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Is a New Zealand resident company, which is a limited partner with a 77 per cent interest in a New Zealand limited partnership (NZLP) that owns shares carrying 49 per cent of the voting power in an Australian resident company paying dividends, a company that 'holds directly' at least 10 per cent of the voting power in the Australian company paying dividends for the purposes of Article 10.2(a) of the tax treaty between Australia and New Zealand (2009 NZ Convention)?

No. In these circumstances, the New Zealand resident is not a company that 'holds directly' at least 10 per cent of the voting power in the Australian resident company paying the dividends for the purposes of Article 10.2(a) of the 2009 NZ Convention.

The taxpayer is a company and a resident of New Zealand for the purposes of New Zealand's tax law and the 2009 NZ Convention.

The taxpayer is a non-resident as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a limited partner with a 77 per cent interest in a NZLP formed under New Zealand's Limited Partnerships Act 2008 .

NZLP is a separate legal person pursuant to section 11 of New Zealand's Limited Partnerships Act 2008 .

NZLP is registered as the owner of 49 per cent of the shares in ACo, a company that is a resident of Australia for the purposes of Australia's tax law and the 2009 NZ Convention.

Voting power in ACo is attached to the shares in ACo and NZLP's shares in ACo carry the right to exercise 49 per cent of the voting power in ACo.

ACo paid an unfranked dividend to NZLP.

For the purposes of Article 10 of the 2009 NZ Convention, the taxpayer is the 'beneficial owner' of the proportion of the dividends that ACo pays to NZLP representing the taxpayer's partnership interest in NZLP.

Subject to certain exceptions, withholding tax is payable under section 128B of the ITAA 1936 on dividends paid by an Australian resident company and derived by a non-resident. Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 sets the rate of withholding tax on such dividends at 30 per cent.

In the present case, liability to Australian withholding tax is subject to the provisions of the 2009 NZ Convention contained in Schedule 4 to the International Tax Agreements Act 1953 .

Article 10.2(a) of the 2009 NZ Convention provides for present purposes that dividends paid by an Australian resident company, being dividends beneficially owned by a New Zealand resident, may be taxed in Australia according to the laws of Australia. However, the tax so charged shall not exceed 5 per cent of the gross amount of the dividends if 'the beneficial owner of those dividends is a company which holds directly at least 10 per cent of the voting power in the company paying the dividends'.

As the taxpayer is a company that beneficially owns a proportion of the dividends paid by ACo (an Australian resident company), it is necessary to determine whether it 'holds directly at least 10 per cent of the voting power' in ACo.

The phrase 'holds directly' is not defined in the 2009 NZ Convention. Article 3.3 relevantly provides that any term not defined in the 2009 NZ Convention shall take its meaning under the domestic laws concerning the taxes to which the Convention applies of the country applying the treaty, unless the context otherwise requires. For Australia, the domestic law meaning may be the statute-defined meaning or, where there is no relevant statutory definition, the common law meaning of the term (see Taxation Ruling TR 2001 / 13 , paragraphs 63 to 71).

There are no relevant statutory definitions of the phrase 'holds directly'. It is therefore necessary to consider the meaning of the phrase under the common law. Consistent with the decision in Dalgety Downs Pastoral Co Pty Ltd v. Federal Commissioner of Taxation (1952) 86 CLR 335; (1952) 10 ATD 55; (1952) 5 AITR 386 ( Dalgety Downs ), where the High Court considered the phrase 'beneficially held', the proper construction of the phrase 'holds directly' involves a consideration of the meaning of each of the component words in that phrase.

In the present case, the voting power in ACo is attached to the shares in ACo. Therefore, in order to determine whether the taxpayer 'holds' the requisite voting power it is necessary to determine whether the taxpayer holds the shares in ACo.

A number of judicial decisions support the view that the use of the word 'holds' in connection with shares refers to legal ownership according to the share register. In Dalgety Downs , the High Court considered the word 'holds' in the context of legislation requiring that shares in a company be 'beneficially held'. In the course of their judgment Webb, Fullagar and Kitto JJ stated (at CLR 341-342): Indeed it is not too much to say that the verb "hold" and its variants, when used in relation to shares in companies, normally refers to the legal ownership of the shares according to the register of members. ... Before a different meaning is accepted, some justification must be found in the context, or the subject-matter. No such justification is provided by the fact that "held" is modified by the adverb "beneficially". This word serves more naturally the purpose of excluding the case of a holding for the benefit of others than the purpose of so broadening the meaning of the word "held" beyond the particular significance which it normally has in relation to shares as to make it equivalent to "owned" in the most general sense of that word.

The Court in Dalgety Downs relied partly on the earlier decision in Avon Downs Pty Ltd v. Federal Commissioner of Taxation (1949) 78 CLR 353; (1949) 9 ATD 5; (1949) 4 AITR 195, where Dixon J stated (at CLR 364) in relation to a provision requiring that certain shares of a company carrying voting power be 'beneficially held': [The provision] is concerned with voting. Its purpose is both to exclude nominees from the enumeration of voting power and to take in those who are members of the company and vote independently of control. There is therefore every reason to treat the provision as using the terminology of company law with the meaning attached to it in company law.

More recently, the majority of the High Court in Federal Commissioner of Taxation v. Linter Textiles Australia Ltd (in liq ) (2005) 220 CLR 592; [2005] HCA 20; 2005 ATC 4255; (2005) 59 ATR 177 held that '[w]hen used in relation to companies, "hold" normally refers to legal ownership established by reference to the register of members' (at CLR 604).

Accordingly, for the purposes of Australian tax law, in order to hold shares in a company an entity must be the legal owner of those shares as established by reference to the register of members.

Article 10.2(a) of the 2009 NZ Convention requires that the requisite percentage of voting power be held 'directly'. The term 'directly' is not subject to any relevant Australian judicial consideration and therefore the term takes its ordinary meaning.

Based on the Macquarie Dictionary (2009, 5th edition), the ordinary meaning of 'directly' relevantly includes 'in a direct line, way, or manner ...'. The word 'direct' in turn includes the meaning '... without intervening agency ...'.

Therefore in the context of Article 10.2(a), the adverb 'directly' confirms that the word 'holds' should not be given a broader meaning than it has under the Australian law in relation to shares. The word 'directly' excludes cases where the requisite voting power is held indirectly through an interposed entity. Accordingly, the composite phrase 'holds directly' in Article 10.2(a) means legally owns without intervening agency.

For an entity to 'hold directly' the voting power that is attached to shares in a company paying dividends for the purposes of Article 10.2(a) of the 2009 NZ Convention, it must be the legal owner of the shares with no intervening agency or interposed entity between the entity and the shares carrying the voting power. That is, Article 10.2(a) does not permit voting power to be traced through an interposed entity.

Moreover, this conclusion is reinforced by paragraph 10 of the Commentary to Article 10 (Dividends) of the 2010 OECD Model Tax Convention which states that, for the purposes of Article 10.2, a company must 'own directly' the relevant holding in the other company. This is consistent with the Australian tax law meaning of 'hold' that requires legal ownership of shares as established by reference to the register of members.

In the present case, NZLP is a separate legal person that is registered as the owner of 49 per cent of the shares in ACo that carry the right to exercise 49 per cent of the voting power in ACo. Therefore, it is NZLP that 'holds directly' that voting power in ACo. The taxpayer does not legally own the shares carrying the voting power in ACo and, as a result, it does not 'hold directly' any voting power in ACo, regardless of its 77 per cent interest in NZLP as a limited partner.

Accordingly, the taxpayer is not a company that 'holds directly at least 10 per cent of the voting power' in ACo for the purposes of Article 10.2(a) of the 2009 NZ Convention.