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Wednesday, 24 September 2008
Page: 8413


Mr NEUMANN (1:14 PM) —I rise today to speak in support of the International Tax Agreements Amendment Bill (No. 2) 2008. I do so because I come from South-East Queensland and about seven per cent of the people who settle in Queensland come from South Africa. Approximately 80,000 South African migrants live in the western suburbs of Brisbane, the greater Brisbane area and through Ipswich and the Lockyer Valley in the Boonah shire, which makes up my electorate of Blair. They are attracted to the area because of the climate, the lifestyle and the attitudes of the Australian people. I regularly go to citizenship ceremonies in my electorate, and almost invariably South Africans make up a huge proportion of the people becoming Australians.

Since World War II we have welcomed about six million people to our shores, and about 4.4 million of them have become Australian citizens. We really are a multicultural society. Our relationship with South Africa has been longstanding and friendly, and it is not just because of our mutual love of cricket, rugby union and soccer. South Africa is part of the Commonwealth of Nations, the World Trade Organisation, the Cairns Group and a number of other international organisations of which Australia is also a member.

This bill includes provisions to amend the International Tax Agreements Act 1953 to incorporate into Australian law the protocol signed on 31 March 2008 between Australia and South Africa. The protocol amends the Agreement between the Government of Australia and the Government of the Republic of South Africa for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income. This is an important piece of legislation, because in democratic countries where there is a free press and where there are fundamentally sound economies we need to reduce barriers, which will help advance our cultural and economic relationships. South Africa is a regional superpower, both politically and economically. We witnessed that recently with the intervention of the now retired President of South Africa to achieve some sort of political resolution in Zimbabwe.

About 115,000 South African expatriates live in Australia, and about 7,500 Australians reside in South Africa. It is a fact that in 2007 about 97,000 Australian residents visited South Africa. Regardless of which side of politics has occupied the treasury bench, the relationship between South Africa and Australia has been strong. There have been bilateral agreements relating to extradition, in 2001; defence information, in 2001; air services, in 1995; science and technology cooperation, in 2006; and, of course, double taxation, in 1999 and 2008.

The bill seeks to update the taxation arrangements between our countries and in turn reduce barriers to bilateral trade and investment by lowering withholding tax rates on interest and royalties. Central to this bill is our trading relationship. It is positive that our relationship with South Africa is growing. In 2007, two-way merchandise trade was valued at $3.88 billion. Australian imports from South Africa were $1.35 billion and our exports to South Africa were $2.53 billion. They were mainly in coal, meat and civil engineering equipment. The two-way investment flows between our countries have expanded since the end of apartheid, and there have been great political progress and economic development since the dark days of the Afrikaner regime, which emerged in 1948. At the end of 2007, investment from South Africa amounted to $1.2 billion, and Australia’s investment in South Africa was $893 million, principally in mining, agriculture, infrastructure and services.

The protocol updates the taxation arrangements between our two countries and aligns withholding tax rate limits for dividends, interest and royalties and capital gains tax treatment more closely with OECD practice. The protocol further addresses Australia’s most favoured nation obligation in the existing treaty by inserting rules to protect from tax discrimination taxpayers of one country operating in the other country. It also extends the scope of the existing exchange of information provisions to conform to modern OECD standards and introduces measures which provide for cross-border collection of tax debts.

As the Minister for Competition Policy and Consumer Affairs and Assistant Treasurer outlined in his second reading speech, ‘Tax discrimination under other countries’ tax systems can be a significant barrier to outbound Australian investment.’ I agree.

The protocol updates the existing Australia-South Africa tax treaty, which was signed in 1999. In accordance with Australia’s most favoured nation obligations under that treaty, the protocol introduces new rules to prevent tax discrimination. These rules are broadly aligned with international tax treaty practice and protect Australian nationals and businesses operating in South Africa and vice versa. The rules are similar to those found in other, recent Australian taxation treaties.

The protocol also amends the withholding tax rates that may be imposed on cross-border dividends, interest and royalties. Under the treaty, dividends, interest and royalties paid from one country—the source country—to a person who is a resident in the other country will generally remain taxable in both countries, but with certain new limits on the tax that the source country may charge on payments to residents of the other country.

The new dividends article provides for a withholding tax rate limit of five per cent for all non-portfolio intercorporate dividends. This will replace the current zero rate for non-portfolio intercorporate dividends paid out of profits that have borne full company tax. A 15 per cent rate applies for all other dividends. These rates are consistent with the OECD model tax convention.

The revision of the non-portfolio intercorporate dividend withholding tax rate was negotiated in the context of the South African government’s announcement of changes to its system of taxing corporate profits in its 2007-08 budget. These changes include the phasing out of the secondary tax on companies, which is not subject to treaty limitations, and the introduction of a dividend tax on shareholders. The implementation of these changes is subject to renegotiation of dividend withholding tax rates by South Africa in several of its tax treaties, including its tax treaty with Australia.

Australian non-portfolio investment in South Africa will generally benefit from reduced total South African tax on corporate profits as a result of these changes. The protocol will not change Australia’s treatment of franked dividends. Franked dividends paid to South African residents will continue to be exempt from withholding tax.

Source country tax on interest will continue to be limited to 10 per cent. However, no tax will be chargeable in the source country on interest derived by the government of the other country from the investment of official reserve assets or by a financial institution resident in the other country. These exemptions are subject to certain safeguards, which exist and assist to discourage tax avoidance. The general limit for royalties will be reduced from 10 to five per cent. The protocol also provides that amounts derived from equipment leasing, including container leasing, will be excluded from the definition of royalty. Such amounts would be treated either as profits from international transport operations or as business profits. Other features include expanding the list of taxes which can be covered; a redefinition of ‘permanent establishment’, including prescribed time limits for the creation of a permanent establishment where an enterprise operates substantial equipment or is engaged in the exploration for, or exploitation of, natural resources; provisions which align capital gains tax treatment more closely with Australian taxation law and OECD practice; Australia’s taxing rights over Australian real property and the business assets of a foreign resident’s Australian permanent establishment be preserved; and improved integrity measures to provide for a more effective exchange of information on a broader range of taxes, including goods and services tax, and to provide for reciprocal assistance in the collection of taxes.

For those of my constituents who are from South Africa and who run small businesses in my electorate, and who deal with South African companies every day—and there are many, from small business operations in the Lockyer Valley through to Ipswich and in the Boonah Shire—this legislation is a great help to them financially. While the legislation sounds unsexy, it has a big financial impact on my constituents and the many South Africans who live in my electorate.

The protocol, the subject of this bill, arose from the need to meet Australia’s most favoured nation obligations in our existing treaty with South Africa. Tax treaties and like international agreements are extremely important in reducing the barriers between countries and improving international cooperation. Those types of treaties, the protocols that we are talking about here today, facilitate and enhance the movement of people, cultural exchange, ideas and capital. They will do that for a country that we have had a long and established cultural history with as part of the Commonwealth of Nations. This is a country that can only be good for us in the future in terms of our relationships. It is a country that we play sport with, which we deal with, which Australians visit and which my constituents do business with. This legislation before the House not only is good for the future economic development of our country but is vital for the future prosperity of the many South Africans who live in my constituency of Blair in South-East Queensland. I commend the bill to the House.