Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008-2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
International Tax Agreements Amendment Bill (No. 1) 2009
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary 1
General outline and financial impact 3
Chapter 1 Australia-British Virgin Islands Agreement 9
Chapter 2 Australia-Isle of Man Agreement 19
Chapter 3 Regulation impact statement for the British Virgin Islands
Agreement and the Isle of Man Agreement 31
Glossary
The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|Agreements Act |International Tax Agreements |
| |Act 1953 |
|ATO |Australian Taxation Office |
|BVI |British Virgin Islands |
|BVI Agreement |Agreement between the |
| |Government of Australia and |
| |the Government of the British|
| |Virgin Islands for the |
| |Allocation of Taxing Rights |
| |with Respect to Certain |
| |Income of Individuals |
|Commissioner |Commissioner of Taxation |
|FBTAA 1986 |Fringe Benefits Tax |
| |Assessment Act 1986 |
|IoM |Isle of Man |
|IoM Agreement |Agreement between the |
| |Government of Australia and |
| |the Government of the Isle of|
| |Man 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 |
|ITAA 1936 |Income Tax Assessment Act |
| |1936 |
|ITAA 1997 |Income Tax Assessment Act |
| |1997 |
General outline and financial impact
What will this Bill do?
This Bill amends the International Tax Agreements Act 1953
(Agreements Act) to give the force of law in Australia to the
following tax agreements:
. The Agreement between the Government of Australia and the
Government of the British Virgin Islands for the
Allocation of Taxing Rights with Respect to Certain Income
of Individuals (BVI Agreement), which was signed in London
on 27 October 2008; and
. The Agreement between the Government of Australia and the
Government of the Isle of Man 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 (IoM Agreement), which was
signed in London on 29 January 2009.
These Agreements contain articles that are based on corresponding
articles contained in Australia's bilateral tax treaties.
The BVI Agreement is the first agreement of its type signed between
Australia and a low-tax jurisdiction and was signed in conjunction
with the Agreement for the Exchange of Information Relating to
Taxes between Australia and the British Virgin Islands (BVI), which
was signed in London on 27 October 2008.
The IoM Agreement is the second agreement of this type and was
signed in conjunction with the Agreement for the Exchange of
Information with Respect to Taxes between Australia and the Isle of
Man (IoM), which was signed in London on 29 January 2009.
Who is affected by this Bill?
Individuals who are residents of Australia and/or the BVI or the
IoM who derive income from pensions and retirement annuities (in
the case of the IoM Agreement only) or the provision of government
services, or receive payments in their capacity as visiting
students or business apprentices.
Residents of Australia or the IoM that wish to contest a transfer
pricing adjustment made by the Australian or IoM tax authorities.
How the legislation is structured
The Agreements Act 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. The provisions of the
Agreements Act (including the terms of the tax treaties) take
precedence over 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 is amended to insert the text of the BVI
Agreement and the IoM Agreement as Schedules to that Act, which
will give them the force of law.
When will these changes take place?
From the date of Royal Assent.
When will these Agreements enter into force, and from what date will they
have effect?
The BVI Agreement
The BVI 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,
enactment of the legislation giving the BVI Agreement the force of
law along with tabling it in Parliament are prerequisites to the
exchange of diplomatic notes.
Once it enters into force the BVI 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 BVI Agreement
enters into force.
Application in the BVI
In respect of any income year beginning on or after 1 January in
the calendar year next following the date on which the BVI
Agreement enters into force.
The IoM Agreement
The IoM 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,
enactment of the legislation giving the IoM Agreement the force of
law along with tabling it in Parliament are prerequisites to the
exchange of diplomatic notes.
Once it enters into force the IoM 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 IoM Agreement
enters into force.
Application in the IoM
In respect of any income year beginning on or after 5 April in the
calendar year next following the date on which the IoM Agreement
enters into force.
The financial impact of this Bill
The impact of both the BVI Agreement and the IoM Agreement on the
forward estimates has been estimated as negligible.
Compliance costs
No significant compliance costs are expected to result from the
entry into force of the BVI Agreement and the IoM Agreement.
Summary of regulation impact statement
The BVI Agreement
Regulation impact on business
Impact: Minimal.
Main points:
. The BVI Agreement is likely to have an impact on
Australian individuals providing services to an Australian
government (including a state or local government) in the
BVI; Australian students and business apprentices
temporarily residing in the BVI for education or training
purposes; the Australian Government and the Australian
Taxation Office (ATO).
. The BVI Agreement will promote a closer bilateral
relationship between Australia and the BVI by eliminating
double taxation of certain income derived by individuals,
specifically government employees, students and business
apprentices.
. In conjunction with the Agreement for the Exchange of
Information Relating to Taxes between Australia and the
BVI, the BVI 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 BVI Agreement but there is likely to be a small,
unquantifiable administration cost.
The IoM Agreement
Regulation impact on business
Impact: Minimal.
Main points:
. The IoM Agreement is likely to have an impact on
recipients of Australian source pensions or retirement
annuities who reside in the IoM; individuals providing
services to an Australian government (including a state or
local government) in the IoM; Australian students and
business apprentices temporarily residing in the IoM for
education or training purposes; the Australian Government
and the ATO.
. The IoM Agreement will also have an impact on Australian
residents (including non-individuals) that wish to contest
a transfer pricing taxation adjustment made by the IoM tax
authority.
. The IoM Agreement will promote a closer bilateral
relationship between Australia and the IoM by eliminating
double taxation of certain income derived by individuals,
specifically pension recipients, government employees,
students and business apprentices.
. In conjunction with the Agreement for the Exchange of
Information with Respect to Taxes between Australia and
the IoM, the IoM 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 IoM Agreement but there is likely to be a small,
unquantifiable administration cost.
Do not remove section break.
Outline of chapter
1. Schedule 1 to this Bill amends the International Tax Agreements Act
1953 (Agreements Act) and inserts Schedule 48 into the Agreements
Act, which is the Agreement between the Government of Australia and
the Government of the British Virgin Islands for the Allocation of
Taxing Rights with Respect to Certain Income of Individuals (BVI
Agreement). This chapter explains the rules that apply in the BVI
Agreement. All legislative references are to Schedule 48, unless
otherwise stated.
Context of amendments
2. The BVI Agreement was signed in London on 27 October 2008. There
is no pre-existing agreement of this type between Australia and the
British Virgin Islands (BVI). The BVI Agreement was signed in
conjunction with the Agreement for the Exchange of Information
Relating to Taxes between Australia and the BVI, 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
3. The main features of the BVI Agreement are as follows:
. Income from government service will generally be taxed
only in the country that pays the remuneration. However,
the remuneration shall 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.
. 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.
Comparison of key features of new law and current law
|New law |Current law |
|Certain income derived by|Australian source income |
|residents of Australia |of foreign residents, and|
|and the BVI from |foreign source income of |
|government service will |Australian residents, is |
|be taxed only by the |generally subject to |
|country for which the |Australian tax. |
|services were rendered. | |
|Certain payments received|Some payments received by|
|by visiting students and |students and business |
|business apprentices will|apprentices may be |
|be exempt from tax in the|taxable in Australia, |
|country visited. |depending on the |
| |circumstances. |
Detailed explanation of new law
4. This Schedule gives effect to the BVI Agreement, which is inserted
as Schedule 48 to the Agreements Act and deals with the allocation
of taxing rights with respect to certain income of individuals.
Article 1 - Persons Covered
5. This Article establishes the scope of the application of the BVI
Agreement by providing for it to apply to persons (defined as
individuals) who are residents of one or both of the countries.
[Article 1]
6. The application of the BVI Agreement to persons who are dual
residents (ie, residents of both countries) is dealt with in
Article 4 (Resident).
Article 2 - Taxes Covered
7. This Article specifies the existing taxes of each country to which
the BVI Agreement applies. This is, in the case of Australia, the
federal income tax. [Article 2, subparagraph 1(a)]
8. For the BVI, the BVI Agreement applies to taxes on income or
profits as imposed by BVI law. [Article 2, subparagraph 1(b)]
9. The application of the BVI 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 of 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
10. 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 the British Virgin Islands
11. The British Virgin Islands is defined to mean the territory of the
Virgin Islands as referred to in the Virgin Islands Constitution
Order 2007. [Article 3, subparagraph 1(b)]
Definition of competent authority
12. The 'competent authority' is the person or institution
specifically authorised to perform certain actions under the BVI
Agreement. For example, the competent authorities are required to
notify each other of any significant changes to the tax law of
their respective countries, and to exchange information in
accordance with Article 7 (Exchange of Information).
13. 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 the BVI, the
competent authority is the Financial Secretary or an authorised
representative of the Financial Secretary. [Article 3,
subparagraph 1(c)]
Definition of contracting party
14. Contracting party means Australia or the BVI, as the context
requires. [Article 3, subparagraph 1(d)]
Definition of national
15. In the case of Australia, a national is any person who is an
Australian citizen [Article 3, sub-subparagraph 1(e)(i)]. In the
case of the BVI, a national is any person who belongs to, or is a
permanent resident of, the BVI [Article 3, sub-subparagraph
1(e)(ii)]. The Virgin Islands Constitution Order 2007 prescribes
the circumstances under which a person 'belongs' to the BVI.
Definition of person
16. For the purposes of the BVI Agreement, a person is an individual.
[Article 3, subparagraph 1(f)]
Definition of tax
17. The term tax means either Australian tax or BVI tax, depending on
the context. [Article 3, subparagraph 1(g)]
Terms not specifically defined
18. A term that is not specifically defined in the BVI Agreement shall
have (unless the context requires otherwise) the meaning that it
has under the domestic taxation law of the country applying the BVI
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]
19. 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 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
20. This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of the BVI
Agreement. Residential status is a criterion for determining each
country's taxing rights and is a necessary condition for the
provision of relief under the BVI 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 the BVI, residence is determined by reference to the
person's liability to pay BVI tax [Article 4, subparagraph 1(b)].
Special residency rules
21. A person is not a resident of a country, for the purposes of the
BVI Agreement, if that person is liable to tax in that country in
respect only of income from sources in that country [Article 4,
paragraph 2]. 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 BVI Agreement.
Accordingly, the BVI will not have to forego tax in accordance with
the BVI Agreement on income derived by Norfolk Island residents
(which will not be subject to Australian tax).
Dual residents
22. Tie-breaker rules are included for determining residency, for the
purposes of the BVI Agreement, if an individual 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
BVI 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 the BVI, and the person is
deemed for the purposes of the BVI 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 of the BVI 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)].
23. 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 Australian as a resident, insofar as the
BVI Agreement allows.
Article 5 - Government Service
24. 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, eg, a state or local government in
Australia or the BVI), 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 country solely for the
purpose of rendering the service (eg, if the recipient is
a permanent resident of that other country).
[Article 5, paragraph 1]
Business income
25. 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 5 of the BVI Agreement is excluded from the scope of the
Article. Such remuneration will remain subject to the domestic
taxation laws of the two countries. [Article 5, paragraph 2]
Article 6 - Students
Exemption from tax
26. 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, 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.
[Article 6]
Employment income
27. Where, however, a BVI 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.
28. 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.
29. In the case of a BVI 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.
30. 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 (ie, a subsistence payment).
If the remuneration is similar to the amounts paid to persons who
provide similar services who are not business apprentices (ie,
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.
31. In these situations, the payments received from abroad for the
student's 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 7 - Exchange of Information
32. Article 7 authorises and limits the exchange of information by the
competent authorities to information that is foreseeably relevant
to the administration of the BVI Agreement.
33. The exchange of information is subject to the provisions of the
Agreement for the Exchange of Information Relating to Taxes, which
was signed by the two countries on 27 October 2008 [Article 7].
After that agreement enters into force and takes effect, it will
provide for full 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 8 - Entry into Force
Date of entry into force
34. The BVI 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,
enactment of the legislation giving the BVI Agreement the force of
law along with tabling it in Parliament are prerequisites to the
exchange of diplomatic notes. Entry into force is also conditional
upon the related Agreement for the Exchange of Information Relating
to Taxes between the two countries being in force at that time.
Date of application in Australia
35. Following entry into force, the BVI 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 8, subparagraph (a)]
36. 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 the BVI Agreement enters into
force will be the relevant year of income for the purposes of the
application of Australian tax.
Date of application in the BVI
37. Following entry into force, the BVI Agreement will take effect in
the BVI 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 8, subparagraph (b)]
Article 9 - Termination
38. The BVI Agreement is to continue in effect indefinitely. However,
either country may give written notice of termination of the BVI
Agreement through the appropriate channel. [Article 9, paragraph
1]
Cessation in Australia
39. In the event of either country terminating the BVI 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 9,
subparagraph 2(a)]
Cessation in the BVI
40. In the event of its termination, the BVI Agreement would
correspondingly cease to be effective in the BVI 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 9, subparagraph 2(b)]
Cessation in other circumstances
41. The BVI Agreement will also terminate and cease to be effective if
the Agreement for the Exchange of Information Relating to Taxes
between the two countries is terminated. In that event, the BVI
Agreement would terminate, for both countries, on the first day of
the month following the expiration of a period of six months after
receipt of notification of termination of the exchange of
information agreement. [Article 9, paragraph 3]
Chapter 2
Australia-Isle of Man Agreement
Outline of chapter
42. Schedule 1 to this Bill amends the International Tax Agreements Act
1953 (Agreements Act) and inserts Schedule 49 into the Agreements
Act, which is the Agreement between the Government of Australia and
the Government of the Isle of Man 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 (IoM Agreement). This chapter explains the
rules that apply in the IoM Agreement. All legislative references
are to Schedule 49, unless otherwise stated.
Context of amendments
43. The IoM Agreement was signed in London on 29 January 2009. There
is no pre-existing agreement of this type between Australia and the
IoM. The IoM Agreement was signed in conjunction with the
Agreement on the Exchange of Information with Respect to Taxes
between Australia and the IoM, 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
44. The main features of the IoM 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 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.
. 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 |
|Pensions and retirement |Australian source income |
|annuities derived by |of foreign residents, and|
|residents of Australia |foreign source income of |
|and the IoM will be taxed|Australian residents, is |
|only by the country of |generally subject to |
|residence, provided such |Australian tax. |
|income is taxed in that | |
|country. | |
|Certain income derived by|Australian source income |
|residents of Australia |of foreign residents, and|
|and the IoM from |foreign source income of |
|government service will |Australian residents, is |
|be taxed only by the |generally subject to |
|country for which the |Australian tax. |
|services were rendered. | |
|Certain payments received|Some payments received by|
|by visiting students and |students and business |
|business apprentices will|apprentices may be |
|be exempt from tax in the|taxable in Australia, |
|country visited. |depending on the |
| |circumstances. |
|The competent authorities|No equivalent. |
|of Australia and the IoM | |
|will endeavour to resolve| |
|taxpayers' disputes | |
|arising from transfer | |
|pricing adjustments that | |
|contravene the arm's | |
|length principle. | |
Detailed explanation of new law
45. This Schedule gives effect to the IoM Agreement, which is inserted
as Schedule 49 to the Agreements Act and principally deals with the
allocation of taxing rights with respect to certain income of
individuals.
Article 1 - Persons Covered
46. This Article establishes the scope of the application of the IoM
Agreement by providing for it to apply to persons who are residents
of one or both of the countries. [Article 1]
47. The application of the IoM Agreement to persons who are dual
residents (ie, residents of both countries) is dealt with in
Article 4 (Resident).
Article 2 - Taxes Covered
48. This Article specifies the existing taxes of each country to which
the IoM Agreement applies. This is, in the case of Australia, the
federal income tax. [Article 2, subparagraph 1(a)]
49. For the IoM, the IoM Agreement applies to taxes on income or
profits (referred to as Manx tax). [Article 2, subparagraph 1(b)]
50. The application of the IoM 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 of 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
51. 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 the Isle of Man
52. The Isle of Man is defined to mean the island of the Isle of Man.
[Article 3, subparagraph 1(c)]
Definition of competent authority
53. The 'competent authority' is the person or institution
specifically authorised to perform certain actions under the IoM
Agreement. For example, the competent authorities are required 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).
54. 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 the IoM, the
competent authority is the Assessor of Income Tax or an authorised
delegate. [Article 3, subparagraph 1(b)]
Definition of party
55. Party means Australia or the IoM, as the context requires.
[Article 3, subparagraph 1(d)]
Definition of national
56. National means any individual possessing the nationality or
citizenship of Australia or the IoM. [Article 3, subparagraph
1(e)]
Definition of person
57. Person includes an individual, a company and any other body of
persons. [Article 3, subparagraph 1(f)]
Definition of tax
58. The term tax means either Australian tax or IoM (Manx) tax,
depending on the context. [Article 3, subparagraph 1(g)]
Definition of transfer pricing adjustment
59. A 'transfer pricing adjustment' is an adjustment made by the
tax authorities of Australia or the IoM to the profits of an
enterprise, based on the application of domestic transfer pricing
laws [Article 3, subparagraph 1(h)]. For Australia, such laws are
contained in Division 13 of Part III of the Income Tax Assessment
Act 1936 (ITAA 1936).
Terms not specifically defined
60. A term that is not specifically defined in the IoM Agreement shall
have (unless the context requires otherwise) the meaning that it
has under the domestic taxation law of the country applying the IoM
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]
61. 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 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
62. This Article sets out the basis upon which the residential status
of a person is to be determined for the purposes of the IoM
Agreement. Residential status is a criterion for determining each
country's taxing rights and is a necessary condition for the
provision of relief under the IoM 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 the IoM, residence is determined according to the IoM's
taxation law [Article 4, subparagraph 1(b)].
Special residency rules
63. A person is not a resident of a country, for the purposes of the
IoM Agreement, if that person is liable to tax in that country in
respect only of income from sources in that country [Article 4,
paragraph 2]. 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 IoM Agreement.
Accordingly, the IoM will not have to forego tax in accordance with
the IoM Agreement on income derived by Norfolk Island residents
(which will not be subject to Australian tax).
Dual residents
64. Tie-breaker rules are included for determining residency, for the
purposes of the IoM Agreement, if an individual 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
IoM 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 the IoM, and the person is
deemed for the purposes of the IoM 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 of the IoM 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)].
65. Where a non-individual is a dual resident, the entity will be
deemed, for the purposes of the IoM Agreement, to be a resident of
the country in which its place of effective management is located.
[Article 4, paragraph 4]
66. 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 Australian as a resident, insofar as the
IoM Agreement allows.
Article 5 - Pensions and Retirement Annuities
67. 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
68. In the case of Australia, retirement annuity means a superannuation
annuity payment within the meaning of the taxation laws of
Australia [Article 5, subparagraph 2(a)]. 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.
69. In the case of the IoM, retirement annuity means an annuity payment
within the meaning of the taxation laws of the IoM. [Article 5,
subparagraph 2(b)]
70. However, the competent authorities may agree that any other similar
periodic payment be regarded as a 'retirement annuity'. [Article
5, subparagraph 2(c)]
Article 6 - Government Service
71. 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, eg, a state or local government in
Australia or the IoM), 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 country solely for the
purpose of rendering the services (eg, if the recipient is
a permanent resident of that other country).
[Article 6, paragraph 1]
Business income
72. 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 IoM 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
73. 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, 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
[Article 7]. 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
74. Where, however, an IoM 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.
75. 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.
76. In the case of an IoM 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.
77. 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 (ie, a subsistence payment).
If the remuneration is similar to the amounts paid to persons who
provide similar services who are not business apprentices (ie,
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.
78. In these situations, the payments received from abroad for the
student's 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
79. This Article provides for consultation between the competent
authorities of the two countries for the purpose of endeavouring to
resolve disputes, between a resident of one country and the tax
authority of the other country, concerning transfer pricing
adjustments purportedly made not in accordance with the arm's
length principle. [Article 8, paragraph 2]
80. 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.
81. 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
82. Article 9 authorises and limits the exchange of information by the
competent authorities to information that is foreseeably relevant
to the administration of the IoM Agreement.
83. The exchange of information is subject to the provisions of the
Agreement on the Exchange of Information with Respect to Taxes,
which was signed by the two countries on 29 January 2009 [Article
9]. 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
84. The IoM 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,
enactment of the legislation giving the IoM Agreement the force of
law along with tabling it in Parliament are prerequisites to the
exchange of diplomatic notes. Entry into force is also conditional
upon the related Agreement on the Exchange of Information with
Respect to Taxes between the two countries being in force at that
time.
Date of application in Australia
85. Following entry into force, the IoM 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)]
86. 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.
Date of application in the IoM
87. Following entry into force, the IoM Agreement will take effect in
the IoM in respect of any income year beginning on or after 5 April
in the calendar year next following the date on which it enters
into force. [Article 10, subparagraph (b)]
Article 11 - Termination
88. The IoM Agreement is to continue in effect indefinitely. However,
either country may give written notice of termination of the IoM
Agreement through the appropriate channel. [Article 11, paragraph
1]
Cessation in Australia
89. In the event of either country terminating the IoM 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 in the IoM
90. In the event of its termination, the IoM Agreement would
correspondingly cease to be effective in the IoM for any year of
income beginning on or after 5 April in the calendar year next
following that in which the notice of termination is given.
[Article 11, paragraph 2(b)]
Cessation in other circumstances
91. The IoM Agreement will also terminate and cease to be effective if
the Agreement for the Exchange of Information with Respect to Taxes
between the two countries is terminated. In that event, the IoM
Agreement would terminate, for both countries, on the first day of
the month following the expiration of a period of six months after
receipt of notification of termination of the exchange of
information agreement. [Article 11, paragraph 3]
Chapter 3
Regulation impact statement for the British Virgin Islands Agreement and
the Isle of Man Agreement
Policy objective
The BVI Agreement
92. The objective of the Agreement between the Government of Australia
and the Government of the British Virgin Islands for the Allocation
of Taxing Rights with Respect to Certain Income of Individuals (BVI
Agreement) is to promote closer economic and administrative
cooperation between Australia and the British Virgin Islands (BVI),
by reducing some of the taxation barriers to trade and investment
between the two countries.
93. The BVI Agreement was signed in conjunction with the Agreement for
the Exchange of Information Relating to Taxes between Australia and
the BVI, which will promote greater cooperation between the
taxation authorities of the two countries to prevent tax avoidance
and evasion.
The IoM Agreement
94. The objective of the Agreement between the Government of Australia
and the Government of the Isle of Man 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 (IoM Agreement) is to promote closer economic
and administrative cooperation between Australia and the Isle of
Man (IoM), by reducing some of the taxation barriers to trade and
investment between the two countries.
95. The IoM Agreement was signed in conjunction with the Agreement for
the Exchange of Information with Respect to Taxes between Australia
and the IoM, which will promote greater cooperation between the
taxation authorities of the two countries to prevent tax avoidance
and evasion.
Implementation options
96. The internationally accepted approach to meeting the policy
objectives specified above is to conclude a bilateral tax
agreement.
Assessment of impacts
Impact group identification
The BVI Agreement
97. The BVI Agreement is likely to have an impact on:
. individuals providing services to an Australian government
(including a state or local government) in the BVI;
. Australian students and business apprentices temporarily
residing in the BVI for education or training purposes;
. the Australian Government, and
. the Australian Taxation Office (ATO).
The IoM Agreement
98. The IoM Agreement is likely to have an impact on:
. recipients of Australian source pensions or retirement
annuities who reside in the IoM;
. individuals providing services to an Australian government
(including a state or local government) in the IoM;
. Australian students and business apprentices temporarily
residing in the IoM for education or training purposes;
. Australian entities that wish to contest a transfer
pricing adjustment made by the IoM tax authority;
. the Australian Government; and
. the ATO.
Analysis of costs/benefits
Assessment of costs
Revenue costs
99. The impact of the BVI Agreement and the IoM Agreement on the
forward estimates has been estimated as negligible.
Administration costs
100. 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 agreement. ATO staff,
taxpayers and tax professionals will need to be made aware of the
entry into force of the BVI Agreement and the IoM 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.
101. The cost of negotiation and enactment of the BVI Agreement and the
IoM Agreement is minimal and has mostly been borne by the Treasury
and the ATO. There will be an unquantified but small cost in terms
of parliamentary time and drafting resources in enacting the
proposed new arrangements.
Taxpayer costs
102. No material additional costs to taxpayers have been identified as
likely to arise from the BVI Agreement or the IoM Agreement. These
agreements are expected to simplify the taxation obligations of the
entities that fall within their scope.
Other costs
103. The BVI Agreement and the IoM Agreement would constrain government
policy flexibility in relation to the taxation of BVI and IoM
individuals. However, as the provisions of the BVI Agreement and
the IoM Agreement 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 BVI Agreement and the IoM Agreement
could be terminated if they were 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 these Agreements.
Consultation
104. The negotiation of the BVI Agreement and the IoM Agreement was not
conducted in the public domain and, consequently, no public
consultation was undertaken. They were negotiated in conjunction
with the negotiation of the Agreement for the Exchange of
Information Relating to Taxes (in the case of the BVI), and the
Agreement for the Exchange of Information with Respect to Taxes (in
the case of the IoM), which were also conducted outside the public
domain.
105. The State and Territory Governments have been consulted through the
Commonwealth-State/Territory Standing Committee on Treaties.
Information on the negotiation of the BVI Agreement and the IoM
Agreement was included in the six-monthly schedule of treaties to
state and territory representatives.
106. The proposed BVI Agreement and IoM Agreement have also been
considered by the Commonwealth Joint Standing Committee on
Treaties, which provides for public consultation in its hearings.
Conclusion and recommended option
107. The proposed BVI Agreement and IoM Agreement are consistent with
the Government's tax treaty policy and is the only option available
to implement the policy objective stated above.