australia new zealand double tax agreement explanatory memorandum

Chapter 2 The AustraliaNewZealand Convention. Resident status in respect of persons other than individuals determined solely by reference to place of effective management. Proposal announced: This measure was announced in the AssistantTreasurer and Minister for Trades joint Media Release No. As double taxation does not arise in these cases, the credit form of relief will not be relevant. Such institutions are liable to tax for the purposes of the Article and, therefore, are residents under the Convention. Under subsections 104-165(2) and (3) of the ITAA1997, 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. That is, a different mode of taxation may be adopted with respect to nonresident enterprises, to take account of the fact that they often operate in different conditions to resident enterprises. 2.91 Paragraph 7 of Article 4 is designed to facilitate the claiming of treaty benefits for New Zealand investments held by MITs. Australia and New Zealand can agree in respect of existing laws or laws that are enacted in the future. 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. 2.300 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. 4.13 In the case of Australia, the competent authority is the Commissioner of Taxation (Commissioner) or an authorised representative of the Commissioner. 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, Pensions and lump sums not subject to tax still counted for certain purposes, It is understood that pensions, other similar periodic remuneration and lump sums referred to in Article 18 (, the income earned by that student as a consequence of that employment may, as provided for in Article 14 (, Double Taxation Convention between the Developed and Developing Countries, Esk Co, an Australia resident company, derives business profits from the sale of merchandise through an independent agent located in NewZealand. For example, section 26-25 (Interest or royalty) of the ITAA1997 provides that where interest or royalties are paid to a nonresident and the payer fails to deduct withholding tax, the interest or royalty cannot be claimed as a deduction. 2.79 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.. 2.227 In the absence of a tax treaty, Australia taxes royalties paid to non-residents at 30 per cent of the gross royalty. 2.143 Paragraphs 1, 3 and 4 of Article 6 are extended to income derived from the use or exploitation of real property of an enterprise. [Article 4, paragraph1]. 4.29 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. 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. 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. The zero rate will also apply to interest derived by governments, their political subdivisions and local authorities (including government investment funds). 2.125 Certain activities do not generally give rise to a permanent establishment (for example, the use of facilities solely for storage, display or delivery). [Article 10, paragraph 5]. 4.20 The same term may have different meaning and a varied scope within different Acts relating to specific taxation measures. 5.77 No costs for the community or other parties have been identified. 2.434 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. On 27 May 2019, the Australian Taxation Office (ATO) and the New Zealand (NZ) Inland Revenue (IR) released their joint administrative approach to interpreting the dual resident provisions in the Multilateral Instrument. 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. 2.122 This provision is an anti-avoidance measure aimed at counteracting contract splitting for the purposes of avoiding the application of the permanent establishment rules. It is understood that paragraph 7 of Article 4 (. 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 27, subparagraph 8d)], 2.419 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. 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. 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. Such people are referred to as dependent agents. 2.420 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. 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); FBTAA 1986 (other than section67 which is an antiavoidance rule). [Article 10, subparagraph2a)], 2.187 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. 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. 2.176 However, no such relief is available in cases that have been designed with a main purpose of taking advantage of this Article. 2.359 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. Comparison of key features of new law and current law. 2.2 The Convention was signed in Paris on 26June2009. [Article 30, sub-subparagraph 1a)(ii)]. 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). In the case of Jersey, the competent authority is the Treasury and Resources Minister or an authorised representative of the Minister. [Article 4, paragraph 4]. [Article 3, subparagraph 1h)]. 2.365 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. 2.246 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. 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. 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 NewZealand through those employees for the purposes of sub-subparagraph a)(ii) of paragraph 4 of Article 5. 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. Since the CER came into effect, trade has increased at an average annual rate of 9per cent over the life of the agreement. Entry into force is also conditional upon the Jersey Information Exchange Agreement being in force at that time. For example, a voyage to nowhere which begins and ends in Sydney on a ship operated by a NewZealand enterprise would not come within the definition of international traffic, even if the ship travels through international waters in the course of the cruise. 5.30 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 NewZealands close economic relationship and the desire of both countries to continue to enhance this relationship. substantial equipment is being used by, for or under contract with the enterprise. 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. 5.6 To prevent fiscal evasion, tax treaties include provision for exchange of information held by the respective revenue authorities. However, it does not include arrangements that have as one of their main purposes the obtaining of benefits under this rule. 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. [Article9, paragraph 3], 2.173 The treaty specifies a time limit for the adjustment of the profits of the enterprise under paragraph 1 or 2 of this Article. 2.200 However, no such relief is available in cases that have been designed with the main purpose of taking advantage of this Article. As Jasons salary is borne by Tasman Banks permanent establishment in Wellington, and the other conditions of paragraph 2 are met, the income will be taxed only in New Zealand. 2.298 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. 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 11, subparagraph 2(a)], 4.46 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. 2.356 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. This reflects the 2005 changes to Article 26 (Exchange of Information) of the OECD Model. 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. 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. 2.320 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). Although Australia does not have specific conservancy measures, the Commissioner may apply for a Mareva injunction, which would prevent the taxpayer and the taxpayers associates from dealing with certain assets. 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., 2.230 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). From 1996, most Explanatory Memoranda are available online through The Convention reduces these costs. 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. [Article 23, paragraph 1]. These rules also apply to business trusts [Article7]. Such option benefits are treated as remuneration from employment for the purposes of Article 14 (Incomefrom Employment). 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). 2.124 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. 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. 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. Income from employment (that is, employees remuneration) will generally be taxable in the country where the services are performed. However, the treaty countries are allowed to reallocate profits between related enterprises on an arms 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). 5.64 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. [Article 11, subparagraph 4b)]. [Article30, sub-subparagraph 1a)(i)], 2.427 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. 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. 2.435 The Convention is to continue in effect until terminated. 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]. 4.27 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, subparagraph1(a)]. As NewZealand 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 NewZealand. Income from real property includes natural resource royalties [Article6]. 2.433 Article 26 (Exchange of Information) and Article 27 (Assistancein 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). 3) 1967, pp. 2.263 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. Australia is defined to include certain external territories and areas of the continental shelf. [Article 7, paragraph 7]. However, reductions in NewZealand 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. 2.61 Section 12400 of Schedule 1 to the Taxation Administration Act1953 defines the term managed investment trust. Source taxation of profits from all domestic shipping and airline activities (including non-transport activities). Provides for mutual agreement procedures to determine residence in respect of persons other than individuals, where place of effective management does not provide an outcome. To avoid difficulties in such cases of ascertaining which country a directors 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. DTAs reduce tax impediments to cross-border trade 2.48 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. 2.171 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. 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. [Article II], 3.23 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. 2.306 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 Australias treaties, no difference in meaning is intended. 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. 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. 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 [Articles10to12]. However, under the Convention, the allocation of taxing rights over such profits is determined by Article 6 (Income from Real Property). 2.54 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). Paragraphs 2 and 3 will apply where those dividends are beneficially owned by a resident of the other country. [Article 5, paragraph3]. Previous experience and anecdotal evidence suggests that these changes will be straight forward and easily accommodated. 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. Only the profits derived by each subsidiary from its own activities would be attributed to each companys permanent establishment. 2.260 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. [Article8, paragraph 4], 2.163 The definition of international traffic refers only to transport and accordingly limits the scope of paragraph 1 of Article 8 to transport activities. [Article I, paragraph 1 of new Article 26]. When will the Convention enter into force, and from what date will the Convention have effect? 5.45 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. However, exemptions from source country taxation have been provided for interest paid to: certain government bodies and banks performing central banking functions [Article11, subparagraph3a)]; and. 2.413 The requested country is permitted to refuse the request for assistance in certain circumstances. This procedure operates independently of, and in addition to, domestic legal remedies available to taxpayers. 2.399 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. Webthe AustralianNew Zealand Double Tax Agreement (AusNZ DTA) deals with this subject. 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. 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 NewZealand enacted after the date of the Convention in place of the AIL. 5.65 The Convention also assists the bilateral relationship by updating an important treaty in the existing network of commercial treaties between the two countries. 2.89 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 NewZealand, 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. It applies to requests for exchange of information in respect of federal taxes of both Australia and Belgium received on or after that date. 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. [Article 24, subparagraph5a) and paragraph 6]. criticism of the dawn of everything 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. [Article 12, subparagraph3f)], 2.239 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. Imports comprised mainly of crude petroleum, gold, paper and paper board, and alcoholic beverages. 2.257 Under Australias CGT regime, ceasing to be an Australian resident can trigger a CGT event (CGT Event I1). 2.357 In the case of New Zealand, the relevant taxes are all taxes imposed by New Zealand except for those imposed by local authorities. 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. On balance, the benefits of concluding the Convention outweighed the cost to revenue. 2.99 This provision only applies to transitional residents of NewZealand. 007 of 25June 2009. [Article 3, subparagraph 1(f)], 4.17 The term tax means either Australian tax or Jersey tax, depending on the context. 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.

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