Income Tax Regulations (Amendment) 1991 No. 391
EXPLANATORY STATEMENT
STATUTORY RULES 1991 No. 391
Issued by the Authority of the Treasurer
Income Tax Assessment Act 1936
INCOME TAX REGULATIONS (AMENDMENT)
These regulations amend the Income Tax Regulations (the Regulations) relating to the collection of dividend withholding tax (DWT).
Section 221YL of the Income Tax Assessment Act 1936 authorises the making of regulations under which the amount of withholding tax to be deducted by an Australian resident company, or interposed payee, from a dividend paid to an overseas resident shall be determined. Those rates are prescribed in regulation 136 of the Income Tax Regulations and the principal amendments made by these amending regulations are to that regulation.
Regulation 136 prescribes a standard rate of DWT deduction of 30% of the dividend. This rate applies where Australia does not have a double taxation agreement (DTA) with the country of residence of the dividend recipient.
Where a DTA applies, regulation 135 classifies the treaty partner country as a "prescribed country" and regulation 136 prescribes a lower rate of DWT deductions for dividends paid to residents of prescribed countries - in accordance with the source country tax rate limitations on outgoing dividends specified in the DTAs. Those lower rates are currently:
• 15% where the dividend payment is made to an address or place in a prescribed country, or is received by an interposed payee on behalf of a resident of a prescribed country, other than the Philippines, and
• 25% in the case of the Philippines.
It has been necessary to amend regulation 136 following the entry into force of double taxation agreements recently concluded by Australia with Fiji, Kiribati and Thailand because those agreements specify different source country tax rate limits on dividend flows between the respective treaty partner countries.
The relevant tax rate limit in the DTA's with Fiji and Kiribati is 20% of the gross amount of the dividend. In the case of the DTA with Thailand, no limit applies in respect of the amount of tax to be imposed by one country on dividends to which a resident of the other country is beneficially entitled except where that resident is a company which holds directly at least 25% of the capital of the paying company. Variable limits apply in those circumstances as follows:
• 15% of the gross amount of the dividend where the paying company engages in an "industrial undertaking" (as defined in the DTA); and
• 20% in other cases.
This means generally that dividends paid by an Australian resident company to a resident of Thailand may be taxed at the dividend withholding tax rate provided for under Australia's domestic law (30%).
Accordingly, the amendments to regulation 136 prescribe a 20% DWT deduction rate for dividends flowing to residents of Fiji and Kiribati.
The general 30% deduction rate has been prescribed in the case of residents of Thailand. This is because it will not necessarily be within the knowledge of those liable to make a deduction from the dividend (the Australian resident company paying the dividend or an interposed payee) whether the necessary requirements for the application of the lower variable rates applicable under the DTA i.e., beneficial ownership of the dividends by a Thai company which holds 25% of the capital of the paying company - are satisfied at the time the dividend is paid. It is not feasible or practicable, therefore, to generally prescribe those lower variable rates for dividends paid to residents of Thailand.
In cases where those requirements are known to be satisfied, the dividend paying company, or if applicable an interposed payee, will be authorised by a notice under section 221YM of the Act (which allows the Commissioner of Taxation to vary an amount of DWT deductions in particular cases) to deduct at the applicable lower rate.
The regulations also contain two minor technical amendments to regulation 135.
The regulations do not specify a commencement date and will, accordingly commence on the day they are notified in the Gazette as provided for by section 48 of the Acts Interpretation Act 1901.
Regulation 1 provides that the Income Tax Regulations are amended as set out in these regulations.
Subregulation 2(1) omits 135(2)(b) of the Income Tax Regulations. The paragraph was inserted by Statutory Rules No. 212 of 1976 and provided for Papua New Guinea to be a "prescribed country" for the purposes of the Division.
The reason for this omission is that paragraph 135(2)(c) of the Regulations provides that where Australia and another country have entered into a double taxation agreement or convention (DTA) the latter country is a "prescribed country" for the purposes of the Division where the DTA has the force of law and it contains a provision limiting the amount of Australian tax payable in respect of a dividend.
Australia and Papua New Guinea concluded a DTA in 1989 which satisfies the requirements of paragraph 135(2)(c). Accordingly, the separate reference to Papua New Guinea in paragraph 135(2)(b) is no longer required.
Subregulation 2(2) omits the former subregulation 135(4) which ties the prescription of a DTA country as a "prescibed country" to the time from which the DTA has effect in relation to dividends - and substitues a new subregulation. The new subregulation is in substantially the same format as the omitted subregulation. It has been redrafted to reflect a change in the drafting style of the provisions in the Income Tax (International Agreements) Act 1953 which give the force of law to Australia's double taxation agreements. The revised drafting style has been adopted when inserting Australia's more recent double taxation agreements as Schedules to that Act.
Subregulation 3(1) includes in paragraph 136(2)(c) references to paragrahs (d), (e), (f), and (g). The effect of this amendment is that where the "prescribed country" address of the dividend recipient is in one of the countries referred to in those paragraphs (the Philippines, Fiji, Thailand and Kiribati respectively) the rate of DWT deductions from dividends flowing to those countries is to be as specified in the relevant paragraph and not at the 15% rate specified in paragraph (2)(c) for "prescribed countries" generally.
Subregulation 3(2) adds paragraphs (e), (f) and (g) at the end of current subregulation 136(2). The rates of DWT deductions prescribed under those paragraphs are
• under paragraph (e), for residents of Fiji : 20% of the gross amount of the dividends
• under paragraph (f), for residents of Thailand : 30% of the gross amount of the dividends
• under paragraph (g), for residents of Kiribati : 20% of the gross amount of the dividends.
Subregulations 3(3) and 3(4) make amendments to existing subregulation 136(3) corresponding to those made to existing subregulation 136(2) by subregulations 3(1) and 3(2). The effects of those amendments are to prescribe the abovementioned DWT deduction rates in respect of dividends to which residents of Fiji, Thailand or Kiribati are beneficially entitled where the dividends are paid to interposed payees in Australia.