ATO ID 2004/863: Assessability of Australian dividend income received by a UK resident company - beneficial ownership of shares - 80% test
Date of decision: 15 October 2004
Year of income: Year ended 30 June 2005
Business line: Public Groups and International

Issue
Can a UK resident company satisfy the 80% voting power requirement contained in Article 10(3) of Schedule 1 to the International Agreements Act 1953 (Agreements Act), if it is the beneficial owner of the shares in an Australian resident company through a trust?

Decision
Yes. A UK resident company satisfies the 80% voting power requirement contained in Article 10(3) of Schedule 1 to the Agreements Act if it is the beneficial owner of the shares in an Australian resident company through a trust.

Facts
A UK resident company is the beneficial owner of all the shares in an Australian resident company through a trust. The Australian company is to be liquidated. It will then distribute unfranked dividends, in respect of which the UK company is beneficially entitled, to the trustee of the trust. The trustee of the trust will then distribute the unfranked dividends to the UK company.

Reasons for decision
Summary: Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the 2003 UK Convention) and 2003 United Kingdom Notes. The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents. Article 10(3) of the 2003 UK Convention provides that dividends shall not be taxed in Australia where, amongst other things, the beneficial owner of the dividends is a UK resident company that has owned shares representing 80 per cent or more of the voting power of the company paying the dividends, for a 12 month period ending on the date the dividend is declared. At issue is whether the requirement that the UK company must have 'owned shares' has been satisfied given that a trustee, rather than the UK company, has legal ownership of the shares. The UK company's beneficial ownership through a trust, of shares representing 80% or more of the voting power of the company paying the dividends, falls within the meaning of the term 'owned shares' in Article 10(3) of the 2003 UK Convention because, when reading the term 'owned' in conjunction with the previous reference to beneficial ownership in Article 10(3), the term 'owned' in this context refers to beneficial ownership where the beneficial owner of the shares differs from the legal one. By contrast, Article 10(2) of the 2003 UK Convention provides for a reduction in the rate of withholding tax where the beneficial owner of the dividends is a company which holds directly at least 10% of the voting power in the company paying the dividends. Here, the beneficial owner must hold the requisite percentage of the voting power in the company paying the dividends 'directly'. The use of the words 'holds directly' in Article 10(2)(a) is supportive of the above interpretation of the term 'owned shares' in that, had 'legal' ownership of shares been a requirement of Article 10(3) of the 2003 UK Convention, the Article could have specified this. Therefore, given the context of the use of the term and the absence of an express requirement for the voting power to be held 'directly', beneficial ownership of shares in the paying company are 'shares owned' for the purposes of Article 10(3) of the 2003 UK Convention.

Legislative references: International Tax Agreements Act 1953 Schedule 1, Article 10(3)
Subject references: Double tax agreements International tax Treaties Dividends Unfranked dividends Withholding tax Trusts