THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION
June 2014
PAPER IIF – AUSTRALIA OPTION
ADVANCED INTERNATIONAL TAXATION
Suggested Solutions
Question 1
This question calls from some discussion regarding the twin concepts of residence and
source and in particular whether any relevant case law examples in Australia might serve to
assist in understanding these concepts and the extent to which they are appropriate as
jurisdictional nexus rules in both the case of developed and less-developed economies.
In the case of modern developed economies consideration should be given to the meaning of
residence and source and some explanation of these concepts in the Australian context
would be appropriate. This would include some discussion of residency rules for individuals
and those applying to companies. For individuals Australia adopts four alternatives for treating
a person as a resident namely
Common law residency rules;
Domicile (but subject to certain qualifications);
Presence in that jurisdiction for more than one half of any given year of income (but subject to
certain qualifications);
Specific tests dealing with Commonwealth public servants.
For companies a company will be treated as a resident of Australia if
It is incorporated in Australia;
It has its central management and control in Australia and carries on business in Australia;
It has its voting power controlled by Australian residents and carries on business in Australia.
Looking at these Australian definitions some commentary should be provided around the
appropriateness of such tests in a modern developed economy where transactions frequently
occur through electronic commerce and thus the place where a company is incorporated can
be utterly meaningless. For example, a company incorporated in Vanuatu could quite readily
transact extensively in Australia without triggering the central management and control test
since all directors meetings and any other meetings that might be relevant could be held
offshore effectively in cyberspace.
For individuals the tests appear to be particularly arcane based largely around domicile and
presence in Australia and again much can be done in Australia without the necessity to be
physically present here.
These observations suggest that existing concepts of residency and source are particularly illequipped to deal with taxation issues arising in developed economies.
In relation to less-developed economies these countries are usually more concerned with
source issues than residence, as they seek to demonstrate that more and more income is
sourced in the jurisdiction since in many cases extractive processes are being adopted to
remove commodities from such countries without triggering residency in that country. The
emphasis in these countries would inevitably be in relation to the source rules and requires
detailed analysis of what might trigger a source in the local jurisdiction.
Although not cases as such, the recent publicity attaching to companies such as Google and
Microsoft and their international structures are in many cases underpinned by ensuring that
the relevant residency rules in a number of countries are not triggered and that source is
maintained outside high tax jurisdictions.
There are a number of recent Australian residency decisions that highlight problems for
individuals including re Murray v FCT (2013) AATA 780 and re Bezuidenhout v FCT (2012)
AATA 799 where certain factual matters that do not always appear to be relevant from a
policy perspective seemed to carry significant weight in determining the residency issue. The
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subtleties of factual differences would suggest that the residency rules are not working in a
clear-cut definitive way at least not in the Australian context.
The source rules in Australia remain broadly common law based and the case law has
grappled with the question of source of income over many years including a recent decision
re Crown Insurance Services Ltd v FCT 2011 85 ATR 905 where income was held to be
foreign sourced. In that case two Vanuatu based companies entered into contracts with
Australian member country companies who provided funeral benefits on the death of
Australian residents. The connections with Australia seemed to be substantial but the Tribunal
at first instance nonetheless found, based on relatively old principles, that the income in
question was nonetheless foreign sourced. On appeal to the full Federal Court the matter was
dismissed on the basis that the appeal did not raise a question of law although there was one
significant dissent in the full Federal court by Jessup J who concluded that the income in
question was indirectly derived from an Australian source and would be taxable as such.
Again this case in particular demonstrates the uncertain manner in which the source rules
operate in Australia and is perhaps an argument which could be used to endorse more blackand-white definitive rules that might give greater clarity to both taxpayers and tax
administrations alike.
Question 2
This question calls for a consideration of withholding tax and how it operates in Australia. To
answer it properly students would need to first explain how withholding tax operates in
Australia and then consider whether that manner of operation confirms or contradicts the
quote.
Students should point out that essentially withholding tax in Australia applies to interest,
unfranked dividends and royalties. Franked dividends while technically subject to withholding
tax, incur a withholding tax rate of zero on the basis that the franking of the dividend has
meant that adequate Australian tax has already been paid in relation to the money that the
dividend represents.
The standard withholding rates in Australia are 10% for interest, 30% for unfranked dividends
and 30% for royalties but these rates can be reduced to as low as zero in some cases for
interest and unfranked dividends and to 5% in the case of royalties if an appropriate double
taxation agreement is operative. This might include, for example, double taxation agreements
which Australia has with countries such as the United Kingdom and the United States.
Students should construct examples of each highlighting the net amount that is paid out to the
foreign jurisdiction and in particular emphasise the fact that a failure to withhold will give rise
to detrimental consequences to the payer of the interest, dividend or royalty even though they
are not strictly the legally obligated party.
This leads directly to the quote which suggests that withholding tax is an absurd creation
since it simply increases the cost to the payer of amounts such as interest, dividends and
royalties. Whether this is true or not will depend,in the case of interest and royalties, on the
economic bargaining power of the parties to the transaction that has given rise to the flow of
interest and royalties. If the foreign party has the superior bargaining power it will use its
leverage to ensure that any tax which is extracted by Australia would be grossed up such that
in net terms the foreigner is not in a position that would be any worse than if no withholding
tax had applied in Australia. In other words, the withholding tax cost in such cases would be
absorbed by the payer rather than the payee of the interest or royalties. If, on the other hand,
the bargaining power sits with the Australian payer it will be able to shift the tax liability to the
foreigner by ensuring that there is no gross-up or adjustment to reflect Australian withholding
tax. Thus, the quote needs to be refined in order to take into account the bargaining power of
the respective parties.
The situation with dividends will probably depend on whether the company is a private or
public company. Private company dividends would usually be subject to the same bargaining
power issues as referred to above in the context of interest and royalties. In the public
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company context the company paying the dividend will determine the size of any unfranked
dividend and is unlikely to be swayed by issues concerning the pre and post-tax positions of
its shareholders.
The quote also refers to there being no advantage to Australia and in fact is quite damaging
to the economy as a whole. This would again only be true if the cost is effectively being
shifted although if the cost is not being shifted and is effectively borne by the foreigner it will
increase the cost to the foreigner doing business in Australia and this in its own way may be
quite damaging to the economy as a whole as it may discourage the foreigner from returning
to make investments here.
Thus, the appropriate comment to conclude with would appear to be that the quote can only
be correct with certain qualifications. Thus, the quote should to take into account the relative
bargaining positions of the parties to the transactions that create the flow of interest, private
company dividends or royalties. The quote is accurate to the extent that the costs are passed
back to the Australian payer and they are only partially accurate if they are not so passed
back since if they are not passed back they are absorbed by the foreigner and the foreigner
may then be less inclined to trade with Australia as there is an additional cost in the form of
the withholding tax and this in and of itself may be quite damaging to the economy as a
whole.
Question 3
The first point to make in relation to this question is that HK Co is presumed to be not resident
in Australia. However, this assumption needs to be more fully tested since although it is
incorporated in Hong Kong, three of its five directors are resident in Australia. This may well
suggest that HK Co is a resident of Australia based on its central management and control
here. However this would also lead to the question of whether it carries on business in
Australia and looking at the classes of income which it has disclosed, this looks unlikely.
Merely purchasing goods from Australian resident associates is unlikely to trigger a
conclusion that HK Co carries on business here.
Accordingly, it would be reasonable to conclude that HK CO is not resident in Australia. As
such, it would not be subject to tax in Australia on any of its income unless that income was
sourced in Australia or it derived capital gains which arose from the disposal of taxable
Australian real property(TARP). Neither of those things appear to arise on the facts as
presented.
As a result HK Co cannot be exposed to tax in Australia in its own right.
However, a question arises as to whether HK Co is a Controlled Foreign Company as far as
Australia is concerned since if it is, the passive income, tainted sales income and tainted
services income of HK Co might be subject to tax in Australia under Part X of the Income Tax
Assessment Act 1936.
In considering this issue, it is noticeable that Aust CO is the owner of only 43% of the shares
in HK Co which means that it is not a CFC based on the primary test for determining whether
a CFC exists which requires at least 50%. It may however be nonetheless a CFC based on
the other two tests, the first of which requires only 40% in circumstances where the remaining
60% are widely held such that no one else appears to control HK Co. Based on the limited
information we have been given that appears to be a strong likelihood.
It should also be noted that the 9% call option will be taken into account as being Aust Co’s
on the basis that you look at not only the shareholding which it holds but the shareholding
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which it is entitled to acquire. This would take Aust CO to 52% and accordingly HK Co would
be a CFC on the basis of the first primary test anyway.
It should also be noted by students that the put option arrangement will have no effect
because Aust Co is a seller of the put option and as such it will be under an obligation to take
those shares if they are put to it but it has no rights under this put option arrangement. The
provisions dealing with entitlements only refer to entitlements to acquire and does not refer to
obligations to take. In any event it would seem that HK Co either on the basis of the primary
CFC test or the secondary CFC test will be treated as a CFC.
Having reached that decision one the needs to analyse Part X to determine the extent to
which the income of HK Co might be subject to attribution under section 456. In this context,
the first point to note is that HK Co is a company resident in an unlisted country for the
purposes of section 333. As such its notional assessable income includes passive income,
tainted sales income and tainted services income.
The first item being business income would be tainted sales income under section 447 (1)(a)
since the goods in question are sold to HKCo by an Australian associate of the company.
The capital gain on the sale of the shares in the Hong Kong subsidiary would be treated as
passive income under section 446 (1) (k) since the disposal would be the disposal of the
tainted asset being shares in a company (see the definition of tainted asset in section 317(1)).
The management fees would not be treated as tainted services income since they are not
fees received from a Part X Australian resident at the time that the income was derived.
The dividend income would be treated as passive income as a result of section 446 (1)(a) and
would not be removed from being included in assessable income by any of sections 402,403
or 404. It would be exempt through the operation of 23AJ via the application of Australian law
on the basis HK Co is assumed to be a resident.
Thus, it would seem that of the total revenue of $400,000 generated within HKCo, only the
management fees are excluded as attributable income for the purposes of section 456. That
is $300,000 of the $400,000 is to be taxed in the hands of Aust CO but with a foreign income
tax offset arising in respect of any tax that might be paid in Hong Kong or Singapore (see
especially s 770 – 135 (2) where a foreign tax offset can arise in respect of foreign income tax
and withholding tax paid by a foreign company where an amount is attributable to the
attributable taxpayer – ie Aust Co in this case - under the CFC measures.
In making this calculation students should point out that some assessment should also be
made as to whether the company has passed or failed the active income test see especially
section 432. For the purposes of the above we have assumed that the tests being would be
failed having regard to the significant amounts of passive and tainted income
It should also be pointed out that these rules apply in relation to the year ended 30 June
2011. The government had previously indicated that the rules will change quite significantly
but more recently these plans appear to have been abandoned.
Students might also mention the repeal of the Foreign Investment Fund rules such that they
would not be applicable in the year in question. Furthermore, the proposed substitute the
Foreign Accumulation Fund (or FAF) rule has not been implemented. In any event if the CFC
rules apply in the manner indicated above, neither the repealed FIF rules nor the proposed
FAF rules are likely to have had any impact whatsoever.
Question 4
This question requires the student to explain each of the six terms referred to in plain English
without the use of jargon. It also requires the students to explain the relevance of each of
these terms to transfer pricing and to explain what transfer pricing is likely to involve in the
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context of an Australian company with subsidiaries in New Zealand Hong Kong and
Singapore.
Thus some of the following comments would be pertinent.
What is transfer pricing and how is it relevant to you?
Transfer pricing is an area of the law which deals with the way in which prices are set where
related parties resident in different tax jurisdictions are dealing with one another in relation to
goods or services which one party provides to another.
This could be particularly relevant to your circumstances since the Australian head company
will be dealing potentially with each of its three subsidiaries in New Zealand, Hong Kong and
Singapore. Thus, if the Australian company were to provide services to any or all of those
three subsidiaries, a question would arise as to how the price for those services was struck.
This is particularly relevant because Australia is seen to be a high tax jurisdiction particularly
in comparison to Hong Kong and Singapore and thus care needs to be taken to ensure that
profits are not being shifted out of Australia into Hong Kong and Singapore where the tax
rates are lower. This could be achieved by the Australian company providing services to the
Hong Kong and Singapore subsidiaries for less than the true proper price which should be
attached to the provision of such services. Such activity could apply equally in relation to
goods where Australia might transfer goods to its subsidiaries particularly in Hong Kong and
Singapore for less than what might be considered to be the true proper price. New Zealand is
not excluded from this although the circumstances would have to be somewhat different since
New Zealand’s headline tax rate is not all that different to Australia’s in most instances.
This is not suggest that all transactions will attract the application of transfer pricing rules but
care needs to be taken to ensure that any pricing is properly documented and justified.
Internationally transfer pricing rules and regulations have been developed and as part of
those a number of methods for determining the appropriate price to charge between related
parties have been established. While there are a number of different acceptable methods, two
of them are the comparable uncontrolled price and transactional net margin method.
In Australia these rules are now covered in Division 815 of the 1997 Income Tax Assessment
Act which is very expansive in its view of transactions which can be covered by Transfer
Pricing. Business restructurings in particular appear to be more broadly covered by the
Australian TP rules than would seem to be the case in other comparable jurisdictions.
What is the comparable uncontrolled price?
The comparable uncontrolled price is the price that would be charged by parties in a
comparable transaction in the same or similar circumstances to the circumstances that are
being tested. Thus, if we are asking about goods that are being transferred from the
Australian company to the Singapore subsidiary, we would look for a comparable transaction
between parties who are not related in relation to the same or similar product in the same or
similar circumstances (but obviously not including the circumstances that the parties are
related). This might be a sale of the goods from the Australian company to a foreign company
to which the Australian company is not related (referred to as an internal comparable) or it
might be a sale of goods from another Australian company to a foreign entity (referred to as
an external comparable) in the same or similar circumstances (but again where one of those
circumstances is not that the parties are related).
If there is a significant difference in the price such that in the comparable transaction a much
higher price is charged, the Australian revenue would have substantial support for an
adjustment to be made to increase the price charged by the Australian company and thereby
to increase the amount of tax that would be paid in Australia by the Australian company.
This methodology is not without its problems – the main difficulty being identifying comparable
transactions as it is not always easy to establish the same or similar circumstances
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particularly in international arrangements where circumstances are almost always different in
some respects. The question is whether the difference is so substantial as to defeat
comparability such that it can no longer be described as a comparable uncontrolled price.
What is the Transactional Net Margin Method?
This is an alternative to the comparable uncontrolled price and looks not so much to the price
charged in relation to a particular transaction but to the overall net margin achieved on a
category of products.
Thus, following the example above, the transactional net margin method would look less to
the exact price charged and more to the percentage margin achieved by the Australian
company from the transactions relating to the goods sold to its Singapore subsidiary. Again
this calls for some comparability because we would be comparing the net margin achieved by
this company with net margins achieved by others in the same or similar circumstances. It
would be fair to say that the degree of comparability required in this context would not be as
onerous as that which would apply in the context of comparable Uncontrolled pricing.
Thus, if the net margin achieved by this company was in the order of 2.5% overall profit, but
comparable transactions have achieved 6%, the Australian revenue would again have
substantial ammunition to make an adjustment to increase the net margin achieved by the
Australian company in the circumstances. Of course, some explanation may be offered for
why there is such a large discrepancy and in certain circumstances this would be taken into
account and may even constitute a full explanation.
What is functional analysis?
As part of the process of establishing the proper price to be charged between the related
entities (e.g. the Australian and Singapore companies), independent parties will often
undertake a functional analysis. This essentially means that they determine in relation to a
specific transaction, or series of transactions, what the parties to those transactions have
done in the sense of what assets have been utilised in relation to that transaction, what
functions have been performed by each of the parties and what risks have been assumed or
undertaken by each of the parties.
By separately identifying and then evaluating the functions, assets and risks associated with
the transaction, or series of transactions, an independent party is then in a position to better
evaluate the contribution which each party has made and accordingly the price that should be
struck in relation to those transactions or the profit that should be earned.
Such a functional analysis is normally conducted by an independent third party adviser such
as the advisory accounting firm but there is no reason why such a functional analysis cannot
be conducted internally by the group provided that realistic assumptions are made about the
functions, assets and risks that are being contributed/adopted by the various parties.
To give one example, an Australian company may be a manufacturer utilising significant
patents in its manufacturing process. That might well give rise to a circumstance where the
Australian company will need to be compensated for the use of those patents as part of the
price which is struck between it and its Singapore subsidiary. If on the other hand the patents
were owned by the Singapore company but were being used by the Australian company
under some type of licensing arrangement where no fee was being charged by the Singapore
company for that licensing arrangement, that circumstance would tend to suggest that a
higher allocation should be made towards the Singapore company to provide it with an
adequate return since the functional analysis suggests that the Singapore company is
contributing more in the way of intellectual property. A further and different example is that if
all insurance risk sits with the Australian company that is an aspect of the functional analysis
which would suggest that the Australian company needs to secure a larger return since it is
taking greater risks.
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Obviously once the functions, assets and risks have been identified allocating numbers will be
a challenge but it will be based on principles of comparability.
What is a Cost Contribution Agreement?
In order to circumvent the likelihood of any challenge to the pricing established between
related parties it would be possible and in fact in many cases desirable for the group to
establish a cost contribution agreement whereby in relation to certain aspects of the group’s
activities each member of the group contributes to the cost of the development of, for
example, assets which are owned by the group and are to be available for the benefit of all
group members.
In this way the argument relating to transfer pricing that might be brought by a revenue
authority at some stage down the track is effectively negated because the parties have
agreed in advance to a formula for contributing to costs. Effectively this is pre-empting any
transfer pricing argument by effectively allocating costs in advance to different companies
within the overall group. Care needs to be taken here as a CCA would need to meet many
threshold tests before it was accepted by for example the Australian Taxation Office. In fact
this could entail almost as much work as a full blown functional analysis in order to
demonstrate that the cost allocations are appropriate. Nonetheless, the existence of such a
CCA will be helpful as a starting point and if well founded with good supporting documentation
can go much further in satisfying the SATO and possibly other revenue authorities at the
same time.
Thus, in your case, a cost contribution agreement would be entered into and signed by each
of the four companies in the group with specific recognition of costs which are to be paid by
different members. If one member is to pay a disproportionate amount in relation to assets
which will be used by other companies within the group, compensating adjustments will be
made upfront.
In my experience, Cost Contribution Agreements are not that common in Australia but they do
have utility and in the appropriate circumstances can work to avoid any subsequent
arguments with revenue authorities. They appear to have greater acceptance and use in the
United States.
What is an Advance Pricing Agreement?
This is an arrangement that is very different to the Cost Contribution Agreement, as it involves
not only the corporate members of the broad group but also one or more revenue authorities
who are in effect bound to the terms of the APA which has been entered into.
The idea is that all the parties agree to a set formula for determining pricing in relation to
related party transactions within the group and will not object to the use of that formula on
certain assumptions.
Importantly the agreement is limited in time – it will usually last up to 5 years but can in
appropriate circumstances be longer.
The ATO (and most other revenue authorities for that matter) will inevitably make it clear that
it will only accept the terms of the APA if the assumptions which underpinned the making of
the APA remain current.
This might, for example, include an assumption that the Australia to US dollar exchange rate
remains within certain bounds. It might also be based on an assumption that insurance risk is
taken on by the Australian company rather than the three subsidiaries. If these assumptions
are invalid after two years it is incumbent on the taxpayers to return to the relevant revenue
authorities and advise them of the change in circumstances so as to give the revenue
authorities the opportunity to revise whatever they think might be appropriate in relation to the
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pricing between the parties. This would apply equally to the companies themselves in the
sense that they might also seek to revise the pricing based on the changed assumptions but
that rarely arises in practice.
APA’s are expensive to negotiate and time-consuming and accordingly are not normally relied
upon except for large corporate group’s where there is often a substantial budget available for
such activities.
What is Unitary Tax Methodology?
Unitary Tax Methodology is essentially the adoption of a formula for determining the allocation
of profits across a group of related companies that reside in different tax jurisdictions.
Thus, in your case if it could be established, for example, that the profit of the whole group in
dealing with the outside world (i.e. without regard to internal transactions) was $A2,000,000,
then that figure would be split between the four countries based on a formula. The exact
formula would be the basis of considerable debate but it historically has had regard to sales in
each jurisdiction, property located in each jurisdiction and the respective payroll size in each
jurisdiction. Thus, to put it simply if half the workforce was in Australia, half the sales took
place there and half the assets were located here, half the profit would be taxed here.
Under the formula different weightings can be given to each aspect of the formula and there is
no universal agreement on what to include in the formula to start with.
There are many problems with this. Most countries oppose its use as being too arbitrary and
does not pay regard to where profits are really generated. Even if you accept the formula –
where do sales take place when electronic commerce is involved/do you measure employees
by sheer number or weighted according to levels of pay.
Getting international agreement on an appropriate formula looks unlikely.
This methodology has not been accepted in Australia as a valid method for dealing with TP
and is unlikely to be so accepted in the near future.
Question 5
The Australian Fringe Benefits Act (FBT) was introduced in 1986 as a Federal tax to
supplement the Federal income tax in Australia. The main reason it was introduced was
because it was felt that certain fringe benefits which were conferred by employers on
employees were not being caught or at least not being caught adequately by the framework of
the income tax legislation. The main examples included the availability of cars provided by
employers to employees which were used in part for private purposes and the making of
home loans by employers to employees at discounted interest rates.
The way the FBT has been structured is that it is a tax imposed upon the employee in respect
of the global fringe benefits which are provided to all its employees. It is divided into
categories with two of the categories being the examples given above, i.e. cars used partly for
private purposes and discounted interest rate loans for housing purposes. There are a series
of other categories which can apply and the final category is residual fringe benefits referring
to fringe benefits not otherwise covered.
The particular category relevant to a particular circumstance will have its own specific
valuation rules which will then give a value for that category of fringe benefit. That value
grossed up at the top marginal tax rate is then included in the fringe benefits that are subject
to tax in the hands of the employer. The valuation rules can be quite complicated particularly
for cars where different valuation methodologies can be adopted. A good answer will touch on
some of these valuation methodologies.
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The reason there are so many classifications is because different types of fringe benefits call
for different types of valuation methodologies and may have attached to them different
qualifications/exemptions.
There are many exemptions, qualifications and exemptions built into the system including a
particular a qualification that to the extent that the employee contributes to the cost of the
fringe benefit, the value of the fringe benefit assessed to the employer is reduced.
Furthermore, to the extent that the cost of the fringe benefit would have been deductible to
the employee had the employee purchased the fringe benefit, a commensurate reduction in
the value of the fringe benefit included in the fringe benefits assessment of the employer will
apply. This “otherwise deductible rule”
is designed to ensure parity of treatment between fringe benefits and ordinary income tax.
There are complexities in the operation of the fringe benefits tax which could be avoided. One
in particular is the different year end for fringe benefits tax as opposed to income tax and
GST. The latter are calculated by reference to the year-end 30 June whereas the FBT is
calculated by reference to the year-end 31 March. This appears to be a rather strange
anomaly and complexity could be avoided by shifting the FBT year-end to 30 June.
A perceived complexity relates to the fact that FBT is levied on the employer rather than the
employee and this appears to be odd as the tax appears to be levied on the provider of the
benefit rather than the recipient. Whilst this might be odd in policy terms, it is a clever and
relatively unique way of dealing with the issue. It is clever in particular because by levying the
tax against the employer where there are say 10,000 employees, the whole situation is in
effect summarised in one composite return without the need to check countless other returns.
Of course some cross-referencing to the individual employees concerned may be necessary,
but nonetheless the task of the revenue authorities is considerably eased by this device.
Although the two exemptions/qualifications mentioned above seem sensible, many of the
other exemptions/qualifications that apply under the FBT Act are not always justified and
could be reviewed with the intention of simplifying the number and content of such
exemptions/qualifications.
Question 6
Division 855 ITAA 1997 now provides a comprehensive code to deal with the taxation of
capital gains derived by foreign residents.
Essentially, a foreign resident can disregard a capital gain or loss unless the relevant CGT
asset is:





a direct interest in Australian real property being real property situated in Australia (this would
include a lease of land if the land is situated in Australia);
a direct interest in a mining, quarrying or prospecting right, if the minerals, petroleum or
quarry materials are situated in Australia;
an indirect interest in either of the above two assets. This would arise in circumstances where
the asset is itself at least 10% of the shares in a company or a unit in a unit trust and the
underlying company or unit trust has its underlying value principally derived from interest in
Australian real property or mining quarrying or prospecting rights;
a direct interest in a CGT asset that has been used as any time in carrying on a business
through a permanent establishment in Australia; or
a direct interest in an option or write to acquire an asset referred to above.
Special rules also apply for individuals who are Australian residents but have become nonresidents or for foreign resident beneficiaries of fixed estates. There are also special rules
dealing with what happens when a foreign resident becomes an Australian resident.
If the asset is not covered by one of the preceding paragraphs any capital gain or capital loss
derived from a CGT event that arises in relation to the asset is disregarded.
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The effect of this is that Australia’s domestic laws are severely restricted in terms of the extent
to which CGT arises for foreign residents dealing with Australian assets. If that asset is not in
any way connected with Australian real property or mining etc rights and is not an asset used
in an Australian business, broadly speaking no Australian capital gains tax will arise.
This limits the scope of the operation of Australia’s double taxation agreements. The double
tax agreements will only come into play if Australia otherwise asserts its right to tax a capital
gain and since the domestic law severely restricts the circumstances in which capital gains
are taxed where they are derived by a non-resident, the likelihood of a DTA applying is
limited.
Nonetheless in appropriate circumstances it is possible that the business profits article in a
DTA could operate to exclude Australia’s right to tax a capital gain where the capital gain is
derived by a foreign resident who is resident of the DTA partner country, the gain is treated as
a business profit under the DTA and the foreign resident entity does not have a permanent
establishment in Australia. In those circumstances, Article 13 of the DTA is likely to preclude
Australia’s right to tax.
However, if the asset involved is real property in Australia which would therefore ordinarily be
subject to tax under division 855 the business profits article in the DTA is likely to be
overridden by a specific real property article in the DTA which may well restore Australia’s
taxing rights by virtue of the fact that the real property is situated in Australia.
In other words the likelihood of such a case arising where Australia’s right to tax is precluded
by the treaty in circumstances where it is allowed under the domestic law is remote.
It is worth noting that the cases where treaties have blocked Australia’s right to tax capital
gains arose under the previous provisions which were much broader in allowing Australia to
tax foreign residents then the current Division 855 – see in particular Virgin Holdings and
Undershaft Number 1 and 2.
Question 7
This statement is reflects to a large degree the problems identified in the application of the
GST The concept of supply has been the subject of considerable judicial comment see
Reliance Holdings Luxotica Qantas and AP Group all of which in various ways grapple with
the supply concept and in particular whether it is possible to break a composite supply into its
smaller components and whether non- performance can amount to a supply. Some
discussion of the terms of the definition would be appropriate. Similarly discussion of the
statutory definition of consideration would be useful highlighting some of the key parts of s 915 of the GST Act 1999. Some reference to AP Group and related cases on whether
consideration must come from the recipient of the supplier would be helpful.
An explanation of the three types of supply and the consequences flowing from a supply
being characterised as one or the other is expected and overlap issues and grey areas should
be discussed.
Case discussion could explain the facts of Qantas where the issue that arose for
consideration before the High Court ultimately was whether a supply had been made in
circumstances where there was a no-show by a consumer, a flight previously paid for was not
taken and the monies were forfeited to the airline. The court ultimately held a supply had
taken place but it is not entirely clear even at this stage as to exactly what the supply was. A
further example is the litigation that went before the full Federal Court in AP Group where
supplies made by car dealerships allegedly to certain manufacturers was in dispute.
These two cases in particular highlight some of the complexities that can arise under the GST
particularly in the context of what constitutes supply and to a lesser extent what constitutes
consideration.
Page 11 of 12
Page 12 of 12