Administrative penalty: failure to withhold from royalty payments to a French resident

Is an administrative penalty imposed under section 16-30 of Schedule 1 to the Taxation Administration Act 1953 (TAA), for failure to withhold from a royalty payment made to a French resident, 'Australian income tax' for the purposes of Article 1(1)(a) of the tax treaty between Australia and the Republic of France signed on 13 April 1976 as amended by the Protocol to that tax treaty (the 1976 French Agreement)?

No. The administrative penalty imposed under section 16-30 of Schedule 1 to the TAA for failure to withhold from a royalty payment made to a French resident is not 'Australian income tax' for the purposes of Article 1(1)(a) of the 1976 French Agreement.

An Australian resident company (the payer) paid a royalty to a resident of France (the payee).

The payer failed to withhold tax from a royalty as required under Subdivision 12-F of Schedule 1 to the TAA.

The Commissioner imposed an administrative penalty under section 16-30 of Schedule 1 to the TAA.

The payer paid that penalty.

Article 1(1)(a) of the 1976 French Agreement provides that the existing taxes to which the 1976 French Agreement applies are in the case of Australia: the Australian income tax, including the additional tax upon the undistributed amount of the distributable income of a private company;

The term 'Australian income tax' is not a defined term in the 1976 French Agreement.

Article 3(3) of the 1976 French Agreement provides for present purposes that any undefined term shall have the meaning it has under Australian income tax law unless the context requires otherwise.

In Virgin Holdings SA v. Federal Commissioner of Taxation [2008] FCA 1503; (2008) 2008 ATC 20-051; (2008) 70 ATR 478 ( Virgin Holdings SA ), Edmonds J stated at paragraph 29: 29. The joint judgment (Mason CJ, Brennan and Gaudron JJ) in Thiel 171 CLR at 343 made it clear that Art 3(2) of the Swiss Agreement provides no assistance in ascertaining the meaning of words which have no particular or established meaning under the laws relating to Australian income tax which is relevant to the outcome of the question for decision...

As the term 'Australian income tax' is not defined in Australia's income tax law, the same applies in the present case.

At paragraphs 30 - 31 of the judgment in Virgin Holdings SA , Edmonds J arrived at a meaning of the term 'Australian income tax' using the definitions of components of that term. Using that same approach, the following analysis applies in the present case: At the time of the conclusion of the [1976 French Agreement] and subsequently, while the term "the Australian income tax" was not defined, components of it were: the term "Australian tax" was defined in subsection 3(1) of the International Agreements Act 1953 (Agreements Act) as meaning, inter alia , "... income tax imposed as such by any Act ...". It follows, in my view, that at the time of the conclusion of the 1976 French Agreement, the term "the Australian income tax" in article 1(1)(a) of the 1976 French Agreement meant, under the relevant laws of Australia income tax as assessed under the ITAA 1936.

This term has the following definition in Article 2(1)(g) of the 1976 French Agreement: tax imposed by Australia, being tax to which the Agreement applies by virtue of Article 1. By subsection 4(1) of the International Agreements Act, subject to subsection 4(2) (not presently relevant), the Income Tax Assessment Act 1936 (ITAA 1936) is incorporated and read as one with the International Agreements Act. Subsection 6(1) of the ITAA 1936 defined 'income tax' or 'tax' as meaning '... income tax imposed as such by any Act, as assessed under this Act'; in other words, as assessed under the ITAA 1936.

The administrative penalty imposed on the payer pursuant to section 16-30 of Schedule 1 to the TAA is not 'income tax' as defined in subsection 6(1) of the ITAA 1936. The administrative penalty is a penalty imposed under the TAA and cannot be income tax as assessed under the ITAA 1936.

For completeness, Edmonds J in Virgin Holdings SA stated at paragraph 43 that he was firmly of the view that the better and preferred approach in relation to the meaning to be given to the term 'Australian income tax' in the provision of the Swiss Agreement corresponding to Article 1(1)(a) of the 1976 French Agreement should be ambulatory and not static. See also the judgment of Lindgren J in Undershaft No.1 Ltd and Another v. Federal Commissioner of Taxation [2009] FCA 41; (2009) 175 FCR 150; 2009 ATC 20-091 at paragraph 108 where he came to the same view as Edmonds J concerning the term 'the Commonwealth income tax' in the 1967 United Kingdom Agreement.

As suggested above, using the definitions of component terms and applying the ambulatory approach referred to by Edmonds J and Lindgren J as obiter dicta means considering the Australian income tax law at the point in time the administrative penalty in this case was imposed.

As they apply in the present case, the provisions of the TAA referred to above have not changed in any material respect.

The term 'income tax' is defined under subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) as: except so far as contrary intention appears, ... income tax imposed by any of these: the Income Tax Act 1986 ; the Income Tax Act (Diverted Income) Act 1981 ; the Income Tax (Former Complying Superannuation Funds) Act 1994 ; the Income Tax (Former Non-resident Superannuation Funds) Act 1994 ; the Income Tax (Fund Contributions) Act 1989 .

The administrative penalty imposed pursuant to section 16-30 of Schedule 1 to the TAA is not 'income tax' as defined, as the administrative penalty is not imposed by any of the Acts listed in the definition of 'income tax' in section 995-1 of the ITAA 1997.

Accordingly, for the reasons stated above, the administrative penalty imposed pursuant to section 16-30 of Schedule 1 to the TAA for failure to withhold from royalties paid to the French resident is not 'Australian income tax' for the purposes of Article 1(1)(a) of the 1976 French Agreement.