for certain cross-border intercorporate dividends
186. No tax will be payable in the source country on dividends paid to a
company that is the beneficial owner of those dividends and is
resident in the other country where:
. the recipient company holds, directly or indirectly,
80 per cent or more of the voting power of the company
paying the dividends; and
. satisfies a 12-month holding requirement at the time of
the declaration of the dividend in relation to the shares
in respect of which the dividend is payable.
[Article 10, paragraph 3]
187. To qualify for the exemption, the company that is the beneficial
owner of the dividends must either be:
. a company that has its principal class of shares;
- listed on specified Australian or New Zealand stock
exchanges; and
- regularly traded on one or more recognised stock
exchanges (as defined under Article 3 (General
Definitions) of the Convention);
. a company that is owned either directly or indirectly by
one or more such companies;
. a company that is owned either directly or indirectly by
one or more third country resident companies that would be
entitled to equivalent benefits; or
. granted benefits with respect to those dividends by
agreement of the competent authorities under subparagraph
c) of paragraph 3 of the Article.
[Article 10, paragraph 3]
188. For the purposes of the above tests, a recognised stock exchange
includes:
. in Australia's case, the Australian Securities Exchange or
any other Australian stock exchange recognised under
Australian domestic law; and
. in New Zealand's case, the securities markets (other than
the New Zealand Debt Market) operated by the New Zealand
Exchange Limited.
189. Provision has been made to allow the competent authorities to reach
agreement that other stock exchanges constitute a recognised stock
exchange for the purpose of the Convention. [Article 3, sub-
subparagraph 1l)(iii)]
Equivalent benefits
190. Under subparagraph b) of paragraph 3 of this Article, an exemption
applies to dividends:
. paid by a company in a country (the paying company) to a
company in the other country (the receiving company); and
. where the receiving company is itself wholly-owned by one
or more companies (the owning companies) that are either
themselves listed on a recognised stock exchange or would
be entitled to equivalent benefits under another treaty
between country of which the receiving company is a
resident and the country of which the paying company is a
resident had the owning companies owned the holding in the
paying company directly.
191. The exemption would apply to dividends paid by an Australian
company to a New Zealand company that is itself owned by one or
more companies entitled to equivalent benefits under another tax
treaty between the country of which that company (or those
companies) were a resident and Australia. Similarly, dividends
paid by a New Zealand company to an Australian company that is
itself owned by one or more companies entitled to equivalent
benefits under another tax treaty between the country of which that
company (or those companies) were a resident and New Zealand, would
also be exempt.
1.
Milford Co is an unlisted New Zealand company which owns all
the shares in Dubbo Co, an Australian company, and has done
so for more than 12 months. Assume Milford Co is the
beneficial owner of the dividends paid by Dubbo Co.
Kent Co, a company resident in the United Kingdom, is listed
on a stock exchange that is a 'recognised stock exchange'
within the meaning of Article 3 of the 2003 Australia-United
Kingdom Convention, and wholly owns Milford Co.
If Kent Co had owned the shares held by Milford in Dubbo Co
directly, then an exemption would apply to the dividends
paid on those shares under subparagraph a) of paragraph 3 of
Article 10 of the 2003 Australia-United Kingdom Convention.
In such case Kent Co is considered to be entitled to
equivalent benefits to those provided under paragraph 3.
Accordingly, the Australian dividend paid to Milford Co will
be exempt under sub-subparagraph b)(ii) of paragraph 3.
2.
Assume Milford Co is now owned by a second New Zealand
resident company, Winton Co, and a Japan resident company,
Osaka Co. Winton Co is listed on a stock exchange that is a
'recognised stock exchange' within the meaning of Article 3
of the Convention. Osaka Co is listed on a stock exchange
that is a 'recognised stock exchange' within the meaning of
Article 23 of the 2008 Australia-Japan Convention. Each
company owns 50 per cent of the shares in Milford Co.
Milford Co owns all the shares in Dubbo Co, an Australian
company, and has done so for more than 12 months. Assume
Milford Co is the beneficial owner of the dividends paid by
Dubbo Co.
If Winton Co had owned the shares held by Milford Co
directly, then an exemption would apply to the dividends
paid on those shares under subparagraph a) of paragraph 3 of
Article 10 of the Convention. If Osaka Co had owned the
shares held by Milford Co directly, then an exemption would
apply to the dividends paid on those shares
under subparagraph a) of paragraph 3 of Article 10 of the
2008 Australia-Japan Convention.
In both cases, Winton Co and Osaka Co are considered to be
entitled to equivalent benefits to those provided under
paragraph 3. Accordingly, the Australian dividend paid to
Milford Co will be exempt under sub-subparagraph b)(ii) of
paragraph 3.
3.
Rotorua Co is an unlisted New Zealand company which owns all
the shares in Broome Co, an Australian company, and has done
so for more than 12 months. Assume Rotorua Co is the
beneficial owner of dividends paid by Broome Co.
Rotorua Co is owned by a second New Zealand resident
company, Taupo Co, and Oculum Co, a company that is a
resident of a treaty partner country. Taupo Co and Oculum
Co each own 50 per cent of the shares in Rotorua Co.
Taupo Co is listed on a stock exchange that is a 'recognised
stock exchange' within the meaning of Article 3 of the
Convention. If Taupo Co had owned the shares held by
Rotorua Co directly, then an exemption would apply to the
dividends paid on those shares under subparagraph a) of
paragraph 3 of Article 10 of the Convention.
Under the tax treaty between Australia and Oculum Co's
country of residence, a withholding tax rate of 15 per cent
applies for all dividends. If Oculum Co had owned the
shares held by Rotorua Co directly, the dividends would have
been subject to dividend withholding tax of 15 per cent.
The requirements of sub-subparagraph b)(ii) of paragraph 3
are not met because one of the companies owning Rotorua Co
(that is, Oculum Co) is not entitled to equivalent benefits.
Accordingly, that provision will not apply to exempt the
Australian dividends paid to Rotorua Co from dividend
withholding tax.
Competent authority determination
192. Dividends which are beneficially owned by a company that does not
meet the conditions in subparagraph a) or b) of paragraph 3 of the
Article will also be exempt from tax in the source country if the
competent authority determines that the receiving company was
established, acquired or maintained for reasons other than
obtaining benefits under the Convention. Before concluding that
the company is not entitled to benefits under this subparagraph
(for example, because the arrangements had a principal purpose of
obtaining such benefits), the competent authority is required to
consult with the competent authority of that company's country of
residence. [Article 10, subparagraph 3c)]
Exemption for dividends derived by Governments
193. Dividends which are beneficially owned by a State, or political
subdivision or a local authority (including a government investment
fund) will be exempt from tax in the source country if they hold no
more than 10 per cent of the voting power in the company paying the
dividends. This exemption complements that provided in respect of
interest derived by States, their political subdivisions and local
authorities (including government investment funds) under Article
11 (Interest). In the course of negotiations, the two delegations
agreed:
'...that dividends and interest will be regarded as being
derived by a Contracting State, political subdivision, local
authority or government investment fund where the investment
is made by the Government and the funds are and remain
government monies.
The delegations also agreed that this would include
dividends and interest paid to, in the case of New Zealand,
the New Zealand Superannuation Fund, the Government
Superannuation Fund, and in the case of Australia, the
Future Fund, the Building Australia Fund, the Education Fund
and the Health and Hospital Fund, as well as any similar
fund the purpose of which is to pre-fund future government
liabilities.'
[Article 10, paragraph 4]
Five per cent rate limit on source country tax of certain cross-
border intercorporate dividends
194. This Article allows both Australia and New Zealand to tax other
dividends flowing between them but limits the rate of tax that the
country of source may impose on dividends paid by companies that
are resident of that country under its domestic law to companies
resident in the other country who are the beneficial owners of the
dividends. [Article 10, paragraphs 1 and 2]
195. A rate limit of 5 per cent will apply for dividends paid in respect
of company shareholdings that do not qualify for the intercorporate
dividend exemption under paragraph 3 of this Article, but
constitute a direct voting interest of at least 10 per cent.
[Article 10, subparagraph 2a)]
Fifteen per cent rate limit for all other dividends
196. All other cases, the Convention provides that the source country
may tax dividends that are beneficially owned by residents of the
other country, but will limit its tax to 15 per cent of the gross
amount of the dividend. In the case of Australia, this will mean
that the rate of withholding tax imposed on unfranked dividends
will be retained at the level of the existing New Zealand
Agreement; that is, 15 per cent. [Article 10, subparagraph 2b)]
197. Although the provisions in Article 10 would allow Australia to
impose withholding tax on both franked and unfranked dividends in
the specified circumstances, the dividend withholding tax exemption
provided by Australia under its domestic law for franked dividends
paid to non-residents will continue to apply.
Dividends effectively treated as business profits
198. Limitations on the tax of the country in which the dividend is
sourced do not apply to dividends derived by a resident of the
other country who has a permanent establishment in the source
country from which the dividends are derived, if the holding giving
rise to the dividends is effectively connected with that permanent
establishment.
199. Where the holding is so effectively connected, the dividends are to
be treated as business profits and therefore subject to the full
rate of tax applicable in the country in which the dividend is
sourced in accordance with the provisions of Article 7 (Business
Profits).
200. Franked and unfranked dividends paid by an Australian company will
be included in the assessable income of a non-resident company or
individual where the dividends are attributable to a permanent
establishment of that non-resident situated in Australia. Expenses
incurred in deriving the dividend income are allowable as a
deduction from that income when calculating the taxable income of
the non-resident. Further, a non-resident company or individual
may be entitled to tax offsets in respect of any franked dividends
under Australia's domestic law. [Article 10, paragraph 6]
Extra-territorial application precluded
201. The extra-territorial application by either country of taxing
rights over dividend income is precluded. Broadly, one country
(the first country) will not tax dividends paid by a company
resident solely in the other country, unless:
. the person deriving the dividends is a resident of the
first country; or
. the shareholding giving rise to the dividends is
effectively connected with a permanent establishment in
the first country.
1.
[pic]
In the diagram above, paragraph 7 would, but for the
exception, preclude New Zealand from taxing the dividend
paid by Australian resident company 2 to Australian resident
company 1 out of profits derived from New Zealand sources.
However, as the dividends relate to the Australian
shareholder's permanent establishment in New Zealand with
which the holding is effectively connected, New Zealand may
tax the dividends.
Dividends paid by dual resident companies
202. The restrictions of paragraph 7 do not apply when the company is,
for tax purposes, a resident of both Australia and New Zealand
under the respective laws of the two countries. In such cases the
dividends paid by the dual resident company out of profits arising
in one of the countries may be taxed in the country in which those
profits arise in accordance with domestic law of that country.
However, where the dividends are beneficially owned by a resident
of the other country, the limits provided for in paragraphs 2 and 3
apply as if the company were a resident solely of the country in
which the profits out of which the dividends are paid arise.
[Article 10, paragraph 8]
203. This provision does not limit taxation in the country of which the
dual resident company is deemed to be a resident for treaty
purposes in accordance with paragraph 4 of Article 4 (Resident) in
the case of dividends paid by the company out of profits from
sources outside that country. Paragraphs 2 and 3 will apply where
those dividends are beneficially owned by a resident of the other
country.
Definition of dividends
204. The term dividends in this Article means income from:
. shares or other rights which participate in profits and
are not debt-claims; and
. income or other distributions which are subject to the
same taxation treatment as income from shares in the
country of which the distributing company is resident for
the purposes of its tax.
205. The phrase 'for the purposes of its tax', which appears in
paragraph 5 of Article 10, refers to the case where a person is a
resident of a country under its domestic tax law, even if the
person is deemed to be a resident only of the other country for the
purposes of the Convention by virtue of paragraph 2, 3 or 5 of
Article 4 (Resident). [Article 10, paragraph 5]
206. In the case of Australia, the definition is consistent with
subsection 3(2A) of the Agreements Act 1953 which clarifies that a
reference to income from shares, or to income from other rights
participating in profits, does not include a reference to a return
on a debt interest as defined in Subdivision 974-B of the ITAA
1997. In the course of negotiations, the two delegations noted:
'It was also agreed that the treaty definition of dividends
would not limit Australia's ability to apply subsection
3(2A) of the International Tax Agreements Act 1953, thus
ensuring Australia's debt/equity rules continue to apply as
intended.'
Limitation of benefits
207. The source country rate limits and exemptions available under this
Article will not apply where an assignment of dividends, or a
creation or assignment of shares or other rights in respect of
which dividends are paid, has been made with the main objective, or
one of the main objectives, of accessing the relief otherwise
available under this Article. [Article 10, paragraph 9]
Article 11 - Interest
208. This Article allocates taxing rights in respect of interest flows
between Australia and New Zealand. Article 11 provides that:
. an exemption from source country tax applies to certain
cross-border interest flows to:
- government bodies or central banks; and
- financial institutions in certain circumstances;
. a maximum 10 per cent rate of source country tax may be
applied on all other interest income;
. interest paid on a debt-claim which is effectively
connected with a permanent establishment shall be subject
to Article 7 (Business Profits);
. interest payments are deemed to have an Australian source
(and may therefore be taxed in Australia) where:
- the interest is paid by an Australian resident to a
New Zealand resident; or
- the interest is paid by a non-resident to a New Zealand
resident and it is an expense of the payer in carrying
on business in Australia through a permanent
establishment; and
. relief will be restricted to the gross amount of interest
which would be expected to be paid on an arm's length
dealing between independent parties.
209. However, no such relief is available in cases that have been
designed with the main purpose of taking advantage of this Article.
210. The phrase 'for the purposes of its tax', which appears in
paragraph 7 of Article 11, refers to the case where a person is a
resident of a country under its domestic tax law, even if the
person is deemed to be a resident only of the other country for
purposes of the Convention by virtue of paragraph 2, 3 or 4 of
Article 4 (Resident).
Permissible rate of source country taxation
Ten per cent rate limit
211. This Article provides for interest income to be taxed by both
countries but requires the country in which the interest arises to
generally limit its tax to 10 per cent of the gross amount of the
interest where a resident of the other country is the beneficial
owner of the interest. [Article 11, paragraphs 1 and 2]
Exemptions for interest paid to government bodies and central banks
212. The exemption for interest paid to the government of a country will
apply to interest derived by the Australian or New Zealand
governments, or the government of any political subdivision or
local authority (including government investment funds) in either
Australia or New Zealand. As discussed in relation to dividends in
paragraph 2.184, this ensures that interest derived by Australia's
Future Fund (and other Funds) from sources in New Zealand is exempt
from New Zealand tax.
213. The exemption also applies to banks performing central banking
functions in Australia and New Zealand. [Article 11,
subparagraph 3a)]
Exemptions for interest paid to financial institutions
214. The exemption for interest paid to financial institutions
recognises that the agreed 10 per cent rate on gross interest can
be excessive given their cost of funds. The exemption will also
broadly align the treatment of interest paid to New Zealand
financial institutions with the Australian domestic law exemption
for interest paid on widely distributed arm's length corporate
debenture issues (section 128F of the ITAA 1936). [Article 11,
subparagraph 3b)]
215. The term financial institution means a bank or other enterprise
substantially deriving its profits by raising debt finance in the
financial markets or by taking deposits at interest and using those
funds in carrying on the business of providing finance. This does
not include a corporate treasury or a member of a group that
performs the financing services of the group. [Article 11,
subparagraph 3b)]
216. In the case of interest arising in New Zealand, the exemption for
interest paid to financial institutions will not apply if it is
paid to a person who has not paid New Zealand's AIL in respect of
the interest. In such cases, the 10 per cent rate limit will
apply. [Article 11, subparagraph 4a)]
217. Under New Zealand's AIL scheme, eligible borrowers who pay interest
to non-resident lenders may elect to pay the AIL instead of having
to deduct non-resident withholding tax. The AIL is payable at the
rate of 2 per cent of the gross interest. For the purposes of this
Article, the term approved issuer levy includes any identical or
substantially similar charge payable by the payer of the interest
arising in New Zealand enacted after the date of the Convention in
place of the AIL. However, the exemption will apply if:
. New Zealand no longer has an AIL;
. if the payer of the interest is not eligible to elect to
pay the AIL; or
. if the rate of the AIL exceeds 2 per cent of the gross
amount of the interest.
218. This will ensure that Australian financial institutions will be
able to benefit from the exemption in cases where the AIL does not
apply to the interest, or where changes are made to remove the AIL
scheme or increase its rate. [Article 11, subparagraph 4a)]
219. Further, the Convention contains a 'most favoured nation' clause in
respect of interest derived by financial institutions. In the
event New Zealand agrees under a future tax treaty with any other
country to provide more favourable treatment of such interest,
New Zealand is required to inform Australia and enter into
negotiations with a view to providing the same treatment.
220. This 'most favoured nation' clause will ensure that Australian
financial institutions deriving interest income in New Zealand
receive no less favourable treatment than financial institutions
benefiting from lower rates of withholding for interest under one
of New Zealand's other tax treaties. Thus for example, if New
Zealand agreed in a future treaty with another country to grant an
interest withholding tax exemption for financial institutions,
without a requirement that AIL be paid, or agreed to a withholding
tax rate lower than 10 per cent in the event AIL was not paid, New
Zealand would be obliged to negotiate with Australia to provide
similar outcomes for Australian financial institutions. [Article
29, paragraph 2]
221. The exemption is not available for interest paid as part of an
arrangement involving back-to-back loans or other arrangement that
is economically equivalent and structured to have a similar effect.
The denial of the exemption for these back-to-back loan type
arrangements is directed at preventing related party and other debt
from being structured through financial institutions to gain access
to a withholding tax exemption. The exemption will only be denied
for interest paid on the component of a loan that is considered to
be back-to-back. In such cases, the 10 per cent rate limit will
apply. [Article 11, subparagraph 4b)]
222. An example of a back-to-back arrangement would include, for
instance, a transaction or series of transactions structured in
such a way that:
. a New Zealand financial institution receives or is
credited with an item of interest arising in Australia;
and
. the financial institution pays or credits, directly or
indirectly, all or substantially all of that interest (at
any time or in any form, including commensurate benefits)
to another person who, if it received the interest
directly from Australia, would not be entitled to similar
benefits with respect to that interest.
223. However, a back-to-back arrangement would generally not include a
loan guarantee provided by a related party to a New Zealand
financial institution.
Definition of interest
224. The term interest is defined for the purposes of this Article to
include:
. income from debt-claims of every kind;
. interest from government securities;
. interest from bonds and debentures;
. premiums and prizes attaching to such securities, bonds or
debentures; and
. income which is subjected to the same taxation treatment
as income from money lent by the law of the country in
which the income arises.
However, it does not include any income which is treated as a
dividend under Article 10 (Dividends). [Article 11, paragraph 5]
Interest effectively treated as business profits
225. Interest derived by a resident of one country which is paid in
respect of a debt-claim which is effectively connected with a
permanent establishment of that person in the other country, will
form part of the business profits of that permanent establishment
and be subject to the provisions of Article 7 (Business Profits).
Accordingly, the rate limitation of 10 per cent and the exemption
for financial institutions (subparagraph b) of paragraph 3 of this
Article) do not apply to such interest in the country in which the
interest is sourced. [Article 11, paragraph 6]
Deemed source rules
226. The source rules which determine where interest arises for the
purposes of this Article are set out in paragraph 7. They operate
to allow Australia to tax interest paid by a resident of Australia
to a resident of New Zealand who is the beneficial owner of that
interest. Australia may also tax interest paid by a non-resident,
being interest which is beneficially owned by a New Zealand
resident, if it is an expense incurred by the payer of the interest
in carrying on a business in Australia through a permanent
establishment.
227. However, consistent with Australia's interest withholding tax
provisions, an Australian source is not deemed in respect of
interest that is an expense incurred by an Australian resident in
carrying on a business through a permanent establishment outside
both Australia and New Zealand (that is, the permanent
establishment is in a third country). In that case, the interest
is deemed to arise in the country in which the permanent
establishment is situated. [Article 11, paragraph 7]
228. In determining whether a permanent establishment exists in a third
country, the principles set out in Article 5 (Permanent
Establishment) apply. [Article 5, paragraph 11]
Related persons
229. This Article includes a general safeguard against payments of
excessive interest where a special relationship exists between the
persons associated with a loan transaction - by restricting the
amount on which the 10 per cent source country tax rate limitation
applies to an amount of interest which might have been expected to
have been agreed upon if the parties to the loan agreement were
dealing with one another at arm's length. Any excess part of the
interest remains taxable according to the domestic law of each
country but subject to the other Articles of the Convention.
[Article 11, paragraph 8]
230. Examples of cases where a special relationship might exist include
payments to a person (either individual or legal):
. who controls the payer (whether directly or indirectly);
. who is controlled by the payer; or
. who is subordinate to a group having common interests with
the payer.
A special relationship also covers relationships of blood or
marriage and, in general, any community of interests.
Limitation of benefits
231. The source country rate limits and exemptions available under this
Article will not apply where an assignment of the interest, or a
creation or assignment of the debt-claim or other rights in respect
of which the interest is paid, has been made with the main
objective, or one of the main objectives, of accessing the relief
otherwise available under this Article. [Article 11, paragraph 9]
Article 12 - Royalties
232. This Article allocates taxing rights in respect of royalties paid
or credited between Australia and New Zealand. The Article
provides that:
. a maximum 5 per cent rate of source country tax may be
levied on the gross amount of the royalties;
. royalties paid in respect of a right or property which is
effectively connected with a permanent establishment are
subject to Article 7 (Business Profits);
. equipment royalties are not included within the definition
of 'royalties' and are subject to either Article 7
(Business Profits) or Article 8 (Shipping and Air
Transport);
. royalties include payments for spectrum licences;
. royalties are deemed to have an Australian source (and may
therefore be taxed in Australia) where:
- the royalties are paid to a New Zealand resident by a
person who is a resident of Australia for purposes of
Australian tax; or
- the royalties are paid by a non-resident to a New
Zealand resident and are an expense of the payer in
carrying on business through a permanent establishment
in Australia; and
. relief will be restricted to the gross amount of royalties
which would be expected to be paid on an arm's length
dealing between independent parties.
233. However, no such relief is available in cases that have been
designed with a main purpose of taking advantage of this Article.
234. The phrase 'for the purposes of its tax', which appears in
paragraph 7 of Article 12, refers to the case where a person is a
resident of a country under its domestic tax law, even if the
person is deemed to be a resident only of the other country for the
purposes of the Convention by virtue of paragraph 2, 3 or 5 of
Article 4 (Resident).
Permissible rate of source country taxation
235. This Article in general allows both countries to tax royalty flows
but limits the tax of the country of source to 5 per cent of the
gross amount of royalties beneficially owned by residents of the
other country. [Article 12, paragraphs 1 and 2]
236. In the absence of a tax treaty, Australia taxes royalties paid to
non-residents at 30 per cent of the gross royalty.
237. The 5 per cent rate limitation does not apply to natural resource
royalties, which, in accordance with Article 6 (Income from Real
Property), remain taxable in the country of source without
limitation of the tax that may be imposed.
Definition of royalties
238. The definition of royalties in this Article reflects most elements
of the definition in Australia's domestic income tax law.
Royalties include payments for the supply of information concerning
technical, industrial, commercial or scientific experience but not
payments for services rendered, except as provided for in
subparagraph c) of paragraph 3. In the Convention, the definition
adopts the OECD Model approach in referring to 'information
concerning technical, industrial, commercial or scientific
experience', rather than the more usual reference in Australian
treaties to 'knowledge or experience'. However, both expressions
refer to what is commonly known as 'know-how', and no difference in
meaning is intended. In the course of negotiations, the two
delegations noted:
'It is understood that the term 'technical, industrial,
commercial or scientific experience' includes knowledge or
information of such kind.'
[Article 12, paragraph 3]
239. The definition also includes payments for the use of intellectual
property stored on various media and used in connection with
television, radio or other broadcasting (for example, satellite,
cable and Internet broadcasting). [Article 12, paragraph 3]
240. Payments for the use of, or the right to use industrial, commercial
or scientific equipment, do not appear in the definition under the
Convention. Such amounts will either be treated as business
profits under Article 7 (Business Profits) or as profits from
transport operations (for certain leases of ships, aircraft and
containers) under Article 8 (Shipping and Air Transport). The
exclusion of payments for the use of equipment from the Royalties
Article reflects common international tax treaty practice and
recognises that source country taxation on a gross basis may be
excessive given low profit margins.
Payments for the supply of know-how versus payments for services
rendered
241. The OECD Model Commentary deals with the need to distinguish these
two types of payments in paragraph 11.3 of the Commentary on
Article 12 (Royalties). The Commentary cites the following
criteria as relevant for the purpose of making the distinction:
. Contracts for the supply of know-how concern information
of the kind described in paragraph 11 of the Commentary
that already exists, or concern the supply of that type of
information after its development or creation and include
specific provisions concerning the confidentiality of that
information.
. In the case of contracts for the provision of services,
the supplier undertakes to perform services which may
require the use, by that supplier, of special knowledge,
skill and expertise but not the transfer of such special
knowledge, skill or expertise to the other party.
. In most cases involving the supply of know-how, there
would generally be very little more which needs to be done
by the supplier under the contract other than to supply
existing information or reproduce existing material. On
the other hand, a contract for the performance of services
would, in the majority of cases, involve a much greater
level of expenditure by the supplier in order to perform
their contractual obligations. For instance, the
supplier, depending on the nature of the services to be
rendered, may have to incur salaries and wages for
employees engaged in researching, designing, testing,
drawing and other associated activities or payments to sub-
contractors for the performance of similar services.
242. Payments for design, engineering or construction of plant or
building, feasibility studies, component design and engineering
services may generally be regarded as being in respect of a
contract for services, unless there is some provision in the
contract for imparting techniques and skills to the buyer.
243. In cases where both know-how and services are supplied under the
same contract, if the contract does not separately provide for
payments in respect of know-how and services, an apportionment of
the two elements of the contract may be appropriate.
244. Payments for services rendered are to be treated under Article 7
(Business Profits).
Image or sound reproduction or transmission
245. The 'royalties' definition includes payments made for the use of,
or the right to use, motion picture films. It also covers payments
for the use of, or the right to use, images or sounds, however
reproduced or transmitted, for use in connection with broadcasting.
Such images or sounds may be reproduced on any form of media, such
as film, tape, CD or DVD, or transmitted electronically, such as by
satellite, cable or Internet. Where the images or sounds are for
use in connection with any form of broadcasting, such as
television, radio or web-casting, the payments will constitute a
royalty. [Article 12, subparagraph 3d)]
Spectrum licences
246. Under the Convention, payments made for the use of, or right to
use, the radiofrequency spectrum specified in a spectrum licence
are treated as royalties. This provision preserves Australia's
ability to tax payments that arise in Australia for the use in
Australia of any part of the radiofrequency spectrum specified in
an Australian spectrum licence. In the course of negotiations, the
two delegations noted:
'It is understood that 'spectrum licence of a Contracting
State' in subparagraph e) of paragraph 3 refers to any
licence in respect of the radiofrequency spectrum of that
State and is not limited to spectrum licences that are
issued by the Government of a Contracting State.'
[Article 12, subparagraph 3e)]
Forbearance
247. Consistent with Australian tax treaty practice and international
standards (see paragraph 8.5 of the OECD Model Commentary on
Article 12), subparagraph f) of paragraph 3 expressly treats as a
royalty, amounts paid or credited in respect of forbearance to
grant to third persons, rights to use property covered by this
Article. This is designed to address arrangements along the lines
of those contained in Aktiebolaget Volvo v Federal Commissioner of
Taxation (1978) 8 ATR 747; 78 ATC 4316, where instead of amounts
being payable for the exclusive right to use the property they were
made for the undertaking that the right to use the property will
not be granted to anyone else. This provision ensures that such
payments are subject to tax as a royalty payment under the terms of
the Royalties Article. [Article 12, subparagraph 3f)]
Other royalties effectively treated as business profits
248. As in the case of dividend or interest income, it is specified that
the withholding tax rate limitation does not apply to royalties
paid in respect of property or rights which are effectively
connected with a permanent establishment in the country in which
the income is sourced. Such income is subject to the full rate of
tax applicable in the country in which the royalty is sourced in
accordance with the provisions of Article 7 (Business Profits).
[Article 12, paragraph 4]
Deemed source rules
249. The source rules which determine where royalties arise for the
purposes of this Article effectively correspond, in the case of
Australia, with the deemed source rule contained in section 6C
(source of royalty income derived by a non-resident) of the ITAA
1936 for royalties paid to non-residents of Australia. They
broadly mirror the source rule for interest income contained in
paragraph 7 of Article 11 (Interest) and operate to allow Australia
to tax royalties paid by a resident of Australia to a resident of
New Zealand who is the beneficial owner of those royalties.
Australia may also tax royalties paid by a non-resident, being
royalties which are beneficially owned by a New Zealand resident,
if the royalties are an expense incurred by the payer in carrying
on a business in Australia through a permanent establishment.
250. Consistent with Australia's royalty withholding tax provisions,
royalty payments that are an expense incurred by an Australian
resident in carrying on a business through a permanent
establishment outside both Australia and New Zealand (that is, the
permanent establishment is in a third State) will not be subject to
tax in Australia. Those royalties are deemed to be sourced in the
country in which the permanent establishment is situated. [Article
12, paragraph 5]
251. In determining whether a permanent establishment exists in a third
country, the principles set out in Article 5 (Permanent
Establishment) apply. [Article 5, paragraph 11]
Related persons
252. Where a special relationship exists between the payer and the
beneficial owner of the royalties, the 5 per cent source country
tax rate limitation will apply only to the extent that the
royalties are not excessive. Any excess part of the royalty
remains taxable according to the domestic law of each country but
subject to the other Articles of the Convention.
253. Examples of special relationships have been provided in respect of
the corresponding paragraph in Article 11. [Article 12,
paragraph 6]
Limitation of benefits
254. The source country rate limit available under this Article will not
apply where the assignment of the royalties, or the creation or
assignment of the property or right in respect of which the royalty
is paid, has been made or performed with the main objective, or one
of the main objectives, of accessing the relief otherwise available
under this Article. The competent authority of the source country
is required to consult with the other country's competent authority
if it intends to deny the benefits of this Article under paragraph
7. [Article 12, paragraph 7]
Article 13 - Alienation of Property
Taxing rights
255. This Article allocates between the respective countries taxing
rights in relation to income, profits or gains arising from the
alienation of real property and other items of property.
256. The reference to 'income, profits or gains' in this Article is
designed to put beyond doubt that a gain from the alienation of
property, which in Australia may be income or a profit under
ordinary concepts, will be taxed in accordance with this Article,
rather than Article 7 (Business Profits), together with relevant
capital gains.
Real property
257. Income, profits or gains from the alienation of real property may
be taxed by the country in which the property is situated.
[Article 13, paragraph 1]
258. For the purpose of this Article, the term 'real property' has
the same meaning as it has under paragraph 2 of Article 6. Where
the property is situated is clarified under paragraph 3 of Article
6 (Income from Real Property).
Permanent establishment
259. Paragraph 2 deals with income, profits or gains arising from the
alienation of property (other than real property covered by
paragraph 1) forming part of the business assets of a permanent
establishment of an enterprise. It also applies where the
permanent establishment itself (alone or with the whole enterprise)
is alienated. Such income, profits or gains may be taxed in the
country in which the permanent establishment is situated. This
corresponds to the rules for taxation of business profits contained
in Article 7 (Business Profits). [Article 13, paragraph 2]
Disposal of ships or aircraft
260. Income, profits or gains derived by a resident of a country from
the disposal of ships or aircraft operated by that resident in
international traffic, or of associated property (other than real
property covered by paragraph 1), are taxable only in that country.
This rule corresponds to the operation of Article 8 (Shipping and
Air Transport) in relation to profits from the international
operation of ships or aircraft. [Article 13, paragraph 3]
261. For the purposes of this Article, the term 'international traffic'
does not include any transportation which commences at a place in a
country and returns to another place in that country, after
travelling through international airspace or waters (for example,
so-called 'voyages to nowhere' by cruise ships). [Article 3,
subparagraph 1h)]
Shares and other interests in land-rich entities
262. Paragraph 4 applies to situations involving the alienation of
shares or other comparable interests that derive more than 50 per
cent of their value directly or indirectly from real property
situated in the other country. Income, profits or gains from the
alienation of such shares or comparable interests may be taxed in
the country in which the real property is situated. Paragraph 4
complements paragraph 1 of this Article and is designed to cover
arrangements involving the effective alienation of incorporated
real property, or like arrangements.
263. This provision ensures that capital gains on a foreign resident's
indirect, as well as direct, interests in certain targeted assets
are taxable by Australia. Such treatment applies whether the real
property is held directly or indirectly through a chain of
interposed entities. [Article 13, paragraph 4]
Capital gains
264. This Article contains a sweep-up provision which reserves the right
to tax any capital gains from the alienation of other types of
property to the country of which the person deriving the gains is a
resident. These would include, for example, capital gains from the
disposal of shares or other interests in an entity (other than a
land-rich entity or a company to which paragraph 4 applies). Such
gains derived by Australian residents will be taxable only in
Australia, regardless of where the property is situated, and will
not be taxed in New Zealand. The liability of the Australian
resident to taxation on such capital gains will be determined in
accordance with Australia's domestic law. [Article 13, paragraph
5]
Departing residents
265. The purpose of paragraph 6 is to prevent double taxation of capital
gains of departing residents. Under section 104-160 of the
ITAA 1997, a person who ceases to be a resident of Australia will
generally trigger a tax liability on unrealised gains from assets
held, other than taxable Australian property (as defined in section
855-15 of the ITAA 1997). Under subsections 104-165(2) and (3) of
the ITAA 1997, the departing Australian resident may elect to
either pay the Australian tax at the time of departure or to defer
tax on the unrealised gain until the actual disposal of the asset.
A former Australian resident who has been taxed on the unrealised
gains upon departure from Australia, and who becomes a New Zealand
resident, may elect to be treated for New Zealand taxation purposes
as having, immediately before ceasing to be a resident of
Australia, alienated and reacquired the property for an amount
equal to its fair market value at that time. [Article 13,
paragraph 6]
1.
An Australian resident, Kylie, owns a house in Bali which
was purchased in the year 2002 for $200,000 (this is the
cost base of the asset as Kylie has not incurred any further
expenditure which should be taken into account in
determining the cost base of the asset). At the time Kylie
ceases to be an Australian resident, the market value of the
house is $300,000. Kylie will therefore have an Australian
capital gain of $100,000. Kylie pays the tax on this
unrealised gain rather than electing to defer payment of the
tax.
Kylie later sells the house for $400,000 while a resident of
New Zealand. Paragraph 5 will allow Kylie to elect to be
treated for New Zealand tax purposes as if she had acquired
the property for $300,000 at the time that she ceased to be
an Australian resident. This will mean that New Zealand is
precluded from taxing Kylie on the gain that accrued on the
house during the period of Kylie's residence in Australia.
[Article 13, paragraph 6]
Australian residents - residence during a six year period prior to
alienation of property
266. Under Australia's CGT regime, ceasing to be an Australian resident
can trigger a CGT event (CGT Event I1). However, an individual can
elect to disregard any capital gain or capital loss from CGT assets
covered by this event. Where this election is made the relevant
assets of the individual are deemed to be taxable Australian
property and accordingly are subject to tax in Australia when the
individual disposes of the asset or again becomes an Australian
resident.
267. In the absence of paragraph 7, the Article would not allow
Australia to tax the gain that arises from the subsequent disposal
of the asset, as the person would no longer be an Australian
resident. As New Zealand does not have a comprehensive CGT regime,
there may be cases where ceasing to be an Australian resident will
result in no tax being payable on gains from CGT Events arising
from the disposal of taxable Australian property in either
Australia or New Zealand.
268. Paragraph 7 protects Australia's taxing rights in respect of
income, profits or gains from the alienation of any property of a
person who is, or has been, a resident of Australia during the year
in which the property is alienated or during the six years
immediately preceding that year. [Article 13, paragraph 7]
Double tax relief
269. In the event that the operation of this Article should result in an
item of income or gain being subjected to tax in both States, the
country of which the person deriving the income or gain is a
resident (as determined in accordance with Article 4 (Resident))
would be obliged by Article 23 (Elimination of Double Taxation) to
provide double tax relief for the tax imposed by the other country.
Article 14 - Income from Employment
Basis of taxation
270. This Article generally provides the basis upon which the
remuneration of visiting employees is to be taxed. However, this
Article does not apply in respect of income dealt with separately
in:
. Article 15 (Fringe Benefits);
. Article 16 (Directors' Fees);
. Article 17 (Entertainers and Sportspersons);
. Article 18 (Pensions); and
. Article 19 (Government Service).
271. Generally, salaries, wages and similar remuneration derived by a
resident of one country from an employment exercised in the other
country may be taxed in that other country. However, subject to
specified conditions, there is a conventional provision for
exemption from tax in the country being visited where visits of
only a short-term nature are involved. [Article 14, paragraphs 1
and 2]
Short-term visit exemption
272. The conditions for this exemption are that:
. the period of the visit or visits does not exceed, in the
aggregate, 183 days in any 12-month period commencing or
ending in the year of income of the visited country;
. the remuneration is paid by, or on behalf of, an employer
who is not a resident of the visited country, or is borne
by or deductible in determining the profits attributable
to a permanent establishment which the employer has in the
'home' country; and
. the remuneration is not borne by a permanent establishment
which the employer has in the country being visited.
273. Where all of these conditions are met, the remuneration so derived
will be liable to tax only in the country of residence of the
recipient. [Article 14, paragraph 2]
274. This Article differs from those in Australia's recent treaties by
extending the short-term visit exemption to cases where the
remuneration is borne or deductible in determining the profits
attributable to a permanent establishment which the employer has in
that country. This will reduce compliance costs for residents of
one country who are employed by a local branch of an enterprise of
the other country by ensuring that their remuneration derived
during short visits to that other country is not taxed in that
other country. [Article 14, subparagraph 2b)]
1.
Tasman Bank is an Australian resident company with a branch
in Wellington. Jason, a New Zealand resident, is an
employee of Tasman Bank who works in the Wellington branch.
The branch constitutes a permanent establishment of Tasman
Bank situated in New Zealand. Jason's salary is deductible
in determining the profits to be attributable to that
permanent establishment.
During the year of income, Jason travels to Australia to
participate in a two-week training course being held in
Tasman Bank's head office and to attend a one-week banking
conference in Melbourne. As Jason's salary is borne by
Tasman Bank's permanent establishment in Wellington, and the
other conditions of paragraph 2 are met, the income will be
taxed only in New Zealand.
Secondments
275. Paragraph 4 of this Article provides a specific rule in respect of
secondments. Where an employee who is a resident of one country
derives remuneration in respect of a secondment to the other
country, that remuneration will be taxable only in the first
country provided that the employee is present in the other country
for not more than 90 days in any 12-month period. [Article 14,
paragraph 4]
276. The term secondment to the other Contracting State is defined in
paragraph 5 of this Article. It means an arrangement under which
an employee of an enterprise in one country temporarily performs
employment services in the other country for either:
. a permanent establishment of the enterprise in the other
country; or
. an associated enterprise (as determined by subparagraph c)
of paragraph 6 of Article 5 (Permanent Establishment),
where such employment services are of a similar nature to those
ordinarily performed by that employee for their usual employer.
However, it does not include arrangements that have as one of their
main purposes the obtaining of benefits under this rule. [Article
14, paragraph 5]
1.
Emily and Alicia are Australian residents employed by an
Australian company, PR PR Co, in the media relations area
situated in Hobart. Emily is seconded to the company's
Christchurch branch to assist the branch staff in developing
a media strategy with respect to their upcoming product
launch, and is present in New Zealand for 45 days. Alicia
undertakes a 30-day secondment to provide similar assistance
to the company's wholly-owned subsidiary, NZ PR PR Co, in
Auckland.
Both Emily and Alicia's activities fall within the
definition of 'secondment to another State', and they are
both present in New Zealand for less than 90 days.
Accordingly, Australia retains taxing rights over both their
salaries.
Where the short-term visit exemption doesn't apply
277. Where a short-term visit exemption is not applicable, remuneration
derived by a resident of Australia from employment in New Zealand
may be taxed in New Zealand. However, this Article does not
allocate sole taxing rights to New Zealand in that situation.
278. Accordingly, Australia would also be entitled to tax that
remuneration, in accordance with the general rule of the ITAA 1997
that a resident of Australia remains subject to tax on worldwide
income. However, in accordance with Article 23 (Elimination of
Double Taxation) Australia would be required in this situation to
relieve any resulting double taxation.
Employment on a ship or aircraft
279. Under the existing New Zealand Agreement, income derived by crew
members from employment exercised aboard a ship or aircraft
operated in international traffic may be taxed in the country of
which the carrier is a resident.
280. In contrast, under paragraph 3 of this Article in the Convention,
income derived by crew members from employment exercised aboard a
ship or aircraft operated in international traffic will be taxable
only in the country of which the crew member is a resident. Thus,
for example, an Australian resident pilot employed by a New Zealand
airline would be taxable only in Australia on his or her
remuneration in respect of services rendered on international
flights. This is expected to reduce the compliance costs faced by
crew members, as they will only have to file returns and pay tax on
this income in their country of residence. [Article 14, paragraph
3]
Article 15 - Fringe Benefits
281. This Article deals with fringe benefits which, in the absence of
the Article, would be taxable in both Australia and New Zealand.
Under this Article, the country that would have the primary taxing
right if the benefit were ordinary employment income will have the
sole taxing right in relation to the fringe benefit. This would
generally be determined in accordance with Article 14 (Income from
Employment) or Article 19 (Government Service). [Article 15,
paragraph 1]
Definition of primary taxing right
282. This Article provides that the primary taxing right lies with the
country that may, in accordance with the Convention, impose tax on
the employment remuneration, being tax in respect of which the
other country is required to provide relief under Article 23
(Elimination of Double Taxation). [Article 15, subparagraph 2b)]
1.
Xavier, a New Zealand resident employee of a New Zealand
company is sent to work in Australia. He is present in
Australia for more than 183 days, and receives both
employment income and fringe benefits. Under paragraph 1 of
Article 14 (Income from Employment), Australia has the right
to tax the employment income. New Zealand may also tax but,
under Article 23 (Elimination of Double Taxation), would be
obliged to give credit for the Australian tax paid on the
fringe benefit if it was ordinary employment income.
Therefore, Australia has the primary right to tax in these
circumstances.
Operation of the provision in respect of fringe benefits tax law
283. Both Australia and New Zealand impose taxation on certain 'fringe'
or employee benefits. In Australia, the relevant law is the
Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986). Under the
FBTAA 1986, an employer who provides a fringe benefit to an
employee or to an associate of an employee (which includes a family
member) may have a fringe benefits tax liability. Such a liability
is separate from income tax and is calculated on the grossed-up
taxable value of the fringe benefits provided. New Zealand's
fringe benefits tax regime operates in a similar fashion, but it is
calculated on the grossed-up taxable value at the employee's
notional marginal tax rate.
284. There may be circumstances in both countries where a resident of
one country working in the other country would be liable to tax in
both countries on the fringe benefit. Regardless of whether the
benefit is taxed under the ordinary income tax law or under a
separate enactment (as is currently the case in Australia), or
whether the tax is liable to be paid by the employer or the
employee, this Article will ensure that the fringe benefit will be
taxed in only one of the countries.
Definition of fringe benefit
285. The term fringe benefit is defined as including a benefit provided
to an employee or to an associate of an employee by:
. an employer;
. an associate of an employer; or
. a person under an arrangement between that person and the
employer, associate of an employer or another person in
respect of the employment of that employee.
286. They include accommodation allowances or housing benefits but do
not include a benefit arising from the acquisition of an option
over shares under an employee share scheme. For example, a fringe
benefit is provided when an employer allows an employee to use a
work motor vehicle for private purposes, gives an employee a
subsidised loan, or pays an employee's private health insurance
costs. Benefits arising from employee share option schemes are
excluded from the treaty definition of fringe benefit. Such option
benefits are treated as remuneration from employment for the
purposes of Article 14 (Income from Employment). [Article 15,
subparagraph 2a)]
Article 16 - Directors' Fees
287. This Article relates to remuneration received by a resident of one
country in the person's capacity as a member of a board of
directors of a company which is a resident of the other country.
To avoid difficulties in such cases of ascertaining which country a
director's services are performed, and consequently where the
remuneration is to be taxed, the Article provides that directors'
fees may be taxed in the country of residence of the company.
Article 17 - Entertainers and Sportspersons
Personal activities
288. Income derived by visiting entertainers and sportspersons from
their personal activities as such may be taxed in the country in
which the activities are exercised, irrespective of the duration of
the visit. The term 'entertainer' is intended to have a broad
meaning and would include, for example, actors and musicians as
well as other performers whose activities have an entertainment
character, such as comedians, talk show hosts, participants in
chess tournaments or racing drivers. The application of this
Article extends to income generated from promotional and associated
kinds of activities engaged in by the entertainer or sportsperson
while present in the visited country. [Article 17, paragraph 1]
Safeguard
289. Income in respect of personal activities exercised by an
entertainer or sportsperson, where derived by another person (for
example, a separate enterprise which formally enters into the
contractual arrangements relating to the provision of the
entertainer's or sportsperson's services), may be taxed in the
country in which the entertainer or sportsperson performs, whether
or not that other person has a permanent establishment in that
country. [Article 17, paragraph 2]
Exception for members of teams playing in league competitions
290. Income derived in respect of personal activities exercised by
sportspersons as members of recognised teams regularly playing in a
league competition organised and conducted in both States, but not
in respect of performance as a member of a national representative
team of either country, is excluded from the operation of
paragraphs 1 and 2. In such cases, the provisions of Article 7
(Business Profits) or Article 14 (Income from Employment) are to
apply. Accordingly, New Zealand residents will generally be exempt
from Australian tax in respect of income in respect of their
activities as members of such teams. However, if the income is
attributable to a permanent establishment that the sportsperson has
in Australia, or if the conditions of paragraph 2 of Article 14
(Income from Employment) are not met in relation to the team
member's salary or wages, Australia may tax that income.
291. The phrase 'league competition organised and conducted in both
States' is intended to cover all sports where an association of
clubs arranges matches between club teams of approximately similar
standard from both countries and the matches are played in both
countries. This would include for example, club-level rugby,
netball, basketball and soccer competitions which take place in
both countries. Unlike the equivalent provision in the existing
New Zealand Agreement, paragraph 3 will also apply to league
competitions that involve clubs from a third country, such as the
Super 14 rugby competition. [Article 17, paragraph 3]
Article 18 - Pensions
General scope
292. Pensions (including government service pensions) and other similar
periodic remuneration are generally taxable only by the country of
which the recipient is a resident. In the course of negotiations,
the two delegations noted that:
'The term 'pensions and other similar periodic remuneration'
is understood to include superannuation annuities, life
annuities, periodic workers compensation and periodic
accident compensation but would not include financial
products in the form of annuities as these are more
appropriately covered under the Interest Article.'
293. The application of this Article extends to pensions and annuity
payments made to dependants, for example, a widow, widower or
children of the person in respect of whom the pension or annuity
entitlement accrued where, upon that person's death, such
entitlement has passed to that person's dependants. [Article 17,
paragraph 1]
Exemption for cross-border pensions
294. Paragraph 1 of this Article provides that pensions and other
similar remuneration:
. arising in one country and paid to a resident in the other
country,
will not be subject to tax by the residence country to the extent
that the income:
. would have not been subject to tax in the first country if
the recipient was a resident of that country.
295. In the course of negotiations, the delegations noted:
'With respect to the second sentence of paragraph 1 of
Article 18 (Pensions), it is understood that the term 'to
the extent that such income would not be subject to tax in
the other State if the recipient were a resident of that
other State' includes instances where amounts would
ordinarily not be included in assessable income under the
domestic law of that other State if such amounts are
ordinarily payable to residents of that other State and, in
the case of payments arising in Australia, includes the
deductible amount based on the undeducted purchase price of
a pension or annuity, the tax free components of a
superannuation benefit and any superannuation benefit
amounts to which a nil rate of tax would apply (such as the
amount of the taxable component of the element taxed in a
superannuation fund which falls below the low rate cap and
to which a zero per cent tax rate applies). It does not
include instances where no tax is payable on the amount in
that other State merely because the individual's total
taxable income falls below the general tax free threshold
for resident individuals.'
296. The term 'to the extent that such income would not be subject to
tax in the other State if the recipient were a resident of that
other State' would capture pensions and other similar remuneration
that are treated under Australian law as:
. not part of assessable income;
. exempt income;
. 'non-assessable non-exempt income'; or
. assessable income but in respect of which there is a tax
offset that results in the rate of income tax applying to
that amount equal to 0 per cent.
For example:
. the deductible amount of the undeducted purchase price of
a pension annuity or annuity that is subject to section
27H of the ITAA 1936 is not included as part of assessable
income;
. the superannuation benefit payable to a member who is over
60 years of age is non-assessable non-exempt income under
section 301-10 of the ITAA 1997;
. the tax-free component of an employment termination
payment is non-assessable non-exempt income; and
. the taxable component of the superannuation benefit
payable to a member who has reached their preservation age
but is below 60 years of age, where a tax offset applies
to the element taxed in the fund up to the low rate cap
amount such that the tax rate on that element does not
exceed 0 per cent under section 301-20 of the ITAA 1997.
297. The second sentence in paragraph 1 therefore ensures that the
income is not taxed in both countries. This exemption in both
countries, however, does not apply to payments of portable New
Zealand superannuation, portable veteran's pensions or equivalent
portable payments arising in New Zealand.
298. Portable New Zealand superannuation is superannuation paid by the
New Zealand Government to recipients living overseas. Similarly,
portable veteran's pensions are paid by the New Zealand Government
to recipients living overseas. 'Equivalent portable payments
arising in New Zealand' is intended to cover similar payments made
by the New Zealand Government to recipients living overseas.
299. Portable New Zealand superannuation or portable veteran's pension
are exempt from tax under New Zealand's domestic legislation in
order to ensure that the country of residence has sole taxation
rights to a person's pension income. The reason why the Article
does not apply to payments of portable New Zealand superannuation
or portable veteran's pension is to ensure that Australia does not
lose the ability to tax such payments. [Article 18, paragraph 1]
1.
Nicholas is a resident of New Zealand in receipt of a
pension which is exempt from New Zealand tax under its
domestic law. The pension is not of a type specified in the
second sentence in paragraph 2 of Article 18. Nicholas
decides to permanently relocate to Australia and becomes a
resident of Australia for tax purposes. He continues to
receive his New Zealand pension.
As the pension would not have been subject to New Zealand
tax if Nicholas had remained a New Zealand resident, the
pension will also not be subject to Australian tax now that
Nicholas is a resident of Australia.
Lump sum payments
300. The term 'pension' refers to periodic payments and does not include
lump sum payments. Lump sums arising under a 'retirement benefit
scheme', or in consequence of retirement, invalidity, disability or
death, in one country and payable to a resident of the other
country will be taxable only in the country in which they arise.
301. In the course of negotiations, the delegations noted:
'It is understood that the term 'retirement benefits scheme'
means an arrangement in which the individual participates in
order to secure retirement benefits. In the case of
payments arising in Australia a retirement benefit scheme
includes a superannuation fund and a retirement savings
account and in the case of New Zealand includes any
superannuation scheme. It was also agreed that in the case
of Australia, a payment by the Commissioner under the
Superannuation (Unclaimed Money and Lost Members) Act 1999
shall be treated as a lump sum paid under a retirement
benefit scheme.'
[Article 18, paragraph 2]
Pensions and lump sums not subject to tax still counted for certain
purposes
302. While certain pensions and lump sums are not subject to tax in a
country as a result of the Convention, this does not prevent them
from being taken into account when determining entitlements to
assistance or obligations in that country. In the course of
negotiations, the delegations noted:
'It is understood that pensions and lump sums that are not
subject to tax may still be taken into account for the
purpose of calculating a person's income-targeted assistance
and obligations such as Working for Families Tax Credits,
child support and student loans.'
Where pensions and lump sums arise
303. To avoid uncertainty as to where pensions, other similar periodic
remuneration and lump sums may be regarded as 'arising' for
purposes of this Article, the two delegations, in the course of
negotiations, reached the following understanding:
'It is understood that pensions, other similar periodic
remuneration and lump sums referred to in Article 18
(Pensions) will arise where the fund is established or, in
the case of such income paid by the Government of a
Contracting State, in that State.'
Alimony payments
304. Alimony and other maintenance payments are taxable only in the
country of which the payer is a resident. The purpose of this
paragraph is to remove any possibility of double taxation of such
payments arising by reason of the treatment accorded such payments
under the respective domestic law of the two countries. In the
case of Australia, those payments will generally remain exempt from
Australian tax in the hands of the recipient and are non-deductible
to the payer. [Article 18, paragraph 3]
Article 19 - Government Service
Salary and wage income
305. Salary and wage type income, other than government service
pensions, paid to an individual for services rendered to a
government (including a political subdivision or local authority)
of one of the countries, is to be taxed only in that country.
However, such remuneration will be taxable only in the other
country if the services are rendered in that other country; and
. the recipient is a resident of, and a national of, that
other country; or
. the recipient is a resident of that other country and did
not become a resident of that other country solely for the
purpose of rendering the services (for example, if the
recipient was a permanent resident of that other country
prior to rendering the services).
[Article 19, paragraph 1]
Business income
306. Remuneration paid in respect of services rendered in connection
with a business carried on by any governmental authority referred
to in paragraph 1 of this Article is excluded from the scope of the
Article. Such remuneration will remain subject to the provisions
of Article 14 (Income from Employment), Article 16 (Directors'
Fees) or Article 17 (Entertainers and Sportspersons). [Article 19,
paragraph 2]
Article 20 - Students
Exemption from tax
307. This Article applies to students or business apprentices who are
temporarily present in one of the countries solely for the purpose
of their education or training if they are, or immediately before
the visit were, a resident of the other country. In these
circumstances, payments from abroad received by the students or
business apprentices solely for their maintenance, education or
training will be exempt from tax in the country visited. This will
apply even though the student or business apprentice may qualify as
a resident of the country visited during the period of their visit.
308. The exemption from tax provided by the visited country extends to
maintenance payments received by the student or apprentice that are
made for maintenance of dependent family members who have
accompanied the student or apprentice to the visited country.
Employment income
309. Where a New Zealand student visiting Australia solely for
educational purposes undertakes any employment in Australia, for
example:
. some part-time work with a local employer; or
. during a semester break undertakes work with a local
employer,
the income earned by that student as a consequence of that
employment may, as provided for in Article 14 (Income from
Employment), be subject to tax in Australia.
310. For business apprentices, this Article only applies where the
apprentice's remuneration consists solely of subsistence payments
to cover training or maintenance. Remuneration for service, that
is, salary equivalents, fall for consideration under Article 14
(Income from Employment), as will any income derived from
employment with a local employer.
311. A payment for maintenance, education or training would not be
expected to exceed the level of expenses likely to be incurred to
ensure the student or business apprentice's maintenance, education
or training (that is, a subsistence payment).
312. In these situations, the payments received from abroad for the
student or business apprentice's maintenance, education or training
will not be taken into account in determining the tax payable on
the employment income that is subject to tax in Australia. No
Australian tax would be payable on the employment income if the
student qualifies as a resident of Australia during the visit and
the taxable income of the student does not exceed the tax-free
threshold applicable to Australian residents for income tax
purposes.
Article 21 - Other Income
Allocation of taxing rights
313. This Article provides rules for the allocation between the two
countries of taxing rights with respect to items of income not
dealt with in the preceding Articles of the Convention. The scope
of the Article is not confined to such items of income arising in
one of the countries - it extends also to income from sources in a
third country.
314. Broadly, such income derived by a resident of one country is to be
taxed only in the country of residence unless it is from sources in
the other country, in which case the income may also be taxed in
the other country. This is consistent with the reservations of
both Australia and New Zealand to Article 21 (Other Income) of the
OECD Model. [Article 21, paragraphs 1 and 3]
315. Although paragraph 3 refers to income 'arising' in a country,
rather than the more usual reference to income 'from sources' in a
country found in Australia's treaties, no difference in meaning is
intended. The wording in this provision in the Convention reflects
New Zealand's treaty practice and the wording used in the United
Nations Model Double Taxation Convention between the Developed and
Developing Countries.
316. Where the income may be taxed in both countries in accordance with
this provision, the country of residence of the recipient of the
income is obliged by Article 23 (Elimination of Double Taxation) to
provide double taxation relief.
317. This Article does not apply to income (other than income from real
property as defined in paragraph 2 of Article 6 (Income from Real
Property)) where the right or property in respect of which the
income is paid is effectively connected with a permanent
establishment which a resident of one country has in the other
country. In such a case, Article 7 (Business Profits) will apply.
[Article 21, paragraph 2]
318. This Article does not apply in the situation where business profits
are not taxed in the country of source because of the absence of a
permanent establishment. That is, in the absence of a permanent
establishment, paragraph 1 of Article 7 (Business Profits) provides
that the profits of an enterprise of a country shall be taxable
only in that country.
1.
Esk Co, an Australia resident company, derives business
profits from the sale of merchandise through an independent
agent located in New Zealand. As Esk Co does not have a
permanent establishment in New Zealand, the business profits
will be taxable in Australia pursuant to Article 7 (Business
Profits) and not under Article 21 (Other Income).
Article 22 - Source of Income
Deemed source
319. Consistent with Australia's treaty practice, this Article
effectively deems income, profits or gains derived by a resident of
a country which, in accordance with the Convention, may be taxed in
the other country, to have a source in that other country. It
therefore avoids any difficulties arising under domestic law source
rules in respect of the exercise by Australia of the taxing rights
allocated to Australia by the Convention over income derived by
residents of New Zealand.
Article 23 - Elimination of Double Taxation
320. Double taxation does not arise in respect of income flowing between
Australia and New Zealand:
. where the terms of the Convention provide for the income
to be taxed only in one country; or
. where the domestic taxation law of one of the States
exempts the income from its tax.
321. It is necessary, however, to prescribe a method for relieving
double taxation for other classes of income, profits or gains
which, under the terms of the Convention, remain subject to tax in
both countries. In accordance with international practice,
Australia's tax treaties provide for double tax relief to be
provided by the country of residence of the taxpayer by way of an
exemption of the foreign income, or a credit or deduction against
its tax for the tax of the country of source. This Article also
reflects that approach.
Australian method of relief
322. This Article requires Australia to provide Australian residents a
credit against their Australian tax liability for New Zealand tax
paid under New Zealand laws and in accordance with the Convention,
on income which is taxable in Australia. The term 'income' in this
context is intended to have a broad meaning and includes items of
profit or gains which are dealt with under the income tax law.
[Article 23, paragraph 1]
323. Australia's general foreign income tax offset rules, together with
the terms of this Article and of the Convention generally, will
form the basis of Australia's arrangements for relieving a resident
of Australia from double taxation on income, profits or gains that
are also taxed in New Zealand.
324. Accordingly, effect is to be given to the tax credit relief
obligation imposed on Australia by paragraph 1 of this Article by
application of the general foreign income tax offset provisions
(Division 770 of the ITAA 1997).
325. Dividends and branch profits derived from New Zealand by an
Australian resident company that are exempt from Australian tax
under the foreign source income measures (for example, sections
23AH or 23AJ of the ITAA 1936) will continue to qualify for
exemption from Australian tax under those provisions. As double
taxation does not arise in these cases, the credit form of relief
will not be relevant.
New Zealand relief
326. This Article also requires New Zealand to provide New Zealand
residents relief by way of a credit against their New Zealand tax
liability for Australian tax paid under Australian laws and
in accordance with the Convention, on income which is taxable in
New Zealand. However, in the case of dividends derived by
a New Zealand resident from an Australian company, no credit will
be given in New Zealand for Australian tax paid in respect of
profits out of which the dividend is paid. [Article 23, paragraph
2]
Fiscally transparent entities
327. Paragraph 3 of this Article ensures that double taxation will be
relieved in situations where, in accordance with paragraph 2 of
Article 1, the same income is taxed in Australia and New Zealand in
the hands of different persons. This situation may arise where the
two countries allocate the income to different persons for tax
purposes; for example, where one country treats the recipient
entity as a taxpayer and taxes income received at the entity level,
while the other country treats the same income as having been
derived by the participants in the entity and taxes that income in
the hands of the participants. Assume, for example, that the
country of source treats a partnership as a company and the country
of residence of a partner treats it as fiscally transparent. In
such cases, this paragraph obliges the country of residence of the
partners to provide relief from double taxation in respect of taxes
imposed by the source country on that income in accordance with the
provisions of Article 23. [Article 23, paragraph 3]
328. In the case of Australia a similar outcome is achieved in domestic
law by subsection 770-130(2) of the ITAA 1997.
329. Paragraph 3 also applies where the country in which the income
arises regards the income as derived by a resident entity, while
the other country regards the entity as fiscally transparent and
allocates the income to its own residents who are participants in
the entity (see Example 2.6). In these circumstances, paragraph 3
provides that the country of residence of the participants will
provide relief in respect of taxes imposed in the source country.
330. Similarly, where the income arises in a third country, the country
of residence of the participant in the entity would provide relief
for tax imposed on the income in the hands of the entity in the
other country.
1.
[pic]
In this case an entity which is treated for tax purposes in
New Zealand as a resident company, derives interest income
from a third country. The third country taxes the royalty
at source at 10 per cent gross. New Zealand taxes that
interest income at 30 per cent as foreign income of a
New Zealand resident company (assuming that no deductions
are available) and gives a foreign tax credit for that
foreign tax, so collecting a net 20 per cent tax. Australia
regards the entity as fiscally transparent and taxes the
Australian resident participant in the entity on the
interest income.
Under paragraph 3 of this Article, Australia is required to
give a foreign income tax offset for the New Zealand tax
actually imposed on the income (that is, the net 20 per cent
after a New Zealand foreign tax credit). The offset is
subject to the normal limits discussed in paragraph 2.313 on
paragraph 1 of Article 23.
Whether Australia would grant an offset for the third
country tax on the interest would depend on the operation of
the foreign income tax offset rules and any treaty between
Australia and the third country. Normally it would be
expected that such an offset would be available subject to
the limits arising under Australian domestic law and any
treaty with that third country.
2.
[pic]
In this case, an entity which is treated for tax purposes in
New Zealand as a resident company, derives royalty income
from Australia. New Zealand taxes that royalty income at 30
per cent as foreign income of a New Zealand resident company
and gives a foreign tax credit for the 5 per cent tax rate
set in paragraph 2 of Article 12, so collecting a net 25 per
cent tax.
Australia regards the entity as fiscally transparent and
taxes the Australian resident participant in the entity on
the royalty income. Under paragraph 3 of Article 23,
Australia is required to give a foreign income tax offset
for the New Zealand tax actually imposed on the income (that
is, the net 25 per cent after a New Zealand foreign tax
credit). The offset is subject to the normal limits
discussed in paragraph 2.313 on paragraph 1 of Article 23.
331. As discussed in paragraphs 2.89 to 2.96, in certain circumstances
treaty benefits under the Convention apply to income flowing
through MITs. Where such income is allocated for Australian tax
purposes to an Australian resident unitholder and taxed in their
hands (that is, where the unitholder is presently entitled to
income of the MIT), the unitholder will be entitled to double tax
relief for New Zealand tax imposed on that income.
1.
[pic]
In this diagram, interest income arising in New Zealand (not
from a financial institution) is paid to a listed Australian
MIT with Australian resident individual unitholders who are
presently entitled to income of the MIT. The MIT satisfies
the conditions in paragraph 7 of Article 4 (Resident), with
the result that the treaty limits on New Zealand tax on the
interest apply. For Australian tax purposes, the interest
income is allocated to the unitholders and taxed in their
hands.
Australia is required to provide double tax relief for New
Zealand tax imposed on the part of the interest income
allocated to the Australian resident unitholders.
Article 24 - Non-Discrimination
332. The Convention includes rules to prevent tax discrimination. The
Australian tax system is generally non-discriminatory. However,
for clarity this Article provides that certain features of the
Australian tax system should not be seen as coming within the
Article's terms. Similarly, the Article provides that certain
features of the New Zealand tax system are not affected by its
provisions. The measures identified can be characterised as being
an integral part of the administration of the two countries'
economic and tax policy and the collection of their taxes.
Discrimination based on nationality
333. This Article prevents discrimination on the grounds of nationality
by providing that nationals of one country may not be less
favourably treated than nationals of the other country in the same
circumstances. [Article 24, paragraph 1]
334. The discrimination that this Article precludes applies to both
taxation and any requirement connected with such taxation.
Accordingly, discrimination in the administration of the tax law is
also generally precluded.
335. The term 'national' is defined in subparagraph i) of paragraph 1 of
Article 3 (General Definitions) of the Convention and covers both
an individual who is a citizen or national of one country or the
other, and a company, partnership or association 'deriving its
status as such from the laws in force in that Contracting State'.
Accordingly, a company that is incorporated in Australia would be a
national of Australia while a company that is incorporated under a
law of New Zealand would be a national of New Zealand for the
purposes of this paragraph. [Article 3, subparagraph 1i)]
The meaning of 'in the same circumstances' and 'in particular with
respect to residence'
336. The expression 'in the same circumstances' refers to persons who,
from the point of the application of the ordinary taxation laws,
are in substantially similar circumstances both in law and in fact.
337. Where a person operates in an industry that is subject to
government regulation such as prudential oversight, another person
operating in the same industry but not subject to the same
oversight, would not be in the same circumstances.
338. The inclusion of the further clarification 'in particular with
respect to residence' makes clear that the residence of the
taxpayer is one of the factors that are relevant in determining
whether taxpayers are placed in similar circumstances. Therefore,
different treatment accorded to a New Zealand resident compared to
an Australian resident will not constitute discrimination for the
purposes of this Article. A potential breach of paragraph 1 of
this Article only arises if two persons who are residents of the
same country are treated differently solely by reason of one being
a national of Australia and the other a national of New Zealand.
The meaning of 'more burdensome' taxation
339. Unlike paragraph 1 of Article 24 (Non-Discrimination) in the OECD
Model and equivalent provisions in Australia's other tax treaties,
this provision refers only to 'more burdensome' taxation rather
than 'other or more burdensome'. However, it is not intended that
the words 'more burdensome...taxation' would refer only to the
quantum of taxation.
340. The phrase is also applicable to more onerous administrative or
compliance requirements that a taxpayer may be called upon to meet
where those requirements differ based on nationality grounds.
Non-residents of Australia/New Zealand
341. Consistent with paragraph 1 of Article 24 (Non-Discrimination) of
the OECD Model, paragraph 1 of this Article applies to persons who
are residents of neither Australia nor New Zealand. Consequently,
residents of third countries who are citizens or nationals of
either Australia or New Zealand are able to seek the benefits of
this provision. Paragraph 1 does not, however, extend to residents
of either country who are not 'nationals' (as defined in
subparagraph i) of paragraph 1 of Article 3 (General Definitions))
of either country.
Non-discrimination and permanent establishments
342. The tax on permanent establishments of enterprises of the other
country shall not be levied less favourably than on the country's
own enterprises carrying on the same activities in similar
circumstances. This applies to all residents of a treaty country,
irrespective of their nationality, who have a permanent
establishment in the other country. [Article 24, paragraph 2]
343. For this paragraph to apply, the enterprises of both States must be
'in similar circumstances'. Therefore, the comparison must be made
between a permanent establishment and local enterprises which are
not only carrying on the same activities but are also carrying on
those activities 'in similar circumstances'. This is to address
situations where resident and non-resident enterprises may be
carrying on the same activities but the circumstances in which they
do so are very different. For example, one may be conducting
dealings on a non-arm's length basis and the other on an arm's
length basis. The provision recognises that appropriate
differences in taxation treatment are not precluded because of the
differing circumstances.
344. Permanent establishments of non-resident enterprises may be treated
differently from resident enterprises as long as the treatment does
not result in more burdensome taxation for the former than for the
latter. That is, a different mode of taxation may be adopted with
respect to non-resident enterprises, to take account of the fact
that they often operate in different conditions to resident
enterprises. The provision would not affect, for example, domestic
law provisions that tax a non-resident by withholding, provided
that calculation of the tax payable is not greater than that
applying to a resident taxpayer.
Non-resident individuals
345. Non-resident individuals do not have to be granted the personal
allowances, reliefs or reductions available to residents of the tax
treaty countries. [Article 24, paragraph 2]
346. This means that Australia will continue to be able to grant certain
tax offsets only to resident individuals, such as the tax offset
for dependents contained in Division 13 of the ITAA 1997.
347. Unlike paragraph 3 of Article 24 (Non-Discrimination) of the OECD
Model, the Article is not just limited to those benefits conferred
by a country relating to civil status or family responsibilities of
the individual. For Australian tax purposes, it also extends, for
example, to the tax-free threshold which may be considered not to
be based either on civil status or family responsibilities.
Deductions for payments to foreign residents
348. The treaty partner countries must allow the same deductions for
interest, royalties and other disbursements paid to residents of
the other country as it does for payments to its own residents.
However, the treaty countries are allowed to reallocate profits
between related enterprises on an arm's length basis under Article
9 (Associated Enterprises) and to limit deductions in accordance
with paragraph 8 of Article 11 (Interest), and paragraph 6 of
Article 12 (Royalties). [Article 24, paragraph 3]
Companies owned or controlled abroad
349. A country must not give less favourable treatment to an enterprise,
the capital of which is owned or controlled, wholly or partly,
directly or indirectly, by one or more residents of the other
country. That is, Australian companies owned or controlled by New
Zealand residents may not be given other or more burdensome
treatment than locally owned or controlled Australian companies.
[Article 24, paragraph 4]
350. Differential tax treatment based on residency is not affected by
this paragraph. Nor does the paragraph require the same treatment
of non-resident shareholders in the company as resident
shareholders. Accordingly, there is no obligation under paragraph
4 or any other provision of this Article to allow imputation
credits to non-resident shareholders.
Exclusions
351. Certain provisions of the law of both countries that are important
for purposes of economic regulation and integrity of the tax system
are not restricted in their application by this Article. Although
most are generally recognised by the international community as not
being discriminatory, the specific exclusion of these provisions
will ensure that they can continue to operate for their intended
purpose. The provisions of the law of Australia and New Zealand
which are not restricted in the application by this Article are
those that:
. prevent the avoidance or evasion of taxes;
. defer tax where an asset is transferred out of the
jurisdiction;
. provide for consolidation of group entities;
. provide for the transfer of losses within company groups;
. do not allow tax rebates, credits or exemptions in
relation to dividends paid by a company;
. provide for deductions for research and development
expenditure; or
. are agreed in an Exchange of Notes between the two
Governments to be unaffected by the Article.
Avoidance or evasion provisions
352. The operation of domestic measures to combat avoidance and evasion
is not affected by this Article. [Article 24, subparagraph 5a)]
353. The reference to 'laws ... designed to prevent avoidance or
evasion of taxes' includes, in the case of Australia, thin
capitalisation, dividend stripping, transfer pricing, controlled
foreign company, transferor trust and foreign investment fund
provisions, and collection measures including conservancy.
Although it is commonly accepted by most OECD member countries that
such provisions do not contravene Non-Discrimination Articles, this
outcome is specifically provided for in the Convention by the
exclusion of such rules from the operation of this Article.
[Article 24, paragraph 6]
354. The enforcement and operation of the various aspects of the
withholding tax provisions relating to non-residents are preserved
by this Article. For example, section 26-25 (Interest or royalty)
of the ITAA 1997 provides that where interest or royalties are paid
to a non-resident and the payer fails to deduct withholding tax,
the interest or royalty cannot be claimed as a deduction. No
similar measure exists in relation to payments from a resident to
another resident. [Article 24, subparagraph 5a) and paragraph 6]
Capital gains roll-over relief
355. This Article will not affect the operation of any provision of
domestic tax legislation which does not permit the deferral of tax
arising on the transfer of an asset where the transfer of the asset
by the transferee would take the asset beyond the taxing
jurisdiction of the country.
356. Under Australia's domestic tax legislation, permanent
establishments generally enjoy the same tax treatment as resident
enterprises. However, roll-over relief is denied to a permanent
establishment where an asset that is taxable Australian property is
transferred to a non-resident if the asset is not taxable
Australian property in the hands of the transferee. Australia will
be able to continue to deny roll-over relief in these
circumstances. [Article 24, subparagraph 5b)]
Consolidation
357. Domestic law rules which provide for single entity treatment of a
group of entities are excluded from the operation of this Article,
provided that there is no discrimination regarding access to
consolidation treatment between Australian resident companies on
the basis of ownership of the company.
358. Australia's consolidation measures are restricted to wholly-owned
Australian resident entities. This Article will not apply to these
measures, with the result that domestic law provisions continue to
operate to preclude permanent establishments of non-resident
companies from consolidating with resident entities that may be
wholly-owned by a non-resident. [Article 24, subparagraph 5c)]
Transfers of losses within company groups
359. Under New Zealand's company grouping rules, companies in the same
group can group losses either by election or by subvention payment.
However, the loss company must either be incorporated in
New Zealand or carrying on business through a fixed establishment
for the period from the first day of the year in which the net loss
was incurred to the last day of the year in which the loss is
grouped. The loss company must not be treated under a tax treaty
as not being a resident of New Zealand or otherwise be liable to
overseas income tax.
360. A specific exclusion to this Article was included at the request of
New Zealand to ensure these rules ensure they continue to operate
for their intended purpose. [Article 24, subparagraph 5d)]
Rebates, credits and exemptions paid for dividends by a company
361. Domestic law rules of either country which allow an inter-corporate
dividend rebate, credit or exemption are excluded from the
operation of Article 24. Dividends paid to non-residents are
subject to withholding tax and are not assessable income. Where
dividends are fully franked they are exempt from withholding tax.
As no imputation credits arise for non-residents, there is no
possibility of excess imputation credits arising. Accordingly, it
is not possible for non-residents to offset excess franking credits
against their Australian source income or to seek a refund of any
excess imputation credits. This Article preserves this domestic
law treatment. [Article 24, subparagraph 5e)]
Research and development expenditure
362. The domestic law research and development provisions are excluded
from the operation of Article 24. It follows that Australia will
be able to continue to apply its domestic law rules concerning
access to concessions in respect of research and development
expenditure. Currently, these concessions are only available to
companies that are incorporated in Australia. [Article 24,
subparagraph 5f)]
Power to carry out an Exchange of Notes
363. The two Governments may agree in an Exchange of Notes that other
domestic law provisions will not be affected by the requirements of
Article 24. Australia and New Zealand can agree in respect of
existing laws or laws that are enacted in the future. In the
course of negotiations, the delegations noted:
'It is understood that paragraph g) of paragraph 5 of
Article 24 (Non-Discrimination) applies to existing and
future provisions of the laws of a Contracting State.'
[Article 24, subparagraph 5g)]
Taxes to which this Article applies
364. This Article applies to taxes of every kind and description imposed
on behalf of the Contracting States, or their political
subdivisions. It is intended that the Article extend to any
identical or substantially similar taxes which are subsequently
imposed by either country in addition to, or in place of, these
taxes.
365. In the case of Australia, the relevant taxes include the income tax
(including the petroleum resource rent tax and tax on capital
gains), the GST and fringe benefits tax. The provisions of this
Article also apply to taxes imposed by the Australian states and
territories.
366. In the case of New Zealand, the relevant taxes are all taxes
imposed by New Zealand except for those imposed by local
authorities. [Article 24, paragraph 7]
More favourable treatment
367. Nothing in this Article prevents either country from treating
residents of the other country more favourably than its own
residents.
Article 25 - Mutual Agreement Procedure
Consultation on specific cases
368. This Article provides for consultation between the competent
authorities of the two countries with a view to reaching a solution
in cases where a person is able to demonstrate actual or potential
imposition of taxation contrary to the provisions of the
Convention. [Article 25, paragraph 2]
369. In the case of Australia, the competent authority is the
Commissioner or an authorised representative of the Commissioner.
[Article 3, subparagraph 1e)]
370. A person wishing to use this procedure may present a case to the
competent authority of the country of which the person is a
resident. If the case comes under paragraph 1 of Article 24 (Non-
Discrimination) of the Convention, the person may present a case to
the competent authority of the country of which the person is a
national.
371. Presentation of a case by a person to a competent authority must be
made within three years of the first notification of the action
which the taxpayer considers gives rise to taxation not in
accordance with the Convention. Presentation of a case does not
deprive the person of access to, or affect their rights in relation
to, other legal remedies available under the domestic laws of the
countries. [Article 25, paragraph 1]
372. If the person's claim seems to the competent authority to which the
case has been presented to be justified, and that competent
authority is not itself able to solve the problem, then the
competent authority is required to seek to resolve the case by
mutual agreement with the competent authority of the other country,
with a view to avoiding taxation not in accordance with the
Convention. [Article 25, paragraph 2]
373. If, after consideration by the competent authorities, a solution is
reached, it must be implemented in accordance with the provisions
of the Article.
Implementation of a solution
374. The solution reached by mutual agreement between the competent
authorities of the relevant countries must be implemented
notwithstanding any time limits in the domestic laws of the tax
treaty countries. This allows the competent authorities the
flexibility to reach a satisfactory solution and avoids problems
that might arise where each country has a different time limit in
their domestic law. [Article 25, paragraph 2]
Consultation on general problems
375. This Article also authorises consultation between the competent
authorities of the two countries for the purpose of resolving any
difficulties that arise regarding the interpretation or application
of the Convention. This may allow, for example, the competent
authorities to agree to apply an agreed solution to a broader range
of taxpayers, notwithstanding that the original uncertainty may
have arisen in connection with an individual case that comes under
the procedure outlined in paragraphs 1 and 2 of this Article.
376. The competent authorities may also consult together with a view to
eliminating double taxation in cases where the Convention does not
provide a solution. However, in eliminating such double taxation,
the competent authorities must act within their statutory powers.
In the course of negotiations, the delegations noted:
'With respect to the provision allowing the competent
authorities to consult for the elimination for double
taxation in cases not provided for in the Convention, it is
understood that this does not provide any additional powers
to the competent authorities beyond their usual statutory
powers.'
[Article 25, paragraph 3]
Methods of communication between competent authorities
377. The competent authorities are permitted to communicate directly
with each other without having to go through diplomatic channels.
This may be done by electronic means (for example, facsimile
transmission, email or web conferencing), letter, telephone, direct
meetings or any other convenient means. [Article 25, paragraph 4]
General Agreement on Trade in Services dispute resolution process
378. This Article also deals with disputes that may be brought before
the World Trade Organisation Council for Trade in Services under
the dispute resolution processes of the General Agreement on Trade
in Services (GATS).
379. Australia and New Zealand are both parties to the GATS. Article
XVII (National Treatment) of the GATS requires a party to accord
the same treatment to services and service suppliers of other
parties as it accords to its own like services and service
suppliers.
380. Articles XXII (Consultation) and XXIII (Dispute Settlement and
Enforcement) of the GATS provide for discussion and resolution of
disputes. Where a measure of another party falls within the scope
of a tax treaty, paragraph 3 of Article XXII (Consultation)
provides that the other party to the tax treaty may not invoke
Article XVII (National Treatment). However, if there is a dispute
as to whether a measure actually falls within the scope of a tax
treaty, either country may take the matter to the Council on Trade
in Services for referral to binding arbitration.
381. This provision is based, in all essential respects, on an OECD
Model Commentary recommendation, and is common in recent
international treaty practice. [Article 25, paragraph 5]
Arbitration
382. In some instances, the competent authorities will not reach
agreement on a solution to a particular case. Paragraph 6 of this
Article provides for arbitration to be used to assist in resolving
those cases. The provisions contained in this paragraph are
broadly consistent with those of paragraph 5 of Article 25 (Mutual
Agreement Procedure) of the OECD Model.
383. Only those cases presented under paragraph 1 of this Article (that
is, where a person contends that the actions of either Australia or
New Zealand will result in taxation not in accordance with the
Convention) are eligible. Cases arising under paragraph 3 of this
Article, for example, a case involving a general difficulty in
interpreting or applying the Convention raised by a competent
authority, are not eligible to be resolved through this arbitration
mechanism.
384. Cases arising under paragraph 1 can only access the arbitration
mechanism if the competent authorities are unable to reach
agreement within two years from when the case was first presented
by the competent authority in one country to the competent
authority of the other country. If the case remains unresolved
after that time, the person may request that the arbitration
mechanism be used. Access to arbitration in such cases is
automatic; it is not subject to the specific agreement of the
competent authorities.
385. As discussed in the OECD Model Commentary, it is not intended that
the arbitration mechanism be an alternative to the mutual agreement
procedure. Where the competent authorities have reached an
agreement that does not leave any issues unresolved in the case,
that case is not eligible for arbitration even if the taxpayer does
not agree with the solution reached. However, if any issue remains
outstanding so that taxation contrary to the Convention remains,
the competent authorities cannot consider (either singly or
together) the case is resolved and refuse the person access to the
arbitration mechanism.
386. Unlike the mutual agreement procedure, which may be invoked where a
taxpayer considers that taxation not in accordance with the treaty
will or may result, the arbitration mechanism is only available in
respect actual taxation contrary to the Convention which has
resulted from the actions of either Australia or New Zealand, or
both. This would include instances where an assessment or
determination of tax has been made, or otherwise where the taxpayer
has been officially notified by the ATO or New Zealand Inland
Revenue Department that they are going to be taxed on an item of
income. [Article 25, paragraph 6]
387. Not all unresolved issues arising from the case are eligible to be
resolved through arbitration. Paragraph 7 of this Article
establishes that the issues to which the arbitration mechanism
applies are issues of fact and issues to which Australia and New
Zealand agree in an Exchange of Notes are to be covered by the
arbitration mechanism. Where cases involve both unresolved issues
of fact and other unresolved issues (for example, the
interpretation to be given to a particular provision in the
Convention), only the issues of fact may be resolved through
arbitration. The mutual agreement procedure will continue to apply
in respect of other issues. [Article 25, paragraph 7]
388. Further, unresolved issues cannot be submitted for arbitration if a
decision on those issues has already been reserved or rendered by a
court or administrative tribunal of either Australia or New
Zealand. As discussed in the OECD Model Commentary, this means
where a court or administrative tribunal of one of the States has
already rendered a decision that deals with those issues and that
applies to that person. Paragraph 6 of this Article in the
Convention also covers those instances where a court or
administrative tribunal has reserved its decision. However, it is
not intended that a person would be prevented from having
unresolved factual issues arising in their case submitted for
arbitration merely because another person is pursuing appeals
through the domestic courts on similar issues.
389. Paragraph 6 provides that unless a person directly affected by the
case rejects the arbitration decision on the issues, the decision
is binding on both Australia and New Zealand. The competent
authorities are required to reflect that decision in the mutual
agreement in respect of the case. The outcomes of the mutual
agreement are to be implemented notwithstanding any time limits in
the domestic laws of both States. [Article 25, paragraph 6]
390. The arbitration mechanism contained in paragraphs 6 and 7 of this
Article shall have effect from the date agreed in a subsequent
Exchange of Notes through the diplomatic channel. This Exchange of
Notes is expected to occur when Australia and New Zealand have
established the underlying procedures governing the arbitration
mechanism. Once paragraphs 6 and 7 have effect, cases which have
been presented under to the relevant competent authority in
accordance with paragraph 1 of the Article in this Convention,
whether the case is presented before or after the date agreed in
the Exchange of Notes, may be submitted to arbitration if they meet
the criteria under paragraphs 6 and 7 of Article 25 (Mutual
Agreement Procedure). However, arbitration is not available in
respect of cases that were brought to the competent authorities
under paragraph 1 of the existing New Zealand Agreement. [Article
30, paragraph 2]
Article 26 - Exchange of Information
391. The Convention allows for the competent authorities to exchange
information on a wide range of taxes and irrespective of whether
the country of whom the information is requested has a domestic tax
interest in the information sought. The information allowed to be
exchanged does not have to concern a resident of either Australia
or New Zealand.
392. The provisions relating to exchange of information in the
Convention are identical in effect to those included in the
existing New Zealand Agreement by the amending Protocol signed on
15 November 2005.
Foreseeably relevant information
393. Article 26 authorises and limits the exchange of information by the
two competent authorities to information foreseeably relevant to
the administration or enforcement of the relevant taxes. The
exchange of information is not restricted by Article 1 (Persons
Covered) or Article 2 (Taxes Covered) of the Convention, and may
therefore cover persons who are not residents of Australia or New
Zealand.
394. The standard of foreseeable relevance is intended to ensure that
information may be exchanged to the widest possible extent.
However, competent authorities are not entitled to request
information from the other country which is unlikely to be relevant
to the tax affairs of a taxpayer, or to the administration and
enforcement of tax laws. [Article 26, paragraph 1]
Taxes to which this Article applies
395. Under the Convention, the Australian competent authority can
request and obtain information concerning taxes of every kind and
description imposed under New Zealand's tax laws. The New Zealand
competent authority can request and obtain information concerning
taxes of every kind and description under the federal laws
administered by the Commissioner. This means, for example, that
information concerning Australian indirect taxes (for example, the
GST) may be requested and obtained from New Zealand.
396. This would also extend to information sought for the prevention of
tax evasion, such as for the purposes of both Australia and New
Zealand's promoter penalty regimes. In the course of negotiations,
the delegations noted:
'The delegations agreed that the term 'concerning taxes' is
intended to have a wide operation and an indirect but
relevant connection with the information would be a
sufficient connection. Accordingly, it was agreed that the
competent authorities could exchange information for the
purposes of their respective promoter penalty regimes to the
extent that the information relates to the promotion of tax
avoidance, tax evasion or abuse of administrative guidance.'
397. It is intended that the Article extend to any identical or
substantially similar taxes which are subsequently imposed by
either country in addition to, or in place of, these taxes.
Use of exchanged information
398. The purposes for which the exchanged information may be used and
the persons to whom it may be disclosed are restricted in a manner
which is consistent with the approach taken in the OECD Model.
However, the final sentence of this paragraph permits the
information to be used for other purposes when such use is
authorised by the competent authority of the supplying country.
399. Any information received by a country must be treated as secret in
the same manner as information obtained under the domestic law of
that country, and can only be disclosed to the persons identified
in paragraph 2 of the Article. [Article 26, paragraph 2]
No domestic tax interest required
400. When requested, a country is required to obtain information in the
same manner as if it were administering its domestic tax system,
notwithstanding that the country may not require the information
for its own purposes. Australia would recognise this obligation to
obtain relevant information for treaty partner countries, even in
the absence of an explicit provision to this effect. [Article 25,
paragraph 4]
Limitations
401. The country requested to provide information under this Article is
not obliged to do so where:
. it would be required to carry out administrative measures
at variance with the law and administrative practice of
either Australia or New Zealand; or
. such information is not obtainable under the domestic law
or in the normal course of administration of Australia or
New Zealand.
[Article 26, subparagraphs 3a) and 3b)]
402. Also, in no case is the country receiving the request obliged to
supply information under this Article that would:
. disclose any trade, business, industrial, commercial or
professional secret or trade process; or
. be contrary to public policy.
[Article 26, subparagraph 3c)]
Information held by institutions such as banks, other financial
institutions or nominees
403. Paragraph 5 ensures that paragraph 3 of this Article cannot be used
to prevent the supply of information solely because the information
is held by institutions such as banks, other financial institutions
or nominees. This reflects the 2005 changes to Article 26
(Exchange of Information) of the OECD Model. [Article 26,
paragraph 5]
Information that exists prior to the entry into force of this
Convention
404. Under this Article, the competent authorities can exchange
information that relates to transactions or events occurring prior
to entry into force of the Convention. This approach conforms with
the international practice contained in paragraph 10.3 of the OECD
Commentary on Article 26 (Exchange of Information).
Article 27 - Assistance in the Collection of Taxes
405. Australia and New Zealand are authorised and required to provide
assistance to each other in the collection of revenue claims. This
assistance is not to be restricted by the terms of Article 1
(Persons Covered) or Article 2 (Taxes Covered) of the Convention.
Assistance must therefore be provided as regards a revenue claim
owed to either country by any person, whether or not a resident of
Australia or New Zealand. The form of the assistance is set out in
paragraphs 3 and 4 of this Article.
406. The provisions relating to assistance in collection in the
Convention are identical in effect to those included in the
existing New Zealand Agreement by the amending Protocol signed on
15 November 2005. [Article 27, paragraph 1]
Definition of revenue claim
407. The term revenue claim is defined for the purposes of this Article
to mean an amount owed in respect of taxes of every kind and
description under New Zealand's tax laws, or any Australian federal
tax administered by the Commissioner, but only insofar as the
imposition of such taxes is not contrary to the Convention or any
other instrument in force between Australia and New Zealand. It
also applies to interest, administrative penalties and costs of
collection or conservancy related to such amount.
408. It is intended that the Article extend to any identical or
substantially similar taxes which are subsequently imposed by
either country in addition to, or in place of, these taxes.
[Article 27, paragraph 2]
Enforceable revenue claims
409. Assistance in collection will only be provided by Australia in
relation to a revenue claim that is enforceable in New Zealand.
Similarly, New Zealand is not required to provide assistance in
collection in respect of an Australian revenue claim that is not
enforceable in Australia. A revenue claim will be enforceable
where the requesting country has the right, under its domestic law,
to collect the revenue claim. Further, the revenue claim must be
owed by a person who, at that time, under the law of that country,
has no administrative or judicial rights to prevent its collection.
410. Paragraph 3 of this Article regulates the way in which the revenue
claim of the requesting country is to be collected by the
requested country. Other than in relation to time limits and
priority (see paragraphs 2.405 to 2.408), the requested country is
required to collect the revenue claim as though it were its own
revenue claim. This obligation applies even if, at that time, the
requested country has no need to undertake collection actions
related to that taxpayer for its own tax purposes. [Article 27,
paragraph 3]
411. Where New Zealand makes a revenue claim, the Commissioner will
apply the provisions of Division 263 in Schedule 1 to the Taxation
Administration Act 1953 for the administration and collection of
that claim.
Measures of conservancy
412. Australia or New Zealand may request the other country to take
measures of conservancy even where it cannot yet ask for assistance
in collection, such as where the revenue claim is not yet
enforceable or when the debtor still has the right to prevent its
collection. An example of a conservancy measure is the seizure or
the freezing of assets before final judgment to guarantee that the
assets will still be available when collection can subsequently
take place.
413. If requested to do so by New Zealand, Australia is required to take
measures of conservancy in respect of the revenue claim in
accordance with the provisions of Australian law as if the revenue
claim were an Australian revenue claim. Although Australia does
not have specific conservancy measures, the Commissioner may apply
for a Mareva injunction, which would prevent the taxpayer and the
taxpayer's associates from dealing with certain assets. [Article
27, paragraph 4]
Time limits
414. The requested country's domestic law time limitations beyond which
a revenue claim cannot be enforced or collected do not apply to a
revenue claim in respect of which the other country has made a
request for assistance in collection. Rather, the time limits of
the requesting country apply. [Article 27, paragraph 5]
415. This paragraph follows the OECD provision but has no practical
effect in Australia as there is currently no time limit imposed on
the collection of a revenue claim.
Priority of claims
416. Any rules of Australia and New Zealand which give priority to tax
debts over the claims of other creditors do not apply to a revenue
claim of the other country. This restriction applies regardless of
the fact that the requested country must generally treat the claim
as its own revenue claim.
417. The words 'by reason of its nature as such' in paragraph 5 indicate
that any time limits and priority rules to which the paragraph
applies are only those that are specific to unpaid taxes.
Consequently, paragraph 5 does not prevent the application of
general rules concerning time limits or priority which would apply
to all debts, such as rules giving priority to a claim by reason of
that claim having arisen or having been registered before another
one. [Article 27, paragraph 5]
Restriction on judicial and administrative proceedings
418. Any legal or administrative objection concerning the existence,
validity or the amount of a revenue claim of the requesting country
is to be exclusively dealt with in that country. For example, no
legal or administrative proceedings, such as a request for judicial
review, may be initiated in Australia with respect to the
existence, validity or amount of a New Zealand revenue claim.
[Article 27, paragraph 6]
Change in circumstances
419. Where the relevant conditions in paragraph 3 or 4 of this Article
are no longer satisfied after a request for assistance has been
made, but before the revenue claim has been collected and remitted
by the requested country, the competent authority of the requesting
country is required to promptly notify the competent authority of
the other country of that fact. [Article 27, paragraph 7]
420. An example of such a situation would be where a request for
assistance in collection has been made by New Zealand, but the
revenue claim ceases to be enforceable in New Zealand prior to its
collection by Australia.
421. Following such notification, the requested country has the option
to ask the requesting country to either suspend or withdraw its
request for assistance. If the request is suspended, the
suspension applies until such time as the requesting country
informs the other country that the conditions necessary for making
a request as regards the revenue claim are again satisfied or that
it withdraws its request. [Article 27, paragraph 7]
Limitations
422. The requested country is permitted to refuse the request for
assistance in certain circumstances.
423. The first limitation on the obligations of the country receiving
the request is that it is not required to exceed the bounds of its
own domestic laws and administrative practice or those of the other
country in fulfilling its obligations under the Article. [Article
27, subparagraph 8a)]
424. However, this does not prevent Australia from applying
administrative measures to collect a New Zealand revenue claim,
even though invoked solely to provide assistance in the collection
of New Zealand taxes.
425. The second limitation provides that the country is not required to
satisfy a request where it would require the carrying out of
measures that are contrary to public policy, such as where
providing assistance may affect the vital interests of the country
itself. [Article 27, subparagraph 8b)]
426. The third limitation provides that neither country is obliged to
satisfy a request for assistance if the other country has not
pursued all reasonable measures of collection or conservancy that
are available under its own laws or administrative practice.
[Article 27, subparagraph 8c)]
427. Either country may reject a request for assistance on the basis of
practical administrative considerations such as when the costs of
recovering a revenue claim would exceed the amount of the revenue
claim itself. [Article 27, subparagraph 8d)]
428. The final limitation allows either country to refuse to provide
assistance if it considers that the taxes with respect to which
assistance is requested are imposed contrary to generally accepted
taxation principles. [Article 27, subparagraph 8e)]
Article 28 - Members of Diplomatic Missions and Consular Posts
429. The purpose of this Article is to ensure that the provisions of the
Convention do not result in members of diplomatic missions or
consular posts receiving less favourable treatment than that to
which they are entitled in accordance with international
conventions. Such persons are entitled, for example, to certain
fiscal privileges under the Diplomatic Privileges and Immunities
Act 1967 and the Consular Privileges and Immunities Act 1972 which
reflect Australia's international diplomatic and consular
obligations.
Article 29 - Miscellaneous
Obligation for Australia and New Zealand to consult every five
years
430. Paragraph 1 of this Article requires Australia and New Zealand to
consult each other every five years regarding the operation of the
Convention to ensure that it continues to operate effectively in
avoiding double taxation and preventing tax evasion. The first
consultation is to occur no later than the end of the fifth year
after entry into force of the Convention.
431. Regular evaluations of the Convention will ensure it remains
consistent with both Australia and New Zealand's objectives.
[Article 29, paragraph 1]
Most favoured nation obligation
432. The Convention includes a 'most favoured nation' clause which
requires New Zealand to notify Australia if it agrees in another
tax treaty to provide more favourable treatment of interest derived
by financial institutions. New Zealand is further obliged to enter
into negotiations with Australia to provide the same treatment
under the Convention. [Article 29, paragraph 2]
433. This 'most favoured nation' clause will ensure that Australian
financial institutions receive no less favourable treatment than
financial institutions in New Zealand's other treaty partner
countries. Thus for example, if New Zealand agreed in a future
treaty to grant an interest withholding tax exemption for financial
institutions, without a requirement that AIL be paid, or agreed to
a withholding tax rate limit lower than 10 per cent in the event
AIL was not paid, New Zealand would be obliged to negotiate with
Australia to provide similar outcomes for Australian financial
institutions.
Article 30 - Entry into Force
Date of entry into force
434. This Article provides for the entry into force of the Convention.
The Convention will enter into force on the last date on which
diplomatic notes are exchanged notifying that the domestic
processes to approve the Convention in the respective countries
have been completed. In Australia, enactment of the legislation
giving the force of law in Australia to the Convention along with
tabling the Convention in Parliament are prerequisites to the
exchange of diplomatic notes. [Article 30, paragraph 1]
Date of application for Australian taxes
Withholding taxes
435. Once it enters into force, the Convention will apply in Australia
in respect of withholding tax on income that is derived by a non-
resident in relation to income derived on or after the first day of
the second month next following the date on which the Convention
enters into force. [Article 30, sub-subparagraph 1a)(i)]
Fringe benefits tax
436. The Convention will apply in Australia in respect of fringe
benefits provided on or after 1 April next following the date on
which this Convention enters into force. [Article 30, sub-
subparagraph 1a)(ii)]
Other Australian taxes
437. The Convention will first apply to other Australian taxes as
regards any year of income beginning on or after 1 July next
following the date on which the Convention enters into force.
438. Where a taxpayer has adopted an accounting period ending on a date
other than 30 June, the accounting period that has been substituted
for the year of income beginning on 1 July next following the date
on which the Convention enters into force will be the relevant year
of income for the purposes of the application of such Australian
tax. [Article 30, sub-subparagraph 1a)(iii)]
Date of application for New Zealand taxes
Withholding taxes
439. In New Zealand, the Convention will apply in respect of withholding
tax on income that is derived by a non-resident in relation to
income derived on or after the first day of the second month next
following the date on which the Convention enters into force.
[Article 30, sub-subparagraph 1b)(i)]
Other New Zealand taxes
440. The Convention will first apply to New Zealand taxes as regards any
year of income beginning on or after 1 April next following the
date on which the Convention enters into force. [Article 30, sub-
subparagraph 1b)(ii)]
Arbitration
441. Paragraph 2 of this Article establishes that the provisions
allowing for arbitration (paragraphs 6 and 7 in Article 25
(Mutual Agreement Procedure)) shall have effect from a date agreed
in a subsequent Exchange of Notes between Australia and New
Zealand. [Article 30, paragraph 2]
Exchange of Information and Assistance in Collection
442. Article 26 (Exchange of Information) and Article 27 (Assistance in
the Collection of Taxes) are intended to have effect from the date
of entry into force of the Convention, irrespective of the year of
income to which the information or the revenue claim relates
(subject to any domestic law time limits).
Termination of the existing New Zealand Agreement
443. The existing New Zealand Agreement shall cease to have effect from
the dates on which the Convention commences to have application for
the respective taxes. The existing New Zealand Agreement shall be
terminated on the last of those dates. [Article 30, paragraph 3]
Article 31 - Termination
444. The Convention is to continue in effect until terminated. Either
country may terminate the Convention after the expiration of
five years from the date of its entry into force. Termination is
by notice in writing of termination through the diplomatic channel,
at least six months before the end of any calendar year beginning
after the expiration of that five-year period.
Cessation in Australia
445. In the event of either country terminating the Convention, the
Convention would cease to be effective in Australia for the
purposes of:
. withholding tax on income derived by a non-resident, in
relation to income derived on or after the first day of
the second month next following that in which the notice
of termination is given;
. fringe benefits tax, in respect of fringe benefits
provided on or after 1 April next following that in which
the notice of termination is given; and
. other Australian taxes, as regards any year of income,
profits or gains in the Australian year of income
commencing on or after 1 July next following that in which
the notice of termination is given.
[Article 31, subparagraph a)]
Cessation in New Zealand
446. The Convention would correspondingly cease to be effective in New
Zealand for the purposes of:
. withholding tax on income derived by a non-resident, in
relation to income derived on or after the first day of
the second month next following that in which the notice
of termination is given; and
. other New Zealand taxes, for income years beginning on or
after 1 April next following that in which the notice of
termination is given.
[Article 31, subparagraph b)]
Chapter 3
The Second Protocol with Belgium
Outline of chapter
447. This Bill amends the International Tax Agreements Act 1953
(Agreements Act 1953). This chapter explains the rules that apply
in the Second Protocol amending the Agreement between Australia and
the Kingdom of Belgium for the Avoidance of Double Taxation and the
Prevention of Fiscal Evasion with Respect to Taxes on Income signed
at Canberra on 13 October 1977 as amended by the Protocol signed at
Canberra on 20 March 1984 (Second Protocol), which amends the
existing tax treaty with Belgium - the Agreement between Australia
and the Kingdom of Belgium for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income
signed at Canberra on 13 October 1977 as amended by the Protocol
signed at Canberra on 20 March 1984 (existing Belgian Agreement).
Context of amendments
448. The Second Protocol was signed in Paris on 24 June 2009.
449. The Second Protocol was negotiated in the context of recent
international progress in improving tax transparency and exchange
of taxpayer information between countries, and the withdrawal by
Belgium of its reservation to Article 26 (Exchange of Information)
of the Organisation for Economic Co-operation and Development
(OECD) Model Tax Convention on Income and on Capital (OECD Model).
450. Once in force, the Second Protocol will replace the Exchange of
Information Article in the existing Belgian Agreement with a new
Article that meets the international standards set by the OECD
Model.
Summary of new law
451. The main changes to the Exchange of Information Article of the
existing Belgian Agreement (as revised by the Second Protocol) are
as follows:
. neither tax administration can refuse to provide
information solely because they do not have a domestic
interest in such information, or because the information
is held by a bank or similar institution;
. the Article now expands the scope of the Exchange of
Information Article, as it will now allow tax
administrations to request taxpayer information with
regard to all federal taxes and not just taxes to which
the existing Belgian Agreement applies; and
. the Article also provides that information received by a
tax authority may be used for other purposes when the laws
of both countries permit this and the tax authority
supplying the information authorises such use.
[Article I, paragraph 1 of new Article 26]
Comparison of key features of new law and current law
|New law |Current law |
|Closely aligns Article 26|The existing rules apply |
|(Exchange of Information)|to a narrower range of |
|to the current OECD |taxes and do not require |
|standard. The effect of |the exchange of |
|the change is to expand |information that is not |
|the range of taxes to |obtainable by the tax |
|which the Article applies|administration under |
|and to clarify that |domestic law. |
|neither bank secrecy laws|The information received |
|nor any requirement of a |can only be used for tax |
|domestic tax law interest|purposes. |
|in the information limits| |
|the exchange of | |
|information. | |
|The new rules also | |
|provide that information | |
|received may be used for | |
|non-tax purposes when the| |
|laws of both countries | |
|permit this and the | |
|supplying tax authority | |
|authorises such use. | |
Detailed explanation of new law
Article I
Substitutes new Article 26 (Exchange of Information) into the
Agreement
452. The Second Protocol aligns the information exchange provisions to
the current OECD standard by replacing Article 26 (Exchange of
Information) of the existing Belgian Agreement. The new Article 26
continues to provide for the exchange of tax information by the tax
administrations of the two countries, but differs from the previous
approach in the following ways:
. the scope is expanded to a wider ranges of taxes;
. the new provision clarifies that the Commissioner of
Taxation (Commissioner) is obliged to obtain information
for Belgian tax authorities regardless of whether
Australia has a domestic tax interest in the information
sought or whether the information concerns a resident of
either country;
. bank secrecy laws do not limit the exchange of
information; and
. information received by a tax authority may be used for
other purposes when the laws of both countries permit this
and the tax authority supplying the information authorises
such use.
Foreseeably relevant information
453. Article 26 authorises and limits the exchange of information by the
two competent authorities to information foreseeably relevant to
the administration or enforcement of the relevant taxes. The
exchange of information is not restricted by Article 1 (Personal
Scope) of the existing Belgian Agreement, and may therefore cover
persons who are not residents of Australia or Belgium.
454. The standard of foreseeable relevance is intended to ensure that
information may be exchanged to the widest possible extent.
However, a competent authority is not entitled to request
information from the other country which is unlikely to be relevant
to the tax affairs of a taxpayer, or to the administration and
enforcement of tax laws. [Article I, paragraph 1 of new Article
26]
455. The change in wording from 'necessary' used in the previous version
of the Article to a 'foreseeably relevant' standard reflects the
wording in Article 26 (Exchange of Information) of the OECD Model
and no difference in effect is intended.
Taxes to which this Article applies
456. Under the corresponding Article in the existing Belgian Agreement,
the information that could be requested and obtained between the
two countries was limited to information in relation to taxes to
which that Agreement applied (generally income taxes).
457. Under the new Article 26, the range of taxes for which information
may be exchanged has been expanded. The Australian competent
authority can now request and obtain information concerning all
federal taxes from the Belgian competent authority. This means,
for example, that information concerning Australian indirect taxes
(for example, the goods and services tax (GST)) may be requested
and obtained from Belgium. [Article I, paragraph 1 of new Article
26]
458. Similarly, in the case of Belgium, the Belgian competent authority
can now request and obtain information concerning all federal taxes
from the Australian competent authority.
Use of exchanged information
459. The purposes for which the exchanged information may be used and
the persons to whom it may be disclosed are restricted in a manner
which is consistent with the approach taken in the OECD Model.
However, the final sentence of this paragraph permits the
information to be used for other purposes when the laws of both
countries permit this and the tax authority supplying the
information authorises such use. [Article I, paragraph 2 of new
Article 26]
460. Any information received by a country must be treated as secret in
the same manner as information obtained under the domestic law of
that country, and can only be disclosed to the persons identified
in paragraph 2 of the Article. [Article I, paragraph 2 of new
Article 26]
No domestic tax interest required
461. When requested, a country is required to obtain information under
the new Article in the same manner as if it were administering its
domestic tax system, notwithstanding that the country may not
require the information for its own purposes. Australia would
recognise this obligation to obtain relevant information for treaty
partner countries, even in the absence of an explicit provision to
this effect. [Article I, paragraph 4 of new Article 26]
Limitations
462. The country requested to provide information under the new Article
26 is not obliged to do so where:
. it would be required to carry out administrative measures
at variance with the law and administrative practice of
either Australia or Belgium; or
. such information is not obtainable under the domestic law
or in the normal course of administration.
[Article I, subparagraphs 3(a) and (b) of new Article 26]
463. Also, in no case is the country receiving the request obliged to
supply information under new Article 26 that would:
. disclose any trade, business, industrial, commercial or
professional secret or trade process; or
. be contrary to public policy.
[Article I, subparagraph 3(c) of new Article 26]
Information held by institutions such as banks, other financial
institutions, trusts, foundations and nominees
464. Paragraph 5 ensures that paragraph 3 of the new Article 26 cannot
be used to prevent the supply of information solely because the
information is held by institutions such as banks, other financial
institutions, trusts, foundations and nominees.
465. The final sentence in paragraph 5 ensures that, to the extent that
it may be necessary in order to obtain information from such
persons or institutions for the purposes of exchange of information
under the new Article 26, the tax administration of the requested
country will have the power to require the disclosure of
information and to conduct investigations notwithstanding the
country's domestic tax laws. This additional sentence is intended
to overcome limitations imposed under Belgian internal law on the
ability of the Belgian tax administration to obtain information,
especially information from banks and other financial institutions
for the purposes of the taxation of their clients. [Article I,
paragraph 5 of new Article 26]
466. The final sentence in paragraph 5 of the new Article 26 will not
have any practical application for Australia, since Australian
domestic tax law already permits the Commissioner to obtain
information from banks and financial institutions in order to meet
obligations under Exchange of Information Articles in tax treaties
or Tax Information Exchange Agreements.
Information that exists prior to the entry into force of the Second
Protocol
467. The Article will apply to the exchange of information made after
the entry into force of the Second Protocol with respect to tax
events occurring on or after the dates specified in Article II,
including where the relevant information existed prior to the entry
into force of the Second Protocol.
Article II
Date of entry into force of the Second Protocol
468. Article II provides for the entry into force of the Second
Protocol. The Second Protocol will enter into force on the last
date on which diplomatic notes are exchanged notifying that the
domestic processes to give the Second Protocol the force of law in
the respective countries has been completed. In Australia,
enactment of the legislation giving the force of law in Australia
to the Second Protocol, along with tabling of the Second Protocol
in Parliament, are prerequisites to the exchange of diplomatic
notes. [Article II]
469. New Article 26 will apply to taxes imposed at source on income
derived on or after 1 January 2010, and to income tax imposed in
respect of taxable periods beginning on or after that date. Thus,
for example, the new Article 26 will apply with respect to
Australian withholding taxes on income derived from 1 January 2010,
and for other Australian income tax, with respect to tax on income
derived during the year of income commencing 1 July 2010 and
subsequent years. For other taxes, such as Australia's GST and
fringe benefits tax, the new Article will apply in respect of
taxable events occurring from 1 January 2010. [Article II,
subparagraphs 1a) to c)]
470. The new Article 26 will apply with respect to criminal tax matters
from the date of entry into force of the Second Protocol. It
applies to requests for exchange of information in respect of
federal taxes of both Australia and Belgium received on or after
that date. [Article II, paragraph 2]
471. The information to be exchanged in relation to criminal tax matters
may relate to the income tax affairs of a taxpayer in a taxable
period (for example, a year of income) that predates the entry into
force of the Second Protocol. [Article II, paragraph 2]
Article III
Second Protocol part of the existing tax treaty
472. Article III provides that the Second Protocol shall form an
integral part of the existing Belgian Agreement and will remain in
force and apply as long as the existing Belgian Agreement is in
force and applicable. [Article III]
Chapter 4
The Australia-Jersey Agreement
Outline of chapter
473. This Bill amends the International Tax Agreements Act 1953
(Agreements Act 1953) and inserts Schedule 50 into the Agreements
Act 1953 which is the Agreement between the Government of Australia
and the Government of Jersey for the Allocation of Taxing Rights
with Respect to Certain Income of Individuals and to Establish a
Mutual Agreement Procedure in Respect of Transfer Pricing
Adjustments (the Jersey Agreement). This chapter explains the
rules that apply in the Jersey Agreement. All legislative
references are to Schedule 50, unless otherwise stated.
Context of amendments
474. The Jersey Agreement was signed in London on 10 June 2009. There
is no pre-existing agreement of this type between Australia and
Jersey. The Jersey Agreement was signed in conjunction with the
Agreement between the Government of Australia and the Government of
Jersey for the Exchange of Information with Respect to Taxes (the
Jersey Information Exchange Agreement), which will establish a
legal basis for the exchange of tax information between the two
countries. Jointly, the two agreements will promote greater
economic and administrative cooperation between the two countries.
Summary of new law
Main features of this Agreement
475. The main features of the Jersey Agreement are as follows:
. Income from pensions and retirement annuities will
generally be taxed only in the country of residence of the
recipient, provided the income is subject to tax in that
country.
. Income from government service will generally be taxed
only in the country that pays the remuneration. However,
the remuneration shall only be taxed in the other country
where the services are rendered in that other country by a
resident of that other country who is a national of that
other country or did not become a resident of that other
country for the purpose of rendering the services.
. Payments made from abroad to visiting students and
business apprentices for the purposes of their
maintenance, education or training will be exempt from tax
in the country visited.
. A non-binding administrative mechanism will be established
to assist taxpayers to seek resolution of transfer pricing
disputes.
Comparison of key features of new law and current law
|New law |Current law |
|Australian source |Australian source income |
|pensions and retirement |of foreign residents is |
|annuities derived by |generally subject to |
|residents of Jersey will |Australian tax. |
|be exempt from Australian| |
|tax, provided they are | |
|taxed in Jersey. | |
|Certain income derived by|Australian source income |
|residents of Jersey from |of foreign residents is |
|government service in |generally subject to |
|Australia will be exempt |Australian tax. |
|from Australian tax. | |
|Certain payments received|Some payments received by|
|by visiting students and |foreign students and |
|business apprentices from|business apprentices may |
|Jersey will be exempt |be taxable in Australia, |
|from Australian tax. |depending on the |
| |circumstances. |
|The competent authorities|No equivalent. |
|of Australia and Jersey | |
|will endeavour to resolve| |
|taxpayers' transfer | |
|pricing disputes arising | |
|from transfer pricing | |
|adjustments that | |
|contravene the arm's | |
|length principle. | |
Detailed explanation of new law
476. This Bill gives effect to the Jersey Agreement, which is inserted
as Schedule 50 to the Agreements Act 1953 and deals with the
allocation of taxing rights with respect to certain income of
individuals.
Article 1 - Persons Covered
477. This Article establishes the scope of the application of the Jersey
Agreement by providing for it to apply to persons who are residents
of one or both of the countries. [Article 1]
478. The application of the Jersey Agreement to persons who are dual
residents (that is, residents of both countries) is dealt with in
Article 4 (Resident).
Article 2 - Taxes Covered
479. This Article specifies the existing taxes of each country to which
the Jersey Agreement applies. This is, in the case of Australia,
the federal income tax. [Article 2, subparagraph 1(a)]
480. For Jersey, the Jersey Agreement applies to the income tax
(referred to as Jersey tax). [Article 2, subparagraph 1(b)]
481. The application of the Jersey Agreement will be automatically
extended to any identical or substantially similar taxes which are
subsequently imposed by either country in addition to, or in place
of, the existing taxes. The competent authorities for the two
countries are required to notify each other in the event of a
significant change to the taxation law of the respective countries,
within a reasonable period of time after those changes. [Article
2, paragraph 2]
Article 3 - Definitions
Definition of Australia
482. The definition of Australia follows corresponding definitions in
Australia's modern tax treaties. 'Australia' is defined to include
certain external territories and areas of the continental shelf.
[Article 3, subparagraph 1(a)]
Definition of Jersey
483. Jersey is defined to mean the Bailiwick of Jersey, including its
territorial sea. [Article 3, subparagraph 1(b)]
Definition of competent authority
484. The competent authority is the person or institution specifically
authorised to perform certain actions under the Jersey Agreement.
For example, to notify each other of any significant changes to the
tax law of their respective countries, to communicate for the
purposes of Article 8 (Mutual Agreement Procedure in Respect of
Transfer Pricing Adjustments) and to exchange information in
accordance with Article 9 (Exchange of Information).
485. In the case of Australia, the competent authority is the
Commissioner of Taxation (Commissioner) or an authorised
representative of the Commissioner. In the case of Jersey, the
competent authority is the Treasury and Resources Minister or an
authorised representative of the Minister. [Article 3,
subparagraph 1(c)]
Definition of party
486. Party means Australia or Jersey, as the context requires.
[Article 3, subparagraph 1(d)]
Definition of national
487. National means any individual possessing the nationality or
citizenship of Australia or Jersey, as the context requires.
[Article 3, subparagraph 1(e)]
Definition of person
488. Person includes an individual, a company and any other body of
persons. [Article 3, subparagraph 1(f)]
Definition of tax
489. The term tax means either Australian tax or Jersey tax, depending
on the context. [Article 3, subparagraph 1(g)]
Definition of transfer pricing adjustment
490. A transfer pricing adjustment is an adjustment made by the
competent authorities of Australia or Jersey to the profits of an
enterprise, based on the application of domestic transfer pricing
laws. For Australia, such laws are contained in Division 13 of
Part III of the Income Tax Assessment Act 1936 (ITAA 1936).
[Article 3, subparagraph 1(h)]
Terms not specifically defined
491. A term that is not specifically defined in the Jersey Agreement
shall have (unless the context requires otherwise) the meaning that
it has under the domestic taxation law of the country applying the
Jersey Agreement at the time of its application. In that case, the
term's domestic taxation law meaning will have precedence over the
meaning it may have under that country's other domestic laws.
[Article 3, paragraph 2]
492. The same term may have different meaning and a varied scope within
different Acts relating to specific taxation measures. For
example, goods and services tax definitions are sometimes broader
than income tax definitions. The definition more specific to the
type of tax should be applied in such cases. For example, where
the matter subject to interpretation is an income tax matter, but
definitions exist in either the ITAA 1936 or the Income Tax
Assessment Act 1997 (ITAA 1997) and the A New Tax System (Goods and
Services Tax) Act 1999, the income tax definition would be the
relevant definition to be applied.
Article 4 - Resident
493. This Article sets out the basis upon which the residence status of
a person is to be determined for the purposes of the Jersey
Agreement. Residence status is a criterion for determining each
country's taxing rights and is a necessary condition for the
provision of relief under the Jersey Agreement. In the case of
Australia, a person's residence is determined according to
Australia's taxation law [Article 4, subparagraph 1(a)]. In the
case of Jersey, residence is determined according to Jersey's
taxation law [Article 4, subparagraph 1(b)].
Special residency rules
494. A person is not a resident of a country, for the purposes of the
Jersey Agreement, if that person is liable to tax in that country
in respect only of income from sources in that country. In the
Australian context, this would mean, for example, that Norfolk
Island residents, who are generally only subject to Australian tax
on Australian source income, are not residents of Australia for the
purposes of the Jersey Agreement. Accordingly, Jersey will not
have to forego tax in accordance with the Jersey Agreement on
income derived by Norfolk Island residents (which will not be
subject to Australian tax). [Article 4, paragraph 2]
Dual residents
495. Tie-breaker rules are included for determining residency, for the
purposes of the Jersey Agreement, if a taxpayer qualifies as a dual
resident, that is, a resident of both countries in accordance with
paragraph 1 of Article 4. These rules, in order of application,
are:
. if the individual has a permanent home available in only
one of the countries, the person is deemed to be a
resident solely of that country for the purposes of the
Jersey Agreement [Article 4, subparagraph 3(a)];
. if the individual has a permanent home available in both
countries or in neither, then the person's residential
status takes into account their personal or economic
relations with Australia and Jersey, and the person is
deemed for the purposes of the Jersey Agreement to be a
resident only of the country with which they have the
closer personal and economic relations [Article 4,
subparagraph 3(a)];
. residency will be determined on the basis of an
individual's nationality where the foregoing tests are not
determinative [Article 4, subparagraph 3(b)];
. if the individual is a national (as defined in
subparagraph 1(e) of Article 3 (Definitions) of the Jersey
Agreement) of both countries, or of neither, the competent
authorities will endeavour to resolve the question of
treaty residence by mutual agreement [Article 4,
subparagraph 3(c)]; or
. where a person that is not an individual is a dual
resident, the entity will be deemed, for the purposes of
the Jersey Agreement, to be a resident of the country in
which its place of effective management is located
[Article 4, paragraph 4].
496. In relation to Australia, a dual resident remains a resident for
the purposes of Australian domestic law. Accordingly, that person
remains liable to tax in Australia as a resident, insofar as the
Jersey Agreement allows.
Article 5 - Pensions and Retirement Annuities
497. Pensions and retirement annuities are taxable only by the country
of which the recipient is a resident, provided such income is
subject to tax in that country. If such income is not subject to
tax in that country, the income may be taxed by the country from
which the relevant payments were made. [Article 5, paragraph 1]
Meaning of retirement annuity
498. In the case of Australia, retirement annuity means a superannuation
annuity payment within the meaning of the taxation laws of
Australia. That is, a superannuation annuity as defined by
Regulation 995-1.01 of the Income Tax Assessment Regulations 1997,
which took effect from 1 July 2007. [Article 5, subparagraph 2(a)]
Article 6 - Government Service
499. Salary and wage type income, other than government service pensions
or annuities, paid to an individual for services rendered to a
government of one of the countries (including a political
subdivision or local authority), is to be taxed only in that
country [Article 6, subparagraph 1(a)]. However, such remuneration
will be taxable only in the other country if the services are
rendered in that other country and:
. the recipient is a resident of, and a national of, that
other country; or
. the recipient is a resident of that other country and did
not become a resident of that country solely for the
purpose of rendering the services (for example, if the
recipient is a permanent resident of that other country).
[Article 6, subparagraph 1(b)]
Business income
500. However, salaries, wages and other similar remuneration in respect
of services rendered in connection with a trade or business carried
on by any governmental authority referred to in paragraph 1 of
Article 6 of the Jersey Agreement is excluded from the scope of the
Article. Such remuneration will remain subject to the domestic
taxation laws of the two countries. [Article 6, paragraph 2]
Article 7 - Students
Exemption from tax
501. Article 7 applies to students or business apprentices who are
temporarily present in one of the countries solely for the purpose
of their education or training if they are, or immediately before
the visit were, resident in the other country. In these
circumstances, payments from abroad received by the students or
business apprentices solely for their maintenance, education or
training will be exempt from tax in the country visited. This will
apply even though the student or apprentice may qualify as a
resident of the country visited during the period of their visit.
Employment income
502. Where, however, a Jersey student visiting Australia solely for
educational purposes undertakes employment in Australia, for
example, part-time work with a local employer, the income earned by
that student as a consequence of that employment may be subject to
tax in Australia.
503. For business apprentices, this Article only applies where the
apprentice's remuneration consists solely of subsistence payments,
made from abroad, to cover training or maintenance. Remuneration
for service, that is, salary equivalents, falls for consideration
under domestic taxation law.
504. In the case of a Jersey business apprentice visiting Australia
solely for training purposes, it may therefore be necessary to
distinguish between remuneration for service and a payment for the
apprentice's maintenance or training. The quantum of the payment
will be relevant in such cases.
505. A payment for maintenance or training would not be expected to
exceed the level of expenses likely to be incurred to ensure the
apprentice's maintenance and training (that is, a subsistence
payment). If the remuneration is similar to the amounts paid to
persons who provide similar services who are not business
apprentices (that is, salary equivalent), this would generally
indicate that the payments constitute income from employment that
would fall for consideration under domestic taxation law.
Likewise, if that business apprentice undertakes any other
employment in Australia, the income earned from that employment may
be subject to tax in Australia.
506. In these situations, the payments received from abroad for the
student or apprentice's maintenance, education or training will
not, however, be taken into account in determining the tax payable
on the employment income that is subject to tax in Australia. No
Australian tax would be payable on the employment income if the
student or apprentice qualifies as a resident of Australia during
the visit and the taxable income of the student or apprentice does
not exceed the tax-free threshold applicable to Australian
residents for income tax purposes.
Article 8 - Mutual Agreement Procedure in Respect of Transfer Pricing
Adjustments
507. Article 8 provides for consultation between the competent
authorities of the two countries for the purpose of endeavouring to
resolve disputes concerning transfer pricing adjustments
purportedly made not in accordance with the arm's length principle.
[Article 8, paragraph 2]
508. The term 'arm's length principle' refers to the requirement that
businesses price their related party international dealings
according to what truly independent parties acting independently
would reasonably be expected to have done in the same situation.
The Commissioner would apply the arm's length principle when
reviewing business transactions in the context of Division 13 of
Part III of the ITAA 1936.
509. A person wishing to use this mutual agreement procedure must
present their case to the competent authority of their country of
residence within three years of the first notification of the
transfer pricing adjustment. This procedure operates independently
of, and in addition to, domestic legal remedies available to
taxpayers. [Article 8, paragraph 1]
Article 9 - Exchange of Information
510. Article 9 authorises and limits the exchange of information by the
competent authorities to information that is foreseeably relevant
to the administration of the Jersey Agreement.
511. The exchange of information is subject to the provisions of the
Jersey Information Exchange Agreement, which was signed by the two
countries on 10 June 2009. After that agreement enters into force
and takes effect, it will provide for exchange of information that
is foreseeably relevant to the administration of the taxation laws
of the two countries. It also contains safeguards to protect
taxpayers' rights. For example:
. confidentiality rules to ensure that information exchanged
is only disclosed to authorised recipients; and
. limitations to ensure that the competent authorities do
not exceed domestic laws and normal administrative
procedures in the course of obtaining and supplying
information.
Article 10 - Entry into Force
Date of entry into force
512. The Jersey Agreement will enter into force on the date of the last
exchange of diplomatic notes notifying that the domestic procedures
to give it the force of law have been completed. In Australia,
tabling the Jersey Agreement and enactment of the legislation
giving the Jersey Agreement the force of law are prerequisites to
the exchange of diplomatic notes. Entry into force is also
conditional upon the Jersey Information Exchange Agreement being in
force at that time.
Date of application in Australia
513. Following entry into force, the Jersey Agreement will take effect
in Australia in respect of any income year beginning on or after 1
July in the calendar year next following the date on which it
enters into force. [Article 10, subparagraph (a)]
514. Where a taxpayer has adopted an accounting period ending on a date
other than 30 June, the accounting period that has been substituted
for the year of income beginning on 1 July in the calendar year
next following the date on which this Agreement enters into force
will be the relevant year of income for the purposes of the
application of such Australian tax. [Article 10, subparagraph (a)]
Date of application in Jersey
515. Following entry into force, the Jersey Agreement will take effect
in Jersey in respect of any income year beginning on or after 1
January in the calendar year next following the date on which it
enters into force. [Article 10, subparagraph (b)]
Article 11 - Termination
516. The Jersey Agreement is to continue in effect indefinitely.
However, either country may give written notice of termination of
the Jersey Agreement through the appropriate channel. [Article 11,
paragraph 1]
Cessation in Australia
517. In the event of either country terminating the Jersey Agreement, it
would cease to be effective in Australia in the year of income
beginning on or after 1 July in the calendar year next following
that in which the notice of termination is given. [Article 11,
subparagraph 2(a)]
Cessation for Jersey
518. The Jersey Agreement would correspondingly cease to be effective in
Jersey for any year of income beginning on or after 1 January in
the calendar year next following that in which the notice of
termination is given. [Article 11, paragraph 2(b)]
Cessation in other circumstances
519. The Jersey Agreement will also terminate and cease to be effective
if the Jersey Information Exchange Agreement is terminated. In
that event, the Jersey Agreement would terminate on the first day
of the month following the expiration of three months after receipt
of notification of termination of that agreement. [Article 11,
paragraph 3]
Chapter 5
Regulation impact statement for New Zealand and Jersey
THE AUSTRALIA-NEW ZEALAND CONVENTION
Background
How tax treaties operate
520. Tax treaties facilitate international investment by removing or
reducing tax barriers to cross-border movement of people, capital
or technology.
521. International taxation is based on concepts of residency and
source. Countries generally tax their residents on their world
wide income. Countries also seek to tax non-residents on the
income that is earned (or sourced) within their borders.
522. Double taxation can therefore arise when the country of residence
and the country where the income is sourced both seek to tax the
same income.
523. Tax treaties reduce or eliminate double taxation by treaty partners
agreeing in certain situations to limit taxing rights over various
types of income. The respective countries also agree on methods of
reducing double taxation where both countries exercise their right
to tax. In the absence of rules to relieve the resulting double
taxation, international commerce would be seriously inhibited.
524. In addition, tax treaties provide an agreed basis for determining
the allocation of profits within a multinational company and
whether the profits on related party dealings by members of a
multinational group operating in both countries reflect the pricing
that would be adopted by independent parties. Tax treaties are
therefore an important tool in dealing with international profit
shifting through transfer pricing.
525. To prevent fiscal evasion, tax treaties include provision for
exchange of information held by the respective revenue authorities.
Treaties may also provide for cross-border collection of tax debts
and may preclude certain types of tax discrimination. Taxpayers
can also avail themselves of the mutual agreement procedures
provided for in treaties which allow the two revenue authorities to
consult with a view to developing a common interpretation and to
resolving differences arising out of application of the treaty.
526. Australia seeks an appropriate balance between source and residence
country taxing rights. Generally, the allocation of taxing rights
under Australian tax treaties is similar to international practice
as set out in the Organisation for Economic Co-operation and
Development (OECD) Model Tax Convention on Income and on Capital
(OECD Model) (Australia being a member of the OECD and involved in
the development of that Model). There are however, a few instances
where Australian practice favours source country taxing rights
rather than the residence approach of the OECD Model.
The existing Australia-New Zealand tax treaty
527. The existing Australia-New Zealand tax treaty was signed on
27 January 1995 and has been in effect in Australia since the
income year commencing 1 July 1995 in respect of income taxes, and
from 1 April 1995 for withholding taxes and fringe benefits tax.
The 1995 treaty was amended in 2005 by insertion via a limited
Protocol of additional integrity measures. However, the provisions
of most interest to business and investors (including the rates of
withholding tax applicable to dividends, interest and royalty
payments) remained unchanged due to New Zealand undertaking an
international tax review. New Zealand completed their internal
review in December 2006.
528. On 28 January 2008, the then Assistant Treasurer and Minister for
Competition Policy and Consumer Affairs announced the commencement
of negotiations to revise the 1995 New Zealand tax treaty and its
2005 amending Protocol to enhance the mutual conduct of business.
529. The detriment to business from not modernising the existing New
Zealand tax treaty and Protocol is difficult to assess and
quantify. However, international consideration by such forums as
the OECD and consultation with business has indicated that a modern
tax treaty, including among other things reductions in withholding
tax rates on payments to non-residents, provide a clear positive
benefit to trade and investment relationships between the
countries. Given the extent of Australia and New Zealand's trade
and investment relationship it is important that these rate limits
remain as up-to-date as possible with current treaty practice.
530. Taxpayers would also suffer from greater uncertainty in their tax
affairs if other aspects of the tax treaty were not updated. For
example, including provisions restricting the time in which
transfer pricing adjustments and allowing taxpayers to have issues
of fact resolved by arbitration in certain cases will provide
greater certainty for taxpayers in their tax affairs. Both
provisions would be included in a modernised New Zealand tax
treaty.
531. Australian taxpayers would also suffer from having no protection
from discrimination in the event New Zealand's tax system sought to
impose more burdensome taxation on Australians, as the existing New
Zealand treaty does not contain a Non-Discrimination Article. A
modernised treaty which incorporates a Non-Discrimination Article
would ensure Australian nationals and business are treated no less
favourably than nationals and business of New Zealand in similar
circumstances, and vice versa.
Australia's trade and investment relationship with New Zealand
Trade
532. New Zealand has been a major trading partner for many years. The
economic and trade relationship between the two countries is shaped
by the Australia New Zealand Closer Economic Relations Trade
Agreement (known as CER), which came into effect in 1983. Since
the CER came into effect, trade has increased at an average annual
rate of 9 per cent over the life of the agreement.
533. Based on trade in goods and services, New Zealand is now
Australia's fifth largest market taking 5.2 per cent of our
exports, and is the eighth largest source of imports for Australia.
Australia is New Zealand's principal trading partner, providing
20.8 per cent of its merchandise imports and taking 22 per cent of
its merchandise exports.
534. Two-way trade reached A$22.45 billion in 2007-08, with bilateral
merchandise trade in 2007-08 accounting for approximately
A$16.47 billion of this, with the balance of trade in Australia's
favour. Two-way trade in services was valued at approximately
A$5.98 billion.
535. Total exports (goods and services) in 2007-08 were valued at A$12.9
billion. Key exports include refined petroleum, crude petroleum,
passenger motor vehicles, and medicaments.
536. Total imports from New Zealand in 2007-08 were valued at A$9.5
billion. Imports comprised mainly of crude petroleum, gold, paper
and paper board, and alcoholic beverages.
Investment
537. Two-way investment between Australia and New Zealand currently
stands at over A$110 billion. New Zealand is Australia's sixth
largest investor, with a total stock of investment worth A$32.4
billion at the end of 2006. New Zealand is the third largest
market for Australian investment abroad, with Australia the largest
investor in New Zealand. The total stock of Australian investment
in New Zealand was worth A$65.3 billion at the end of 2006. Over
half of Australia's total investment in New Zealand is foreign
direct investment, reflecting the high level of economic
integration.
Policy objective
538. The objective of this measure is to:
. promote closer economic cooperation between Australia and
New Zealand by further reducing taxation barriers to trade
and investment between the two countries; and
. update the taxation arrangements between the two
countries, including the insertion of provisions to
prevent tax discrimination.
Implementation options
539. The implementation options for meeting the policy objectives
specified above are:
. retain the existing Australia-New Zealand tax treaty;
. conclude a second amending Protocol to amend certain
aspects of the existing treaty and Protocol to reflect
current policies; or
. conclude a new bilateral tax treaty.
Option 1: Retain the existing Australia-New Zealand tax treaty
540. While the existing tax treaty has provided a good measure of
protection against double taxation and prevention of fiscal
evasion, it has become outdated in many respects and no longer
adequately reflects the current tax treaty policies and practice of
Australia or New Zealand.
541. In particular, relying on the existing tax treaty means
arrangements between Australia and New Zealand would not benefit
from the move to lower withholding tax rate limits provided under
Australia's most recent tax treaties. The existing treaty also
does not contain other recent international developments, such as
access to arbitration for taxpayers in certain circumstances where
they have been taxed in a way that does not accord with the treaty.
Relying on the existing treaty would also mean there would be no
protection for Australian nationals or business in the event of tax
discrimination. Relying on the existing treaty would also mean
that other barriers to conducting cross-border business activities
would not be removed.
Option 2: A second limited amending Protocol - rely on the existing tax
treaty and Protocol measures
542. This option would rely on the existing tax treaty and Protocol
measures with an additional amending second Protocol covering both
countries' desired changes. In view of the number of changes both
partners wanted to make to update the existing treaty and Protocol
to reflect the current tax treaty policies and practices of both
countries, and the fact that the treaty already contained one
amending Protocol, a second amending Protocol did not seem
practicable in this instance.
Option 3: Conclude a new tax treaty
543. This option would replace the existing treaty and Protocol with a
new bilateral tax treaty that reflects the current policies and
practices of both countries.
544. A new tax treaty would be largely based on the current OECD Model,
with some mutually agreed variations reflecting the economic, legal
and cultural interests of the two countries.
545. Both countries have particular policy objectives to achieve in
updating the tax treaty and the end result ultimately represents
compromises necessary to achieve a mutually acceptable agreement.
The key changes in a new treaty include:
. a reduction of the dividend withholding tax limit from
15 per cent to zero for dividends paid on portfolio
investment by government bodies, and for intercorporate
dividends on non-portfolio holdings of more than 80 per
cent subject to certain conditions; 5 per cent dividend
withholding tax limit for other intercorporate non-
portfolio holdings and 15 per cent dividend withholding
tax limit for all other dividends;
. a reduction in the interest withholding tax limit from
10 per cent to zero where interest is paid to:
- government bodies and central banks; or
- financial institutions, provided that in the case of
interest paid from New Zealand, the New Zealand
2 per cent Approved Issuer Levy has been paid. A 'most
favoured nation' provision applies if New Zealand
subsequently provides better treatment in respect of
such interest in another treaty;
. a reduction in the maximum royalty withholding tax rate
limit from 10 per cent to 5 per cent;
. extending the meaning of 'royalties' to include spectrum
licences. Leasing of industrial, commercial or scientific
equipment will no longer constitute a royalty;
. clarifying the residence status of Australian managed
investment trusts and entities participating in dual
listed company arrangements to ensure these entities can
access the treaty's benefits where appropriate;
. providing for profits from the provision of services
performed in a country to be taxed by that country in
certain circumstances;
. ensuring that profits derived from the operation of ships
and aircraft in international traffic are generally taxed
only in the country of residence of the operator;
. updating rules governing the taxation of income, profits
or gains from the alienation of real property, and other
capital gains;
. ensuring that employees' remuneration during certain short
visits on secondment to one country are not taxed by the
country visited;
. providing that pensions will not be subject to tax in the
residence country when they are exempt from tax in the
country from which they are sourced. Lump sum payments
will only be taxed in the country in which they are
sourced;
. providing certainty to taxpayers by restricting transfer
pricing adjustments to within a seven-year period except
where an audit has been initiated or where there is fraud,
gross negligence or wilful neglect;
. providing certainty to taxpayers by giving them access to
arbitration where issues of fact resulting in taxation not
in accordance with the treaty cannot be resolved by the
Australian and New Zealand tax authorities within two
years; and
. providing new rules to protect nationals and businesses
from tax discrimination in the other country.
Assessment of impacts
Difficulties in quantifying the impacts of tax treaties
546. Only a partial analysis of costs and benefits can be provided
because all of the impacts of tax treaties cannot be quantified.
While the direct cost to Australian revenue of withholding tax
changes can be quantified relatively easily, other cost impacts
such as compliance costs are inherently difficult to quantify.
There are also efficiency and growth gains and losses to Australia
that provide estimation problems. Analysis has been conducted to
establish plausible impacts on Australian economic activity and
consequent tax revenue flowing from implementation of the tax
treaty. The tax revenue estimates are subject to more uncertainty
than the estimates of costs but are best estimates given the
technology of estimation, the availability of estimates of
behavioural responses, and data.
547. Benefits that flow to business are generally equally difficult to
quantify. The evidence from international consideration (for
example, by the OECD) and from consultation with business strongly
indicates, however, that while the quantum of benefits is very
difficult to assess, a modern tax treaty provides a clear positive
benefit to trade and investment relationships. Tax treaties
provide increased certainty and reduce complexity and compliance
costs for business.
Impact group identification
548. The Convention with New Zealand is likely to have an impact on:
. Australian residents doing business with New Zealand,
including principally:
- Australian residents investing directly in New Zealand
(either by way of a subsidiary or a branch);
- Australian residents investing indirectly in New
Zealand;
- Australian banks and the other specified Australian
institutions lending to New Zealand borrowers;
- Australians borrowing from New Zealand banks;
- Australian residents using technology and know-how
supplied by New Zealand residents;
- Australian residents supplying services to New Zealand
and vice versa; and
- Australian residents exporting to New Zealand;
. Australian employees working in New Zealand;
. Australian residents receiving pensions from New Zealand;
. Australian residents who receive income that is exempt in
New Zealand because they are transitional residents of
New Zealand;
. the Australian Government; and
. the Australian Taxation Office (ATO).
Assessment of benefits
Renegotiation provides a better outcome for all stakeholders
549. While the existing tax treaty has provided a good measure of
protection against double taxation and prevention of fiscal evasion
since coming into force, it has become outdated and no longer
adequately reflects both partners' desired positions, given
Australia and New Zealand's close economic relationship and the
desire of both countries to continue to enhance this relationship.
550. The Convention comprehensively modernises and updates the existing
treaty and Protocol. As well as revising the allocation of taxing
rights between the two countries and the withholding tax rate
limits prescribed in the treaty, Australia is able to achieve
improved certainty for taxpayers by restricting the time in which
transfer pricing adjustments may be made and allowing taxpayers to
have issues of fact resolved by arbitration in cases where they
cannot be resolved by the Australian and New Zealand tax
authorities within two years.
551. The Convention provides benefits to Australian business and to the
Australian revenue by ensuring certainty of legislative outcomes
based on the treaty. It is another step forward in providing
Australian business with an internationally competitive tax treaty
network and business tax system.
552. The Convention provides better outcomes than the existing treaty
for a large majority of stakeholders. Given the long-term nature
of such arrangements, the Convention is expected to promote greater
certainty than the existing tax treaty. It also contributes to the
updating of Australia's ageing treaty network.
Economic benefits
Withholding tax reductions
553. The Convention will address businesses' desire to improve the
competitiveness of Australia's tax treaty network, particularly
through the reductions of withholding tax rates.
554. Under its domestic tax law, Australia imposes a final withholding
tax on interest, royalty and unfranked dividend payments to non-
residents at the rates of 10, 30 and 30 per cent of the gross
payment, respectively. However, Australia generally agrees to
limit these withholding tax rates, on a reciprocal basis, in its
bilateral tax treaties. In the existing New Zealand treaty, the
withholding tax rates for interest, royalty payments, and dividends
are limited to 10, 10 and 15 per cent of the gross payments,
respectively.
555. Withholding tax reductions below the rates reflected in the
existing New Zealand tax treaty were first included in the 2001
Protocol amending the Convention with the United States of America
(US). Similar reductions have generally been agreed in Australia's
subsequent tax treaties. The similar treatment in the Convention
aligns treatment, where possible, with Australia's recent tax
treaties, maintains the integrity of Australia's treaty network and
discourages treaty shopping (and the consequent degradation of the
tax base of countries where the costs of capital and intellectual
property are higher under their treaties as a result of the higher
withholding tax rates).
556. While a reduction in maximum withholding tax rates will involve a
cost to revenue, there are expected to be benefits to the revenue
and to the wider economy arising out of increased business and
investment activity, with the most direct benefits accruing to
business.
Dividends
557. Outcomes such as that provided in the US and United Kingdom of
Great Britain and Northern Ireland (UK) treaties (that is, no
withholding tax on dividends paid to a company with an 80 per cent
or greater voting interest in a listed company in the other
jurisdiction, and 5 per cent withholding tax where the interest is
at least 10 per cent of the voting power) remove distortions in the
raising of capital for direct investment that results from the more
favourable terms that currently apply bilaterally in the case of
the US and the UK. The existing treaty only has a 15 per cent rate
for all dividends and therefore would not remove these distortions.
558. The Convention also includes an exemption for dividends derived in
respect of portfolio holdings by the Governments of either country
(including their political subdivisions, local authorities and
government investment funds).
Interest
559. The zero Australian interest withholding tax rate on interest
arising in Australia and paid to unrelated New Zealand financial
institutions is consistent with Australia's current treaty
practice, recognising that a 10 per cent interest withholding tax
rate on gross interest derived by financial institutions may be
excessive given their cost of funds. It should accordingly lower
the costs of borrowing in those cases where the financial
institution can pass the cost represented by the withholding tax on
to the Australian borrower. The existing treaty does not provide
an exemption for unrelated financial institutions, and therefore in
the absence of updating the existing treaty in this respect
Australian borrowers often pay the cost of the withholding tax.
560. In the case of interest arising in New Zealand and paid to an
Australian financial institution, the exemption from withholding
tax only applies where the Approved Issuer Levy (if applicable) has
been paid. Due to the nature of New Zealand's banking sector it was
necessary for New Zealand to maintain payment of this levy in order
for a zero withholding tax rate to apply. New Zealand payers of
interest to non-resident lenders can elect (if they meet the
required conditions) to pay the Approved Issuer Levy instead of non-
resident withholding tax. The Convention provides that if New
Zealand repeals their Approved Issuer Levy regime, or increases it
beyond the current 2 per cent, then this condition will no longer
need to be satisfied for the zero rate to apply.
561. A 'most favoured nation' provision applies to interest derived by
financial institutions so that if New Zealand subsequently provides
better treatment in respect of such interest, they must notify
Australia and enter into negotiations with Australia with a view to
providing the same treatment.
562. As is the case in Australia's other recent tax treaties, the
Convention includes an exemption for interest derived by the
Governments of either country (including their political
subdivisions, local authorities and government investment funds),
and the countries' central banks.
Royalties
563. Australian residents required to meet the cost of Australian
royalty withholding tax on royalty payments made to New Zealand
residents will benefit from the reduced royalty withholding tax
rate of 5 per cent. Commercial practice indicates that, as with
interest, the cost represented by the royalty withholding tax is
commonly passed on to the payer of the royalty. This means that
the Australian payer may bear the cost of higher rates of
withholding tax if the existing treaty rate of 10 per cent is
maintained, which would place them at a competitive disadvantage in
competing with businesses from other countries with lower rates.
The effect of lowering the withholding tax rate is a lowering of
the cost of new technology and intellectual property, which may
encourage the development of Australia's economy through use of the
most up-to-date technology and processes. Additionally it may
encourage New Zealand residents to use Australian technology and
intellectual property.
Managed investments trusts
564. The inclusion of provisions to provide treaty benefits in respect
of income derived through Australian managed investment trusts
(MITs) is of benefit to the managed funds industry and investors.
Under the existing treaty, as MITs are considered to be fiscally
transparent (where the income flows through the entity and is taxed
in the hands of the participants as opposed to taxation at the
entity level), Australian investors would need to be able to
identify amounts derived by the MIT from New Zealand, and the
character of each item of income, in order to be able to claim
treaty benefits in New Zealand (such as reduced withholding tax
rates).
565. The Convention provides that the MIT will be entitled to treaty
benefits if they are listed on an Australian stock exchange, or
more than 80 per cent of the interests in the MIT are held by
Australian residents. By treating the MIT as an Australian
resident for treaty purposes, the MIT is able to claim treaty
benefits in respect of items of income flowing from New Zealand to
Australia.
566. If the MIT does not meet the listing requirement or the 80 per cent
resident ownership threshold, the Convention nevertheless allows it
to claim treaty benefits to the extent that Australian residents
own the income.
567. These provisions remove the need for each individual investor in a
MIT to claim treaty benefits from New Zealand on their own behalf
as is required under the existing treaty, which significantly
reduces compliance complexity and costs for Australian investors.
This will help promote Australia as a funds management hub in the
Asia-Pacific region.
Alienation of Property
568. Article 13 (Alienation of Property) better aligns with Australia's
domestic law treatment and international treaty practice by
providing for taxation of certain capital gains only in the
alienator's country of residence. The existing treaty maintains
the domestic tax law treatment where the taxation treatment of the
income, profit or gain from the disposal of property is not subject
to specific rules in the treaty. The treatment under the existing
treaty is not consistent with recent treaty practice and does not
align with OECD practice.
569. This is expected to encourage investment in Australia and result in
generally lower compliance costs. Australia's source country
taxing rights over capital gains on real property, land rich
companies and assets which form the business property of a
permanent establishment in Australia would be retained.
570. The provision permitting Australia to continue to tax capital gains
of its former residents for up to six years prevents the creation
of double non-taxation, since New Zealand does not have a general
capital gains tax regime.
Income from Employment
571. The revised provisions in the Income from Employment Article will
ensure that an employee's remuneration during their short-term
visits on secondment to one country is taxable only in the country
of residence of the employee. These provisions will facilitate
cross-border secondments within an enterprise or company group and
will simplify the taxation affairs of the receiving enterprise and
the employee. These provisions will reduce compliance burdens
significantly. The existing treaty does not provide special rules
for such short-term visits on secondment, resulting in non-
residents being burdened with the need to comply with a foreign
country's tax system, even though they are only there for a short
period.
Pensions
572. The Convention provides that pensions are exempt in the country of
residence of the recipient to the extent they are not subject
to tax if the recipient were resident in the source country. This
will encourage the free movement of workers between Australia and
New Zealand. In line with the objectives under the CER,
encouraging the free movement of people between Australia and New
Zealand in this way removes some of the 'behind-the-border'
impediments to trade. Australia and New Zealand residents are
regularly caught up in both countries' superannuation systems.
Each country's domestic law treatment of foreign pension payments
means cross-border pension payments are often taxed more heavily
than if the payment was received by a resident recipient. This
pension provision, unlike the provision in the existing treaty,
removes impediments to working and accumulating superannuation
benefits in both countries.
Arbitration
573. The arbitration provision gives taxpayers access to arbitration
where issues of fact in relation to taxation not in accordance with
the Convention are not resolved by the Australian and New Zealand
tax authorities within two years. This will provide certainty to
taxpayers. The arbitration provision also provides businesses with
a mechanism for the timely resolution of disputes regarding the
application of the tax treaty to issues of fact. The existing
treaty does not allow taxpayers to seek arbitration.
Non-Discrimination
574. The Non-Discrimination Article will prevent tax discrimination
against Australian nationals and businesses operating in New
Zealand and vice versa. The existing treaty does not provide any
such protection.
Other benefits
575. Where Australians carry on business activities in New Zealand, the
existing treaty prevents New Zealand from taxing the business
profits of an Australian resident unless that Australian resident
carries on business through a permanent establishment (such as a
branch) in New Zealand. The Convention further refines the concept
of when a permanent establishment is taken to exist and the level
of activity to constitute a permanent establishment. This
principle also applies where a New Zealand enterprise carries on
business activities in Australia.
576. The refined permanent establishment concept includes a services
provision, which allows Australia to tax a New Zealand resident
entity on income it derives from the provision of services
performed through one or more individuals present in Australia for
more than 183 days in a year. It allows New Zealand to tax the
Australian resident's income in the reverse situation.
577. The 2008 OECD Commentary to the OECD Model (OECD Model Commentary)
includes an optional provision providing for source country
taxation of services. The provision in the Convention is based on
the OECD Model Commentary provision, but incorporates modifications
designed to minimise compliance costs for business to the greatest
extent possible.
578. While the existing New Zealand treaty already has a services
provision in that it permits a country to tax professional services
in the country where they are performed where the individual is
present for a period of 183 days in any twelve months (in the
Independent Personal Services Article), it does not provide an
exemption for short-term stays of five days or less. Further, it
only applies to self-employed individuals performing professional
services, while the new provision would apply to services provided
by individuals or companies.
579. Other benefits also include:
. the clarification of the residency rules. Under the
existing treaty the residency status of certain entities,
for instance entities participating in dual listed company
arrangements, is left uncertain;
. clarifying that treaty relief is not available on certain
income, profits or gains that are exempt in New Zealand
because the recipient is a transitional resident of that
country, which the existing treaty does not provide,
creating uncertainty for these individuals;
. clarifying the treatment of income derived through trusts,
which the existing treaty leaves uncertain;
. ensuring that income from real property, including natural
resource royalties, may be taxed in full by the country in
which the property is situated;
. providing new time limits for transfer pricing
adjustments, giving taxpayers greater certainty;
. ensuring that profits derived from the operation of ships
and aircraft in international traffic are generally taxed
only in the country of residence of the operator, as
opposed to source taxation of profits from all domestic
shipping and airline activities, as occurs under the
existing treaty. This change will provide closer
alignment with the OECD Model and more consistent
treatment for similar activities; and
. requiring Australia and New Zealand to consult with each
other every five years to ensure the treaty continues to
operate effectively. This will ensure the treaty is
reviewed at regular intervals, unlike the existing treaty
which does not provide for a review period.
Revenue benefits
580. The Convention represents another step in facilitating a
competitive and modern treaty network for Australian companies and
helps to maintain Australia's status as an attractive place for
business and investment, helping to better position Australia as a
regional headquarters for multinational companies and as a regional
financial hub. While a reduction in maximum withholding tax rates
and the pensions exemption involve a cost to revenue, there are
expected to be benefits to revenue and to the wider economy arising
out of increased business and investment activity, with the most
direct benefits accruing to business.
Compliance and administrative cost reduction benefits
581. Tax exemptions in respect of withholding taxes, and exclusive
taxation of income from employment in the employee's resident state
in respect of short-term secondments to another country, are likely
to reduce compliance and administration costs associated with
remitting and claiming credits for such tax.
582. The closer alignment with more recent Australian and international
treaty practice is generally expected to reduce compliance costs.
583. Clarifying other areas of uncertainty, such as tax treaty tests of
'residency' (including for MITs), the time periods for transfer
pricing adjustments, and allowing taxpayers access to arbitration
on issues of fact should also decrease compliance costs and
uncertainty.
Improved international relationships
584. The Convention also assists the bilateral relationship by updating
an important treaty in the existing network of commercial treaties
between the two countries. It also promotes closer economic
relations through the provisions aimed at improving the free
movement of employees between the countries and by preventing tax
discrimination against Australian nationals and businesses
operating in New Zealand and vice versa.
585. The Convention takes account of changes to the OECD Model as far as
possible (for instance, the inclusion of a limited arbitration
provision), and also helps to maintain Australia's status as an
active OECD member which in turn maintains Australia's position in
the international tax community.
Assessment of costs - types of costs
Revenue costs
586. Treasury has estimated the impact of the first round effects on
forward estimates as unquantifiable. Identifiable costs to revenue
associated with reductions in the rates of withholding tax and the
change to taxing rights for pensions have been estimated as A$142
million over the forward estimates. Estimating the revenue
benefits to Australia flowing from reductions in New Zealand
withholding taxes is problematic. Reductions in New Zealand
withholding taxes can be expected to result in an increase in the
amount of Australian tax revenue through reduced Foreign Income Tax
Offsets claimed and increases in Australian taxable income. Given
the bilateral flows between Australia and New Zealand, the current
features of the Australian and New Zealand tax systems, and the
impact of the changes in the arrangements under the Convention, the
revenue costs are expected to be broadly offset by revenue gains.
Administration costs
587. The administrative impacts on the ATO from the changes made by any
new treaty arrangements are considered to be minimal. Some formal
interpretive advice may be required, for example private binding
rulings, concerning the application of the treaty. Staff from the
ATO, clients and tax professionals will need to be made aware of
the entry into force and changes from the previous treaty.
Therefore a number of ATO information products will need to be
updated. Further, the insertion of a new arbitration provision may
have some minimal administration impacts in setting up the mode of
application of the provision, and once the provision and mode of
application are in effect, facilitating arbitration where it is
sought.
588. The cost of negotiation and enactment of the Convention were
minimal and have mostly been borne by Treasury and the ATO. There
was also an unquantifiable but small cost in terms of parliamentary
time and drafting resources in enacting the Convention.
589. There are also 'maintenance' costs to the ATO associated with tax
treaties and mutual agreement procedures (including advance pricing
arrangements). These costs also apply to the existing
arrangements. The Convention reduces these costs. However, as
treaties are deals struck between the two countries that reflect
specific features of the bilateral relationship, some level of
differential treatment or wording between treaties, which may
require interpretation or explanation by the ATO, is inevitable.
Other costs
590. Government policy flexibility in relation to taxation of
New Zealand residents has been further constrained by changes to
treaty obligations, for example with respect to exemption from
taxation of New Zealand pensions where those pensions are exempt in
New Zealand. However, such constraints are also placed on New
Zealand law makers, providing long-term certainty to taxpayers. As
such, the cost of such constraints is outweighed by the benefits.
Ultimately, the Convention could be terminated if it became out of
step with Government policy. Such terminations are very rare in
international tax treaty practice, however, and could be expected
to be resisted by the business community and others who benefit
from the treaty.
591. The impact of new tax treaty arrangements on tax policy flexibility
is generally quite minimal as tax treaties are based on broad and
generally accepted taxation principles. Australia's closer
economic relations with New Zealand through the CER, has meant that
some provisions in the Convention have been negotiated with this
particular relationship in mind. Australia can justify these
particular provisions within this context, and therefore it is
likely that any impact on tax policy flexibility is minimal.
Assessment of costs
Taxpayer costs
592. No material additional costs to taxpayers have been identified as
likely to arise from the Convention.
593. Businesses that collect withholding taxes will need to make small
system changes to change the rate at which they withhold to reflect
the Convention's withholding tax rate limits. Previous experience
and anecdotal evidence suggests that these changes will be straight
forward and easily accommodated.
594. Businesses with New Zealand resident employees or with employees or
professionals performing services in New Zealand may need to make
business system changes to calculate days during which services are
provided in the other country, as under the Convention very short
periods of service (five days or less) are disregarded and other
provisions to moderate compliance costs are provided. Under the
existing treaty, businesses already have to calculate days of
service in the other country for self-employed persons performing
independent personal services (under the Independent Personal
Services Article).
595. Most businesses that have dealings with New Zealand would already
understand their tax obligations under the existing tax treaty and
Protocol, accordingly changes are likely to give only a minor
compliance cost as businesses adjust to the Convention.
596. No costs for the community or other parties have been identified.
Administration costs
597. The costs to the ATO with respect to arbitration are expected to be
minor, and only arise when taxpayers seek arbitration.
Consultation
598. The then Assistant Treasurer and Minister for Competition Policy
and Consumer Affairs' Press Release No. 004 of 28 January 2008
invited submissions from stakeholders and the wider community on
Australia's future tax treaty policy and in particular issues that
might arise during negotiations with New Zealand. Treasury has
also sought comments from the business community through the Tax
Treaties Advisory Panel.
599. In general, business and industry groups support the general
approaches taken in Australia's recent treaties. They also favour
a more residence-based taxation treaty policy, lower withholding
taxes, time limits on transfer pricing audits and the inclusion of
arbitration clauses.
600. The state and territory governments have been consulted through the
Commonwealth/State Standing Committee on Treaties. Information on
the negotiation of this treaty was included in the Schedules of
treaties to state and territory representatives from early March
2009.
601. The Convention was considered by the Commonwealth Joint Standing
Committee on Treaties, which provides for public consultation in
its hearings.
602. The Bill and explanatory materials were the subject of confidential
consultation with the Tax Treaties Advisory Panel.
Conclusion and recommended option
603. While the existing tax treaty and its amending Protocol have
provided a good measure of protection against double taxation and
prevention of fiscal evasion since coming into force, in the
context of the closer economic relationship that Australia and New
Zealand share, the treaty has become outdated and no longer
adequately reflects current tax treaty policies and practices of
either Australia or New Zealand, nor modern international norms.
604. The Convention responds to businesses' desire for greater certainty
and more competitive withholding tax rate limits in Australia's tax
treaty network.
605. Developments in both countries' domestic law, commercial practices,
and treaty policies and practices supported a full revision of the
treaty. This also provided an opportunity to update the text in
accordance with modern OECD practice, which a second limited
amending Protocol would not permit.
606. The Convention is consistent with Australia's recent move towards a
more residence-based tax treaty policy. It brings Australia's
arrangements with New Zealand more into line with international
norms, as set out in the OECD Model and provides outcomes similar
to Australia's recent treaties.
607. There is a direct cost to revenue, largely due to reduced
withholding tax collections and the limited exemption provided for
pensions. On balance, the benefits of concluding the Convention
outweighed the cost to revenue.
608. The Convention was therefore recommended.
Implementation and review
609. The Convention is implemented by amending the International Tax
Agreements Act 1953 to include the treaty as a Schedule to that
Act, giving the treaty the force of law in Australia. Like all
other tax treaties it will be administered by the ATO. Since the
ATO already administers the existing New Zealand treaty,
implementing and administering the Convention is not expected to
require extra resources, and only result in minor costs from
updating information products.
610. The Convention makes provision for review of the treaty. Review
will take place no later than five years after the Convention
enters into force, by both countries consulting with each other in
regard to the operation and application of the treaty with a view
to ensuring that it continues to serve its purposes of avoiding
double taxation and preventing fiscal evasion.
THE AUSTRALIA-JERSEY AGREEMENT
Policy objective
611. The objective of the Agreement between the Government of Australia
and the Government of Jersey for the Allocation of Taxing Rights
with Respect to Certain Income of Individuals and to Establish a
Mutual Agreement Procedure in Respect of Transfer Pricing
Adjustments (the Jersey Agreement) is to promote closer economic
and administrative cooperation between Australia and Jersey, by
reducing some of the taxation barriers to trade and investment
between the two countries.
612. The Jersey Agreement was signed in conjunction with the Agreement
between the Government of Australia and the Government of Jersey
for the Exchange of Information with Respect to Taxes (the Jersey
Information Exchange Agreement), which will promote greater
cooperation between the taxation authorities of the two countries
to prevent tax avoidance and evasion.
Implementation options
613. The internationally accepted approach to meeting the policy
objectives specified above is to conclude a bilateral tax
agreement.
Assessment of impacts
Impact group identification
614. The Jersey Agreement is likely to have an impact on:
. recipients of Australian source pensions or retirement
annuities who reside in Jersey;
. Australian individuals providing services to an Australian
government (or political subdivision or local authority)
in Jersey;
. Australian students and business apprentices temporarily
residing in Jersey for education or training purposes;
. the Australian Government; and
. the ATO.
Analysis of costs/benefits
Assessment of costs
Revenue costs
615. The impact of the Jersey Agreement on the forward estimates is
estimated to be negligible.
Administration costs
616. The administrative impacts on the ATO from the changes made by any
new bilateral tax agreements (including tax treaties) are
considered to be low. General enquiries may arise and some formal
interpretive advice, such as private binding rulings, may be
required concerning the application of the Jersey Agreement. ATO
staff, taxpayers and tax professionals will need to be made aware
of the entry into force of the Jersey Agreement. Therefore a
number of ATO information products will need to be updated. This
is normal in the context of any new tax treaty or bilateral
agreement.
617. The cost of negotiating and enacting the Jersey Agreement was
minimal.
Taxpayer costs
618. No material additional costs to taxpayers have been identified as
likely to arise from the Jersey Agreement. The agreement is
expected to simplify the taxation obligations of the entities that
fall within their scope.
Other costs
619. The Jersey Agreement will constrain Government policy flexibility
in relation to the taxation of Jersey individuals. However, as
their provisions are consistent with the Government's general tax
treaty policy, and are based on broad and generally accepted
taxation principles, the impact of such a loss of flexibility would
be minimal. Ultimately, the Jersey Agreement could be terminated
if it was found to contravene Government policy but such
termination is rare in international treaty practice and would
likely be resisted by those individuals who will benefit from this
Agreement.
Consultation
620. The negotiation of the Jersey Agreement was not conducted in the
public domain and, consequently, no public consultation was
undertaken. It was negotiated in conjunction with the negotiation
of the Jersey Information Exchange Agreement, which was also
conducted outside the public domain.
621. The Jersey Agreement has also been considered by the Commonwealth
Joint Standing Committee on Treaties, which provides for public
consultation in its hearings.
Conclusion and recommended option
622. The Jersey Agreement is consistent with the Government's tax treaty
policy and implements the policy objectives stated above.