The Double Taxation Relief (Taxes on Income) (Australia) Order 2003

Explanatory Note

(This note is not part of the Order)

A Convention dealing with the avoidance of double taxation and fiscal evasion between the United Kingdom and Australia (“the Convention”) is set out in Part I of the Schedule to this Order.

Article 1 of the Order provides for its citation.

Article 2 makes a declaration as to the effect and content of the arrangements set out in the Convention contained in Part I of the Schedule to the Order and in the Exchange of Notes constituting an Agreement set out in Part II of that Schedule, and that it is expedient that those arrangements should have effect.

The Convention provides for business profits not arising through a permanent establishment to be taxed only in the country of the taxpayer’s residence. Profits attributable to a permanent establishment may be taxed in the country in which the permanent establishment is situated (Articles 5 and 7).

Income from real property and income or gains from the alienation of real property may be taxed in the country in which the property is situated (Articles 6 and 13).

Profits from international shipping and air transport and income or gains from the alienation of ships or aircraft operated internationally are generally to be taxed only in the residence state of the enterprise (Articles 8 and 13).

The Convention includes rules for determining taxable profits when a company in one country is associated with a company in the other (Article 9).

Subject to certain conditions, dividends are exempted from tax in the country of source if they are beneficially owned by a company resident in the other country that has owned shares representing 80 per cent. or more of the voting power of the company paying the dividends for a 12-month period ending on the date the dividend is declared. Otherwise, the rate of tax imposed in the country of source on dividends beneficially owned by a resident of the other country is not to exceed 5 per cent. of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 10 per cent. of the voting power in the company paying the dividends, and 15 per cent. of the gross amount of the dividends in all other cases (Article 10).

Subject to certain conditions, interest is exempted from tax in the country of source if it is beneficially owned by the government or central bank of the other country, or by a financial institution of the other country which is unrelated to, and dealing wholly independently with, the payer of the interest. In all other cases, the rate of tax imposed in the country of source on interest beneficially owned by a resident of the other country is not to exceed 10 per cent. of the gross amount (Article 11).

The rate of tax imposed in the country of source on royalties beneficially owned by a resident of the other country is not to exceed 5 per cent. of the gross amount (Article 12).

Subject to certain specified exceptions, each country may tax capital gains in accordance with its domestic law (Article 13).

The earnings of individuals resident in one country but working temporarily in the other country are, subject to certain conditions, to be taxed only in the country of the taxpayer’s residence (Article 14). Fringe benefits are to be taxed only in the country which would have the primary taxing right under the Convention if the value of the benefit was paid as ordinary employment income (Article 15). Income derived from the activities of entertainers and sportspersons may be taxed in the country in which those activities are performed (Article 16).

Pensions (including government pensions) and annuities are to be taxed only in the country of residence of the recipient (Article 17).

Government service remuneration is normally to be taxed only by the paying Government (Article 18). There are separate provisions for diplomatic or consular officials (Article 28). Certain payments made to visiting students are generally exempt from tax in the country visited (Article 19).

Other income not specified in the Convention will generally be taxed only by the country of which the beneficial owner is a resident. However, if such income arises in the other country, it may also be taxed in that country (Article 20).

Income or gains derived by a resident of the United Kingdom and taxable in Australia under one or more of Articles 6 to 8 and 10 to 16 and 18 of the Convention, are deemed for the purposes of Australian tax law to arise from sources in Australia (Article 21).

In general, where income continues to be taxable in both countries, credit is to be given by the country of the taxpayer’s residence for tax imposed by the other country (Article 22).

Provision is made to limit the relief to be allowed under the Convention in circumstances where this might otherwise interact with certain provisions of the domestic law in either country to produce an unintended measure of relief (Article 23).

Members of a partnership may be taxed in their country of residence on their individual shares of the income or gains of the partnership, even if the partnership is treated as a taxable unit under the law of the other country (Article 24).

Provision is made to safeguard nationals and enterprises of one country against discriminatory taxation in the other country (Article 25).

Provisions are also made for consultation to resolve difficulties in the application or interpretation of the Convention (Article 26) and for exchanges of information between the taxation authorities of the two countries (Article 27).

The Exchange of Notes comprising Part II of the Schedule clarifies the intended interpretation of certain parts of the Convention.

The Convention will enter into force on the date of the later of the notifications by each country of the completion of its legislative procedures. It will take effect in the United Kingdom in respect of tax withheld at source on 1st July next following the date of entry into force, in respect of corporation tax on 1st April next following that date, and in respect of capital gains tax and income tax generally from 6th April next following that date. It will take effect in Australia in respect of tax withheld at source on 1st July next following the date of entry into force, in respect of fringe benefits tax on 1st April next following that date and in respect of other Australian tax on 1st July next following that date (Article 29). The date of entry into force will, in due course, be published in the London, Edinburgh and Belfast Gazettes.