The Australian Treasurer, the Hon Josh Frydenberg, delivered the 2020/21 Federal Budget on October 6 2020. As anticipated, the key focuses were on firstly, bringing forward the effective date of previously legislated personal income tax cuts to July 1 2020, and secondly, expanding significant economic stimulus initiatives.
However, several important international tax and related measures were also announced, including:
Clarifying the ‘corporate residency’ test for non-Australian incorporated companies, and in effect requiring a ‘significant economic connection’ to Australia, as well as Australian central management and control, in order to be regarded as Australian resident;
Expanding the list of exchange of information (EOI) countries eligible for the concessional (15%) managed investment trust (MIT) withholding tax, including most importantly adding Hong Kong SAR to the EOI list;
Enabling businesses, with aggregated annual turnover of less than AUD5 billion (US$3.53 billion), to immediately deduct the full cost of certain capital assets (with restrictions), provided these assets are first used or installed by June 30 2022;
Introducing limited loss carry-back rules for companies with aggregated annual turnover of less than AUD5 billion; and
Reversing various integrity measures and limitations to the research and development (R&D) tax offset.
ATO guidance on principal or main purpose test
On October 1 2020, the Australian Tax Office (ATO) issued Practice Statement Law Administration, PS LA 2020/2, which deals with the recommended approach to the principal or main purpose test as applicable to Australia’s double tax treaties.
The Practice Statement essentially provides guidance to ATO staff on the internal processes for considering the potential application of the principal or main purpose test, and thereby denies benefits under an Australian double tax treaty – e.g. withholding tax rate concessions. Guidance is provided on consultation with ATO international tax specialists, the Tax Counsel Network and the General Anti-Avoidance Rules Panel, as well as questions to raise and documents to access from relevant taxpayers. It is a guideline applicable to both multilateral instrument impacted treaties, as well as non-multilateral instrument impacted treaties/scenarios. It replaces draft PS LA 2019/D2.
Memorandum of understanding: Arbitration process for unresolved issues
under the Australia/Switzerland double tax treaty
The ATO has released the memorandum of understanding (MOU) on the mode of application of proposed arbitration processes between the competent authorities of Australia and the Swiss Confederation under Article 24 (5) of the Australia/Swiss Double Tax Agreement.
The MOU is operative from September 15 2020 and prescribes the arbitration process, selection and appointment of arbitrators, timing issues, confidentiality and non-disclosure rules, operating procedures and the effect of arbitration decisions which are generally binding on both contracting states (subject to limited exceptions).
Generally, unresolved issues arising from a mutual agreement procedure may be submitted to arbitration however, only after three years from the date on which a case was presented to the competent authority of one contracting state under Article 24(1) of the double tax agreement.
Individual residency case – tie breaker operative
In a decision of the Full Federal Court in Australia, Federal Commissioner of Taxation v Pike (2020) FCAFC 158, it was held that a taxpayer resident in Australia under ordinary concepts, was deemed to be a tax resident solely in Thailand under the tiebreaker provision, Article 4 (3) of the Australia/Thailand double tax agreement.
While the taxpayer was mostly employed in Thailand for several years, his partner and children stayed in Brisbane living in properties jointly rented in the name of the taxpayer. The Full Court held that the taxpayer’s personal and economic relations were closer to Thailand under the tiebreaker test in the double tax agreement.
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