Double Taxation Relief Manual: Guidance by country: Australia: Notes
Resident (article 4)
The Agreement contains definitions of resident that are broadly in line with standard OECD definitions, however there is an exception for companies participating in a dual listed company arrangement as defined at Article 4(6). Under Article 4(5), a company which is a participant in a dual listed company arrangement shall be deemed to be a resident only of the territory in which it is incorporated, provided its primary stock exchange listing is also in that State.
Dividends (Article 10)
Australian dividends are either ‘franked’, ‘partly franked’ or ‘unfranked’. The dividend voucher should identify the appropriate category.
(i) Franked Dividends. A voucher for a franked dividend paid by an Australian company shows a gross amount, an imputed tax credit (or rebate) and a net amount which is what the shareholder actually receives. The Australian tax credit reflects the underlying tax paid by the company on its profits (see INTM164010) and a portfolio shareholder (see INTM164010) is not entitled to credit for this tax. The correct measure of the dividend for United Kingdom tax purposes is the net amount of the dividend.
(ii) Unfranked Dividends. Australian tax deducted from unfranked dividends at the agreement rate of 15 per cent qualifies for credit as a direct tax. The reduction to the agreement rate is not given if the dividend is effectively connected with a business carried on by the United Kingdom resident recipient through a permanent establishment in Australia. Credit for underlying tax is only to be taken into account where the recipient is a company resident in the United Kingdom which controls, directly or indirectly, at least 10 per cent of the voting power in the paying company.
(iii) Partly Franked Dividends. To the extent the dividend is franked see (i) above and to the extent it is unfranked follow the rules in (ii).
An unfranked dividend of 100 is paid to a UK resident. Australian tax will be deducted at the agreement rate of 15 per cent so the UK resident will receive 85. The measure of the taxpayer’s taxed income is 100 and, as indicated above, the Australian tax, deducted at the agreement rate of 15 per cent qualifies for credit against the UK tax on that income.
Fringe Benefits Tax (Article 15)
The Agreement with Australia applies for fringe benefits provided on or after 1st April 2004.
Where a fringe benefit would otherwise be taxable in both the UK and Australia, Article 15 of the new Agreement provides that it will be taxable only in the country that would have the primary taxing right over that benefit if it were ordinary earnings. In other words, it follows Article 14.
‘Fringe benefit’ in this context has the meaning it has under Australia’s Fringe Benefit Tax Assessment Act 1986. It does not include a share option.
This special provision for Australia is necessary because it charges benefits on the employer rather than the employee.
Share Options (Exchange of Notes)
The Exchange of Notes to the Agreement with Australia contains specific provision for the taxation of share options. But it follows existing practice.
Both countries agree that income or gains derived by employees from share option schemes should be treated as earnings within Article 14 “income from employment”.
Unless the facts indicate otherwise, the period of employment to which the option relates is taken as the period between the grant and the date when all the conditions for exercise have been satisfied (the “vesting date”).
Where a resident of one territory makes such income or gains and:
(i) the period between grant and vesting is the period of employment to which the share option relates;
(ii) the employee remains in that employment when the option is actually exercised or otherwise alienated;
(iii) that employment has been exercised by the employee in the other territory for all or some of the period between grant and vesting
then the proportion of the gain attributable to employment exercised in that other territory will be determined on a straight line time apportionment.
In other cases, consult the Employment Related Securities Manual.
Certain Australian income of United Kingdom superannuation funds is exempt from Australian tax under the provisions of Australian domestic law.
Any enquiry on the subject should be referred to the Pension Schemes Office which will, where appropriate, give a certificate for production to the Australian authorities of the United Kingdom status of the fund seeking the relief.