Talking Tax – Issue 155

Australia and Israel sign Double Taxation Agreement

Australia and Israel have signed a double taxation agreement (DTA), the first of its kind between the two countries.

As Hall & Wilcox previously covered in 2016, Australia commenced treaty negotiations with Israel with a priority to provide Australian resident companies with an increased opportunity to benefit from Israel’s – dubbed the Startup Nation – technology boom.

The DTA includes an agreement between the two countries with respect to, among other things:

• limitations on taxes imposed on dividends, interest and royalties;
• rules to reduce the potential for double taxation of profits, including a mutual agreement procedure (MAP); and
• base erosion and profit shifting (BEPS) measures.

The DTA will become law in Australia once it is ratified by the Australian Parliament.

Currently, Australian companies that pay unfranked dividends, interest and royalties to Israeli companies must withhold tax on these payments at a rate of 30% on unfranked dividends and royalties, and 10% on interest. This is a significant cost of doing business with Israeli companies, and diminishes the opportunities of Australian companies and their customers to benefit from the technology boom in Israel, particularly in the areas of biotechnology and information communication technology.

Under the DTA:

• Dividends may be taxed in the source country up to the following limits:
  • Nil for dividends derived by governments, central banks, tax exempt pension funds or Australian residents carrying out complying superannuation activities on direct holdings of no more than 10 per cent;
  • 5% of the gross amount of the dividend, for dividends paid to companies that hold 10 per cent or more of the paying company throughout a 365 day period; and
  • 15% for all other dividends.
• Interest may be taxed in the source country up to the following limits:
  • Nil for interest derived by government bodies and central banks;
  • 5% for interest derived by recognised pension funds, Australian residents carrying out complying superannuation activities and unrelated financial institutions; and
  • 10% for all other interest.
• Royalties may be taxed in the source country up to a limit of 5% of the gross royalty.

In terms of BEPS measures, the DTA provides a general seven-year time limit for making transfer pricing adjustments and mandates a correlative adjustment to be made so that the first-mentioned adjustment does not result in double taxation.

The treaty also creates mechanisms for taxpayers to present a case if they believe they are not, or will not, be taxed in accordance with the treaty. This may require representatives from both countries to endeavour to resolve the case by mutual agreement, with the relevant procedure set out in the DTA.

For more information about structuring an investment into Israel (or Israeli investment into Australia), please contact Anthony Bradica.[vc_column_text]

Review into the Future of the Tax Profession Report

On 3 April 2019, the office of the Inspector-General of Taxation Ombudsman (IGTO) released a report on its Review into the Future of the Tax Profession (Report), as requested by the Commissioner of Taxation and other stakeholders within the tax profession.

The Report explores the challenges and opportunities presented by new and emerging digital technologies such as AI, Blockchain, Big Data and Fintech. The IGTO states that while these and other technological advancements may facilitate ease of compliance for taxpayers, they are likely to create complexities for the Australian Taxation Office (ATO), the Tax Practitioners Board (TPB) and tax practitioners. The Report highlights that these complexities can be addressed proactively. For example, the IGTO has noted that revenue agencies, such as the ATO, have the opportunity to involve themselves in the design of blockchain governance structures so that any new standards will be developed in line with its requirements.

The Report focuses on technology and the interconnectedness of the ATO, the TPB and tax practitioners, recommending measures to improve their working relationship. Among other things, the IGTO recommends that:

• the role of the TPB should be expanded in the future to keep pace with developments in the tax profession and workforce more generally;
• the TPB conduct periodic review of the education requirements under the Tax Agent Services Regulations 2009;
• the ATO consider a strategy to communicate its research and views on new technologies with tax practitioners;
• the ATO engage with CSIRO’s Data61 group on the latter’s work on the machine readability of tax laws;
• the Government reform the work-related expense deduction regime; and
• the Government increase the sanctions the TPB can impose on non-compliant tax professionals.

The IGTO made nine recommendations, comprising 28 parts in total. The TPB accepted all recommendations, whereas the ATO disagreed with eight parts, relating to those parts aimed at enhancing the ATO workforce, assisting tax practitioners to prepare themselves to meet the future challenges and ensuring that the fragile relationship between tax practitioners and the ATO is carefully managed.

Given the level of the ATO’s disagreement, the IGTO has indicated it may either undertake a follow-up review of the ATO’s implementation of the recommendations or commence a new review covering the same or similar areas.

Reducing the costs associated with employee share schemes

The Government last week released a consultation paper (Paper) with a view to reducing the regulatory barriers currently discouraging small businesses from using employee share schemes (ESSs) to attract, retain and incentivise their employees.

The review focuses on the regulatory aspects of offering equity to employees and does not impact on the current tax concessions that are particularly generous for start-ups and their employees.

In the Paper, the Government acknowledges that the current regulatory framework for ESS offers is complex and fragmented, too restrictive in relation to requirements for ASIC class orders relief and can involve the public release of commercially sensitive information.

The Government proposes to make ESSs more attractive and user-friendly by:

• simplifying the statutory exemptions and ASIC class order relief from disclosure, licensing, hawking, advertising and on-sale obligations in the Corporations Act 2001;
• increasing the value limit of financial products that an unlisted company can offer in a 12 month period from $5,000 per employee to $10,000 per employee;
• expanding relief for unlisted companies offering an ESS to cover contribution plans where an employee can make a monetary contribution to acquire financial products; and
• allowing small companies that cannot come within the exemptions, to offer an ESS without publicly disclosing commercially sensitive financial information.

The closing date for submissions is 30 April 2019.

For more information about whether an ESS may be appropriate for your business, please contact Anthony Bradica.