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Protocol to the double taxation agreement with the United Kingdom

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ir. PRESS Λ\ NO. 10





A Protocol to the double taxation agreement between Australia

and the United Kingdom was signed today in Canberra.

Before dealing with the contents of the Protocol, I point

out that its provisions will not be effective until all

necessary constitutional processes have been completed, both by Australia and by the United Kingdom. Legislation will

be necessary to give the Protocol the force of law in . Australia and a Bill for that purpose will be introduced into Parliament as soon as practicable..

The Protocol amends the existing Australian-United Kingdom

agreement and one change it effects became necessary because of amendments to the United Kingdom income tax law concerning the taxation of company profits and dividends. Under these amendments part of the tax paid by a United Kingdom company on its profits is allowed as a credit in the assessment of a shareholder, in the company. Generally only United Kingdom

shareholders are entitled to this credit except where provision is made in a double taxation agreement with another country

for shareholders resident in that country to receive it. There

is, however, a special provision in the United Kingdom law under which shareholders who are not United Kingdom residents,

but who are British subjects, may apply to have the credit

extended to them and most Australian shareholders in United Kingdom companies have been entitled to claim the credit in

this way. ' ‘

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It has, however, been decided by a Taxation Board of Review

that under the existing Australian law, which was framed in

the context of the previous United Kingdom arrangements for

taxing company profits and dividends, the payment from the United Kingdom Government resulting from the allowance of the

credit is not subject to Australian tax.

Under the new Protocol, all Australian resident, individual

shareholders, whether or not they are British subjects, will be entitled to a credit from the United Kingdom Government equal to that to which an individual resident of the United Kingdom would be entitled. As in the case of a United Kingdom

shareholder, the Australian shareholder will be taxed on the sum of the dividend and the credit but, as the United Kingdom tax will be limited to 15 per cent of that sum, the shareholder

will be entitled to a payment from the United Kingdom Government

of the amount by which the credit exceeds the amount of the United Kingdom tax. Correspondingly, the sum of the dividend

and the credit will be treated, for Australian tax purposes, as a dividend and credit will be allowed against the Australian

tax thereon for the 15 per cent United Kingdom tax. Australian

company shareholders in United Kingdom companies are not entitled

to the credit in respect of dividends they receive from United Kingdom companies but are not subject to any United Kingdom tax on those dividends. Such dividends are effectively freed from

Australian tax by the rebate of tax on intercorporate dividends.

The· Protocol provides that the new arrangements will operate

in respect of dividends paid by United Kingdom companies on or after 6 April 1977. The legislation to be enacted to give the

force of law in Australia to the Protocol will provide, however, that, in relation to dividends received up to and including today, the existing taxation treatment will be applied if that

would be more favourable to the taxpayer.

As regards dividends paid by Australian companies to United Kingdom residents, the new Protocol is in similar form to the

provisions of the existing agreement. Such dividends will

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continue to be liable to Australian withholding tax of 15 per

cent, unless they are effectively connected with a trade or

business carried on by a United Kingdom resident through a

permanent establishment in Australia.

Another change made by the Protocol relates to amendments to the United Kingdom basis of. taxation of foreign earnings of

persons resident in the United Kingdom. The existing

agreement has provisions designed to avoid a situation in which income derived from Australia by United Kingdom residents, for example from temporary employment in Australia,

could be tax-free in both countries. When the agreement was

concluded such income derived by a United Kingdom resident was not taxable in the United Kingdom if not remitted there

and the agreement provided that, if for this reason the United Kingdom did not tax the income, Australia did not have

to refrain from levying its tax on it.

Subsequently the United Kingdom formally made such income subject to tax in the United Kingdom but allowed a special

deduction against the income that had the effect of wholly or partially freeing it from United Kingdom tax. This had

the unintended result that some income became free of tax in both countries. The Protocol adapts the former provision designed to avoid complete and unwarranted freedom from tax

so that it is consistent with the changed United Kingdom law. This provision of the Protocol will operate in respect of employment income from 1 July 1980 in Australia and 6 April 1980 in the United Kingdom.

Copies of the Protocol will be available to interested persons

at Taxation Offices in the capital cities.


29 January 1980