Issue
Does Australia have the right under the New Zealand Agreement to tax dividend income paid by an Australian resident to another Australian resident, who derives the income in carrying on a business at or through a permanent establishment in New Zealand?
Decision
Yes. Australia has the right under the New Zealand Agreement to tax dividend income paid by an Australian resident to another Australian resident, who derives the income in carrying on a business at or through a permanent establishment in New Zealand.
Facts
The taxpayer is a company incorporated in Australia and is a resident under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).
However the taxpayer is also a resident of New Zealand under New Zealand tax law. The taxpayer's place of effective management is in New Zealand and it is deemed to be a resident of New Zealand for the purposes of the New Zealand Agreement.
The taxpayer carries on a business of lending money in New Zealand. The taxpayer's activities in New Zealand amount to a permanent establishment under subsection 6(1) of ITAA 1936.
The taxpayer is paid dividend income by Australian resident companies. The taxpayer's activities in Australia do not amount to a permanent establishment under the New Zealand Agreement.
The dividend income is derived in the course of carrying on the business in New Zealand.
Reasons For Decision
The Commissioner, in Taxation Ruling TR 98/17, accepts that where the tie-breaker test in a double tax agreement provides that a dual resident be treated solely as a resident of the treaty partner country for the purposes of the agreement, Australian resident status is not lost for purposes of the general operation of the domestic law. However the terms of the relevant double tax agreement should be referred to when determining tax liability.
Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder in a company (whether the company is a resident or a non-resident) includes dividends (other than non-share dividends) that are paid to the shareholder by the company out of profits derived by it from any source and all non-share dividends paid to the shareholder by the company.
However in determining the taxpayer's liability under subsection 44(1), it is necessary to consider the New Zealand Agreement. In interpreting the wording of the Agreement, the Commissioner accepts in Taxation Ruling TR 2001/13 that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (Condensed Version 2005) (the OECD Commentary).
Article 7 of the New Zealand Agreement gives the right to tax business profits to the country of residence unless the profits are attributable to a permanent establishment, in which case the country where the permanent establishment is situated may tax. In the present case, the taxpayer has derived dividend business income. The taxpayer is also deemed to be a New Zealand resident for the purposes of the New Zealand Agreement and does not have a permanent establishment in Australia. Accordingly, under Article 7, only New Zealand may tax the dividend income.
However Article 10(2) of the Agreement deals specifically with dividend income. It provides that the country where the dividend is paid may also tax the dividend income, provided that the tax is not more than 15% of the gross amount. In the present case, a dividend is paid by Australian resident companies to the taxpayer. Under Article 10(2), Australia may tax the dividend income received by the taxpayer.
In resolving whether the terms of Article 7 or Article 10 prevail, it is necessary to consider Article 7(8) of the New Zealand Agreement, which provides: 8. Where profits include items of income or gains which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this (business profits) Article.
The OECD Commentary, in dealing with the tiebreaker provision between the business profits article and the specific income article (Model Article 7(7)), states that: 35. ...paragraph 7 gives first preference to the special Articles on dividends, interest etc. It follows from the rule that this (business profits) Article will be applicable to business profits which do not belong to categories of income covered by the special Articles...
This paragraph implies that where business income belongs in the category of income covered by the special Articles (for example, interest or dividends) the application of the business profits Article shall be read subject to the application of the specific income Article.
The OCED Commentary goes on to state that: 35. ... It is understood that the items of income covered by the special Articles may, subject to the provisions of the ...Convention, be taxed either separately, or as business profits, in conformity with the tax laws of the Contracting States.
The reference to the 'tax laws of the Contracting States' to determine whether the 'income covered by the special Articles' may be taxed, suggests that Australia can tax those items of income, although this is subject to any limitation imposed by the relevant specific income article. In this case, Article 10(2) of the New Zealand Agreement imposes a limit of 15% of the gross amount.
Pursuant to Article 7(8) of the Agreement, the terms of Article 10 will prevail. Therefore Australia has the right to tax the dividend income earned by the taxpayer. Accordingly, subsection 44(1) of the ITAA 1936 can operate to include in the assessable income the dividend income paid by Australian companies to the taxpayer, subject to the limitation imposed by the New Zealand Agreement of the tax being no more than 15%.