Private ruling: Dividend and interest withholding tax
Date of advice: 2 September 2024
Published: 14 October 2024
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Will Article 10(2) of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of fiscal Evasion with Respect to Taxes on Income [1983] ATS 16 and Protocol amending the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of fiscal Evasion with Respect to Taxes on Income [2003] ATS 14 (the US Convention) apply to reduce to 15% the withholding tax on the unfranked dividends paid Company A to Z LP to the extent to which a proportion of such dividends was attributed to the Retirement System A? | A1: Yes. | Q2: If the answer to Question 1 is "Yes", will the Retirement System A be entitled to apply in writing for a refund by the Commissioner of Taxation (Commissioner) under subsection 18-70(1) of Schedule 1 to the Taxation Administration Act 1953 (the TAA 1953) of dividend withholding tax amounts in excess of 15% withheld and remitted by Company A to the Commissioner on its portion of unfranked dividends paid by Company A to Z LP? | A2: Yes.

Relevant facts and circumstances: Company A 1. Company A is a company incorporated in Australia as the head company of the Company A tax consolidated group (Company A TCG) which includes Company B and Company C. Z LP 2. Z LP is a limited partnership formed in the Cayman Islands which comprises of Z LLC as general partner and other investors being limited partners. 3. Z LP is governed by the Partnership Agreement. 4. Z LP is not an Australian resident and does not have any operations in Australia nor does it carry on business in Australia. 5. Z LP is not taxed in its own right under Cayman Islands income tax law. It is treated as 'fiscally transparent' in the Cayman Islands such that profits derived by Cayman LP are not taxed in the Cayman Islands but rather are treated as profits of the investors in proportion to their interest in Z LP as evidenced by the distribution statement that shows the income being distributed to the limited partner. 6. In 20XX, Z LP acquired X% of the ordinary shares in Company A. 7. In 20XX, Z LP subscribed for additional shares in Company A. Dividends received by Z LP 8. The dividends were paid by Company A and withholding tax withheld by Company A and remitted to the ATO. Income received 9. Clause X.X of the Partnership Agreement provides that Distributable Cash, as defined by the Partnership Agreement, received by the Fund shall be distributed to the partners within 60 days, or as soon as practicable thereafter. Tax partnership status 10. Z LP is taxable as a partnership as per the Partnership Agreement. Retirement System A 11. The Retirement System A is a contributory retirement system in State A, United States (US). It is created and empowered under the State A General Laws (SAGL) and governed by five members. 12. The Retirement System A earns income through the investment of the money it collects from its members. 13. The Retirement System A has a direct legal holding of X.X% of Z LP (as at 30 June 20XX) and accordingly retains ownership and control of that asset and the use and enjoyment of any income flowing from it. 14. There is no entity interposed between the Retirement System A and Z LP. 15. The Retirement System A is a resident of the US for tax purposes. 16. The Retirement System A's members are actively working for City A or are retired/pensioners from one of the above entities. Membership in Retirement System A is mandatory for nearly all employees. 17. Generally, members are only entitled to receive payment following retirement or disability. Their spouses may also receive payment upon the death of a member. Members do not have a direct right to Retirement System A's cashflow. 18. The State A Retirement Guides provide members with an understanding of their benefits. 19. The members of Retirement System A are all residents of the US. 20. The Retirement System A does not carry on a business in Australia through a permanent establishment. 21. The Retirement System A is tax-exempt in the US. 22. The Retirement System A received distributions from Z LP directly. The total distributions received included the Retirement System A's portion of the net unfranked dividends from Company A in accordance with its percentage interest in Z LP. Of the dividends received by Z LP from Company A, certain cash was retained by Z LP to fund ongoing expenses. 23. The dividends ultimately received by the Retirement System A were net of withholding tax of 30%. 24. The Retirement System A has not previously applied for a refund of the dividend withholding tax previously withheld by Company A.

Relevant legislative provisions: Convention between the Government of Australia and the Government of the United States of America for the | Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1983] ATS 16 | Protocol amending the Convention [2003] ATS 14 | Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 section 7 | Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1936 subsection 128B(1) | Income Tax Assessment Act 1936 subsection 128B(4) | Income Tax Assessment Act 1997 subsection 6-5(3) | International Tax Agreements Act 1953 subsection 4(1) | International Tax Agreements Act 1953 subsection 4(2) | Taxation Administration Act 1953 Schedule 1 subsection 18-70(1)

Reasons for decision: Summary: The requirements under Article 10(1) of the US Convention are satisfied. Therefore, Article 10(2) of the US Convention will apply to reduce to 15% the withholding tax applying to the portion of unfranked dividends paid by Company A to Z LP that Retirement System A is beneficially entitled to. | Detailed Reasoning - Australian withholding tax for non-residents and the US Convention: Non-resident taxpayers will, prima facie , be liable to withholding tax under section 128B of the Income Tax Assessment Act 1936 (ITAA 1936) on Australian sourced dividend income, unless an exemption or exclusion applies (subsection 128B(1) of the ITAA 1936). Australia has entered into income tax treaties, commonly known as double tax agreements (DTAs), with many countries to avoid the incidence of double taxation and fiscal evasion, including the US Convention. Subsection 5(1) of the International Tax Agreements Act 1953 gives the force of law to the provisions of the US Convention. Article 1(1) of the US Convention states that the Convention applies to persons who are residents of one or both of the Contracting States. Article 3(1)(a) of the US Convention defines a "person" as including "an individual, an estate of a deceased individual, a trust, a partnership, a company and any other body of persons". The Retirement System A is an entity that falls under the definition of a person as it is any other body of persons. The Retirement System A is a resident of the US for federal income tax purposes and an indirect investor in Company A, an Australian incorporated company, through a limited partnership, Z LP. Article 4(1)(b)(iii) of the US Convention states that for the purposes of the US Convention a person is any other person (except a corporation or unincorporated entity treated as a corporation for US tax purposes) resident in the US for purposes of its tax. Retirement System A is a resident of the US for the purposes of the US Convention. Based on the facts as outlined above, the US Convention will apply to the Retirement System A and it will be treated as a resident of the US under Article 4(b)(iii) of the US Convention for the purposes of applying the US Convention. | Detailed Reasoning - Dividend withholding tax: Subsection 128B(1) of the ITAA 1936 states that (subject to excluding provisions) the operative provisions of the section apply to a dividend paid to a non-resident by an Australian resident company. Subsection 128B(4) of the ITAA 1936 provides that a person who derives dividend income to which the section applies is liable to pay income tax upon that income at the rate declared by the Parliament. Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 prescribes that the relevant rate is 30%. However, certain DTAs may set a different rate of withholding in circumstances where a resident of a country which has a DTA with Australia is beneficially entitled to a dividend. The primary legislation governing DTAs in Australia is the International Tax Agreements Act 1953 (Agreements Act). Subsection 4(1) of the Agreements Act incorporates the ITAA 1936 and the ITAA 1997 so that those acts are read as one with the Agreements Act. Subsection 4(2) of the Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (with some limited exceptions). Article 10(1) of the US Convention outlines how dividends are to be taxed: Dividends paid by a company which is a resident of one of the Contracting States for the purposes of its tax, being dividends to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. Article 10(2) of the US Convention provides that those dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident for the purposes of its tax, and according to the law of the state, but: (a) the tax charged shall not exceed 5 percent of the gross amount of the dividends, if the person beneficially entitled to those dividends is a company which holds directly at least 10 percent of the voting power in the company paying the dividends; and (b) the tax charged shall not exceed 15 percent of the gross amount of the dividends to the extent to which those dividends are not within sub-paragraph (a). In summary, it must be established that the distributions paid by Company A are dividends for the purposes of Article 10 of the US Convention and that the Retirement System A is beneficially entitled to the dividends. | Detailed Reasoning - Dividends: Article 10(6) of the US Convention defines dividends as income from shares, as well as other amounts which are subjected to the same taxation treatment as income from shares by the law of the State of which the company making the distribution is a resident for the purposes of its tax. The effect of Article 10(6) of the US Convention is that the distributions paid by Company A to Z LP of AUD XXX, AUD XXX and AUD XXX on XX September 20XX, X January 20XX and XX June 20XX, respectively, were dividends for the purposes of Article 10 of the US Convention as they are income from the holding of shares in Company A, an Australian resident company. | Detailed Reasoning - Beneficially entitled: The term 'beneficially entitled' is not defined in the US Convention, however Article 3(2) of the US Convention provides that: As regards the application of this Convention by one of the Contracting States, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has under the laws of that State relating to the taxes to which this Convention applies. In general, when interpreting DTAs, the OECD Commentaries provide important guidance on interpretation and application of the OECD Model Tax Convention and can be considered, in interpreting DTAs. Paragraph 12.1 of the 2014 OECD Commentary on Article 10 (being the Article dealing with dividends) of the OECD Model Tax Convention states: The term 'beneficial owner' is therefore not used in a narrow technical sense (such as the meaning that it has under the trust law of many common law countries), rather, it should be understood in its context, in particular in relation to the words 'paid to a resident', and in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance. Paragraph 12.4 of the 2014 OECD Commentary on Article 10 of the OECD Model Tax Convention describes the concept of beneficial ownership as a recipient's right to use and enjoy the income not being constrained by a contractual or legal obligation to pass on the payment received to another person. Such an obligation will normally derive from relevant legal documents but may also be found to exist on the basis of facts and circumstances showing that, in substance, the recipient does not have the right to use and enjoy the amounts unconstrained. Z LP is a limited partnership formed in the Cayman Islands. Z LP holds X % of the shares that have been issued by Company A. Z LP is not taxed under Cayman Islands income tax law and is treated as a fiscally transparent entity in the Cayman Islands and the US. All profits derived by Z LP are treated as profits of the partners themselves in proportion to their partnership interest in Z LP for Caymans Islands and US federal income tax purposes. Retirement System A directly invested in Z LP and did in fact receive, and is beneficially entitled, to the distributions from Z LP as Retirement System A is not constrained by any obligation to pass on payment received to its members until they fulfil certain eligibility requirements. Based on the relevant facts and circumstances as outlined above, it can be concluded that the Retirement System A was beneficially entitled to its relevant proportion of dividends paid by Company A to Z LP for the purposes of the US Convention. | Detailed Reasoning - Article 10 of the US Convention: Article 10(2)(a) of the US Convention does not apply as the Retirement System A is not a company. Article 10(3) of the US Convention does not apply as the Retirement System A does not own shares representing 80 percent or more of the voting power of the company paying the dividends. Article 10(5) of the US Convention does not apply as the Retirement System A does not carry on business in Australia through a permanent establishment. Therefore, Article 10(2)(b) of the US Convention will apply so that the withholding tax applicable to dividends to which the Retirement System A is beneficially entitled would be at the rate of 15%. | Detailed Reasoning - Limitation of Benefits: Article 16 of the US Convention applies to deny treaty benefits unless the relevant entity is a 'qualified person' for the purposes of the Convention. Article 16(1) of the Convention states: Except as otherwise provided in this Article, a resident of one of the Contracting States that derives income from the other Contracting State shall not be entitled to the benefits of this Convention otherwise accorded to residents of one of the Contracting States unless such resident is a "qualified person" as defined in paragraph (2). Article 16(2) of the Convention contains the definition of a 'qualified person'. Sub-paragraph (f) provides that an entity organised under US law and established and maintained to provide a plan, pensions or other similar benefits to employed persons and more than 50 percent of its beneficiaries, members or participants are individuals resident in the US shall be a qualified person. As outlined above, the Retirement System A is such an entity and thus is a qualified person such that Article 16 of the US Convention will not apply to deny treaty benefits. Consequently, Article 10(2) of the US Convention will apply to reduce to 15% the withholding on unfranked dividends paid by Company A to Z LP to the extent to which a proportion of such dividends was attributed to the Retirement System A. | Detailed Reasoning - Question 2: If the answer to Question 1 is "Yes", will the Retirement System A be entitled to apply in writing for a refund by the Commissioner of Taxation under subsection 18-70(1) of Schedule 1 to the Taxation Administration Act 1953 (the TAA 1953) of dividend withholding tax amounts in excess of 15% withheld and remitted by Company A to the Commissioner on Retirement System A's portion of unfranked dividends paid by Company A to Z LP? | Summary: The Company A to Z LP will be entitled to apply for a refund by the Commissioner of the dividend withholding tax amounts withheld and remitted by Company A to the Commissioner on their portion of unfranked dividends paid by Company A to Z LP. In order for a refund to be provided, the application must satisfy the requirements of subsection 18-70(2) of Schedule 1 to the TAA 1953. | Detailed Reasoning - Detailed reasoning: Subdivision 18-B of Schedule 1 to the TAA 1953 contains the rules allowing certain amounts withheld or paid to the Commissioner under the pay as you go (PAYG) withholding provisions to be refunded to recipients. Relevantly, subsection 18-70(1) of Schedule 1 of the TAA 1953 states: An entity (the recipient) may apply in writing to the Commissioner for the refund of an amount if: (a) another entity (the payer): (i) withheld an amount purportedly under Division 12 from a payment made to, or received for, the recipient..... (b) either: (i) the amount was so withheld, or paid to the Commissioner, in error... (c) section 18-65 does not apply because the payer did not become aware of the matter mentioned in paragraph (b), or the recipient did not apply for a refund, as mentioned in subsection 18-65(1); and (d) if subparagraph (a)(i) applies - the payer has already paid the withheld amount to the Commissioner. | Detailed Reasoning - Paragraphs 18-70(1)(a) and 18-70(1)(b) of Schedule 1 to the TAA 1953: Company A has withheld and remitted to the Commissioner an amount equating to 30% of the unfranked dividends paid to Z LP. As outlined above in response to Question 1, the Retirement System A was beneficially entitled to a proportion of such unfranked dividends which has resulted in an overpayment of withholding tax. As Article 10(2)(b) of the US Convention applies to reduce the withholding tax rate to 15%, Company A has withheld and remitted a higher amount than necessary. Law Administration Practice Statement PS LA 2011/11 Refunds of certain pay as you go withholding amounts also details the obligations and rights of a payer, a recipient and the Commissioner where an amount has been withheld, in error, purportedly under the PAYG withholding system. It also provides information as to how a recipient may obtain a refund of incorrectly withheld amounts (paragraph 4 of PS LA 2011/11). The term 'in error' is discussed in paragraph 7 of PS LA 2011/11 and states: The word error has its ordinary, broad meaning and includes an error of fact and an error of law. An error of fact is one where an error is made by a decision maker about the existence of a particular fact. An error of law is a misinterpretation or misapplication of a principle of law, or the application of an inappropriate principle of law to an issue of fact. Paragraph 8 of PS LA 2011/11 provides examples that illustrate where an amount would be considered to have been withheld in error. In particular, one example relevant to this case states: An incorrect (higher) withholding rate is used in calculating the amount withheld from a payment of an interest, unfranked dividend or royalty to a non-resident (for example, because they did not take account of the rate provided under an agreement or convention covered by the International Tax Agreements Act 1953 ). Subsequently an excess amount is withheld from these payments. It is accepted based on the relevant facts and circumstances as outlined above that the amounts withheld by Company A have been withheld 'in error'. | Detailed Reasoning - Paragraph 18-70(1)(c) of Schedule 1 to the TAA 1953: Where an overpayment of withholding tax is made, the recipient of the income can obtain a refund from either the payer under section 18-65 of Schedule 1 to the TAA 1953 or from the Commissioner under section 18-70 of Schedule 1 to the TAA 1953, subject to the requirements of the relevant sections being satisfied and the relevant timeframes being met. Subsection 18-65(1) of Schedule 1 of the TAA 1953 relevantly states: An entity (the payer) must refund to another entity (the recipient) an amount if: (a) the payer: (i) withheld the amount purportedly under Division 12 from a payment made to, or received for, the recipient (whether the amount has been paid to the Commissioner or not)... (b) either: (i) the amount was so withheld, or paid to the Commissioner, in error... (c) either: (i) the payer becomes aware of the matter mentioned in paragraph (b); or (ii) the recipient applies to the payer for the refund; before the end of the financial year in which the amount was so withheld or paid to the Commissioner;... Subsection 18-65(4) of Schedule 1 of the TAA 1953 explains the timeframes for the payer when a request for refund is made: The request must be made within 7 working days (of the payer) after the payer receives the application for the refund or after the payer otherwise becomes aware of the matter mentioned in paragraph (1)(b) (as appropriate). In accordance with the relevant facts and circumstances as outlined above, the Retirement System A has not previously sought a refund of the dividend withholding tax withheld by Company A. As such, the requirements of subsection 18-65(1) of Schedule 1 to the TAA 1953 have been met. Therefore, paragraph 18-70(1)(c) of Schedule 1 to the TAA 1953 is satisfied. | Detailed Reasoning - Paragraph 18-70(1)(d) of Schedule 1 to the TAA 1953: Company A has remitted the relevant amount of withholding tax to the Commissioner. As such, this paragraph is satisfied. Consequently, the Retirement System A is entitled to apply for a refund by the Commissioner of the dividend withholding tax amounts withheld and remitted by Company A that exceeds the 15% rate in accordance with Article 10(2)(b) of the US Convention, on their portion of unfranked dividends paid by Company A to Z LP.

Will Article 10(2) of the US Convention apply to reduce to 15% the withholding tax on the unfranked dividends paid by Company A to Z LP to the extent to which a proportion of such dividends was attributed to Retirement System A?