Submission No. 247 Back to full list of submissions
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16 April 1999


The Secretary
Review of Business Taxation
Dr Alan Preston
Department of Treasury
Parkes Place


Dear Dr Preston


Please find enclosed a submission dealing with international taxation issues.

I appreciate the opportunity to provide input into your review of business taxation and am happy to assist further in any way you consider appropriate and helpful.

I can be contacted on 0409-004-233 if you need to discuss this submission.

Yours sincerely


DGS Consulting Group Pty Ltd




This submission will focus on the international taxation aspects of Australia’s business tax system, in particular foreign earnings paid to foreign shareholders. It draws on the taxation principles outlined in A New Tax System and is consistent with the objectives, terms of reference and strategies described in the Review of Business Taxation’s A Platform for Consultation (APC).

Summary of key proposals:

  • Australian tax relief for Australian residents who receive foreign income through entities, by way of an Australian imputation credit for foreign dividend withholding tax paid on the foreign income being distributed;
  • Foreign tax relief for non-residents on taxed (or tax preferred) Australian source income distributed to non-residents by Australian entities, by way of a Non-Resident Investor tax Credit equal to Dividend Withholding Tax (paid by way of a tax switch from full franked dividends), and therefore able to be creditable in the investor’s native country. (Noting that a direct investor would be able to get a foreign tax credit on the underlying Australian company tax.)
  • Permit the payment of comparably taxed foreign earnings direct to foreign investors without any Australian tax consequence, and in such a fashion that franking can be preserved as much as possible for use by Australian shareholders.

These measures encapsulate a systemic solution to implement a more internationally competitive taxation treatment of foreign income and foreign shareholders which is of fundamental importance in ensuring that Australian entities can both attract foreign capital and participate in foreign earnings growth.

In the context of global financial markets (where Australia is a net importer of capital), these measures will also be beneficial to Australian capital markets by: improving effective returns for both domestic and overseas shareholders of Australian entities; and ameliorating the need for Australian groups with large offshore assets and earnings from considering relocating offshore.

Reform in this area should be regarded as one of the absolutely key reforms for business taxation and is an essential component of any package of measures for a bold, visionary and globally competitive taxation and economic system. A series of objectives I entirely support.


Illustrated below is the Conceptual model of an integrated international taxation system. It would fully integrate Australian and foreign tax systems for both income and residents. Thereby, eliminating inter and intra jurisdictional "double taxation", i.e. taxing the same income more than once.



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The Conceptual model would include a comprehensive tax and credit (or tax then exempt) approach, within and between countries. It would not matter how (directly or through an entity) or where (domestic or offshore) the income was earned as the tax applicable would be the same in each case. That it, there is no tax difference and no "double tax" in particular.

Assuming (for simplicity) in the diagram above that the tax rate is 30% for entities in both countries and shareholders in both countries, then the 30% tax would always be the final and total amount of tax payable.

The following tables illustrate – as opposed to being comprehensive or case studies - the actual system for tax on foreign income & foreign investment through an Australian entity (without allowance for possible ‘streaming’). They highlight the situations under which "double taxation" can occur and will continue to occur unless otherwise addressed.

Direct Investment

  Australian tax Franking Credits Foreign Tax "Double taxed"
Resident & Australian taxed Income 30% Yes - No No
Resident & Australian tax preferred Income 30% DCT or RDWT Yes - No No (unless timing diffs)
Resident & Foreign Income 30% DCT or RDWT Yes Foreign tax creditable (or exempt) for entity only 30% & DWT Yes
Non-Resident & Australian taxed Income 30% Yes Australian tax creditable against foreign tax 30% - credit Not usually
Non-Resident & Australian tax preferred Income 30% DCT or 15% DWT Yes with DCT Australian DWT creditable against foreign tax 30% - credit Yes with DCT
Non-Resident & Foreign Income Proportion or 15% DWT or 30% DCT Proportion or Yes with DCT Australian DWT creditable against foreign tax 30% - credit Yes

Note 1: Assuming 30% Australian & foreign corporate rates, 30% investor marginal tax rate, 15% Dividend Withholding Tax rates & full franking for all Australian income (i.e. DCT or RWDT)

Note 2: "Double taxed" i.e taxed more than once

Portfolio Investment

  Australian tax Franking Credits Foreign Tax "Double taxed"
Resident & Australian taxed Income 30% Yes - No No
Resident & Australian tax preferred Income 30% DCT or RDWT Yes - No No (unless timing diffs)
Resident & Foreign Income 30% DCT or RDWT - credit Yes Proposal to make foreign DWT creditable 30% & DWT Yes
Non-Resident & Australian taxed Income 30% Yes Proposal to make some creditable through NRITC 30% - credit Yes
Non-Resident & Australian tax preferred Income 30% DCT or 15% DWT Yes with DCT DWT creditable & Proposal to make some DCT creditable through NRITC 30% - credit Yes with DCT
Non-Resident & Foreign Income Proportion or 15% DWT or 30% DCT Proportion or Yes with DCT DWT creditable & Proposal to make some DCT creditable through NRITC [or exempt from DCT] 30% - credit Yes

Notes 1 & 2: as above


  1. "Double taxation" is already a problem. As shown above ‘double taxation’ is already a problem with Australia’s business tax systems integration with overseas taxation regimes. In Australia unfranked dividends – representing comparably taxed foreign income – are subject to taxation at the shareholder’s marginal tax rate without any foreign tax credit available to the shareholder. With respect to non-residents, either the foreign jurisdiction imposes double taxation (first where the income is earned and taxed and then in the second jurisdiction – that could even be the same as the first – when the income is paid to the non-resident as foreign income from an Australian entity) or double taxation can also occur where an Australian entity’s franking account is debited in order to pay the foreign earnings to the foreign shareholder – in accordance with the proportionality requirements and anti-foreign streaming laws related to Australian entities. As Australian corporates grow overseas investments and shareholders this problem is growing as a constraint on them, and leading to increasing pressure to relocate assets and shareholders (and management) to more closely align with taxation arrangements in foreign countries. In other words, Australia’s attractiveness as a headquarters for global firms is severely restricted by our taxation arrangements.
  2. The proposed "profits first rule" will excentuate the above problem by forcing entities to distribute the foreign earnings and hence incur the double tax, even when they could (and are currently permitted to) try to manage this situation by way of capital returns rather than distributing foreign earnings. This choice or option will not be available under the "profits first rule".
  3. Deferred Company Tax (DCT) would maintain the double of foreign earnings to domestic shareholders who can access franking refunds, while increasing the extent of double taxation where entities or investors can not utilise franking refunds (e.g. tax exempts or other entities who will have a timing disadvantage by pre-paying the tax on foreign earnings distributions vis--vis the treatment as unfranked dividends. DCT could increase the double taxation of non-resident shareholders if DCT is applied to these distributions and results in the tax rising from DWT of 15% to the corporate tax rate of 30% or 36%. If the Resident Dividend Withholding Tax (RDWT) is introduced or the s.46 rebate is repealed then these proposals will either continue the double taxation and/or also result in increased complexity through entities as "foreign earnings" must be tracked through dividends or distributions to ensure that they maintain their character for ultimate DWT only application to non-residents.


  1. Provide relief to non-resident portfolio investors through the provision of a Non-Resident Investor Tax Credit (NRITC). This proposal is canvassed in detail in Chapter 30 of APC. It is a welcome proposal in providing greater creditability in overseas jurisdictions for Australian tax paid. It would provide benefits to all tax paid distributions and tax preferred ones if and where a decision is taken to tax these at a rate above the DWT rate applicable between Australia and the non-resident’s home jurisdiction.
  2. Support the provision of an imputation credit for foreign DWT paid by Australian residents (entities as well as individuals). At present only direct individual investors have the practical advantage of this crediting as the credit for DWT does not flow through the entity to its shareholders. This solution only provides part relief to residents for the foreign DWT. It does not address the underlying foreign tax paid and the provision of any relief for that. This solution is also proposed in Chapter 32 of APC.
  3. Permit foreign earnings derived in comparably tax countries to be paid directly to foreign shareholders without any Australian tax consequences (including removing any impact on Australian franking account balances). This is the main proposal advocated in this submission and the subject of the remainder of it.

I note that in Chapter 31 of APC, on Page 654, the RBT puts forward the conceptual principle underpinning this proposal. Namely,

"Where income from major foreign investments flows through Australian entities to non-residents, Australia should not levy additional tax where that income has already been comparably taxed in the country where the income is derived. Australia should not cause the income to be double taxed."

This submission wholeheartedly endorses that principle for reform and proposes a practical solution to achieve that highly worthwhile objective.


The key assumptions for this proposal are:

  • There is no Australian dividend streaming permitted (as at present) and franking credit trading laws are retained (as they would likely be under any ‘franking’ options considered by the RBT).
  • Australian tax preferred income is taxed on distribution. Although the option selected (DCT or RDWT) does not fundamentally change the impact on this proposal.
  • Only applicable comparably taxed country income is able to participate in this measure. The selection of countries could be either the full exempt and/or limited exemption countries. Conceptually it should include both, as by definition, Australia’s tax laws currently consider any "harmful" or haven tax countries to be excluded from these lists.
  • The measure would be optional for entities - similar to Foreign Dividend Account provisions. However, shareholders would be automatically included where the entity has made the election, i.e. they can not opt in or out independent of the entity’s election. This would greatly enhance consistency, simplicity and equity in that all foreign shareholders equally participate.
  • All shareholders receive the same $A (equivalent) dividend, declared and paid at the same time. It just may be paid out of different "profit/cash pools" in accordance with the option selected.

There are two possible approaches to implement this proposal.

Firstly, to expand the Foreign Dividend Account (or Foreign Income Account as you propose) provisions to remove the proportionality test – so it is only pro-rataed over foreign shareholders - and any Australian franking impact. Many companies already have FDAs and this could be a simple, transparent and certain way of achieving the policy. This main disadvantage with this approach is that the entity may still incur transaction costs of bringing the funds back to Australia and possibly foreign dividend withholding tax, especially in the US, Canada and Germany. These added imposts (which are present today) have an adverse impact on the entity’s published Profit and Loss.

Secondly, Australian law could permit the creation of "special purpose vehicles", in practice most likely to be stapled securities, such as trusts, that could be used for paying dividends to foreign shareholders. The extra advantage of allowing this option is that it could provide greater tax advantages in the investor’s home country depending on the particular tax regime they reside in or where the income was earned. Some companies, especially in the UK, have special trusts already established that they could use for this purpose. It could also result in lower or no foreign dividend withholding tax being applicable to the dividends. The major disadvantage with this approach is that it depends as much on the overseas country/countries tax regimes as it does Australia’s so it may not always be legally or economically viable.

Therefore, as both approaches can achieve the policy proposal objective, I recommend that the option be given to entities to utilise either or both options. As at the end of the day, the consequences for Australian tax will be nil and only foreign tax consequences will be relevant in determining the method used, a choice simply provides greater flexibility to maximise the benefits.

A final issue is the proposed order of distributions for payment. At present taxed profits (with franking) must be paid before unfranked dividends can be made. If different profits/cash can be paid to different shareholders – consistent with all getting the same amount – then an ordering may be desired. A possible ordering could be as follows:

  1. Foreign profits to foreign shareholders
  2. Tax paid Australian profits to Australian shareholders
  3. Any remaining tax paid Australian profits to foreign shareholders
  4. Any remaining profits (foreign earnings distributed to Australians or any tax preferred Australian income distributed to any shareholders)

The ordering would only be relevant to the FDA approach if foreign profits had been remitted.


This is a systemic solution to a systemic problem. It represents a bold and significant internationalisation of our business tax system in respect of international taxation.

The key benefits are:

  • it improves the effective after tax returns on foreign earnings earned by Australian entities and distributed to foreign shareholders (and Australians when combined with the other measures above);
  • it allows Australian taxed profits, with franking, to be consumed more by Australian taxpayers, thereby reducing the possible incidence of DCT or RDWT (which themselves can cause double taxation at either the entity or shareholder level);
  • it creates a very attractive environment for regional investment bases or headquarters for foreign entities seeking to invest;
  • it reduces and in many cases (certainly over time) removes the pressure on Australian entities with large foreign earnings to consider relocating offshore;
  • it provides the opportunity to reduce the effective foreign taxes paid on foreign earnings, as foreign shareholders may be able to directly access tax credits or other intra or inter jurisdictional benefits;
  • it will almost certainly, if employed, have a positive Profit and Loss impact for Australian entities; and
  • as a result of some or all these benefits will have an appreciably positive impact on Australian entities’ valuations by investors (both Australian and overseas).

Other approaches that focus solely on providing Australian imputation credits fail to provide the most effective (if any at all) relief to foreign shareholders. And in failing to address this crucial part of the problem they can not match this proposal’s likely positive impact on capital markets.

Notwithstanding the major improvement that it would represent, it is neither a perfect nor complete solution to possible double taxation of foreign earnings and/or shareholders. It will still be possible for Australian shareholders to pay double tax on foreign earnings (although it will be less severe than now) and for foreign shareholders to waste franking credits (although it will be less common and of lesser value, especially with a 30% entity tax rate).

While its only other disadvantage is the potential cost, estimated at up to $500 million when combined with providing imputation credits for foreign dividend withholding tax.


I thank you for the opportunity to present this proposal to you. I hope you find it an interesting, constructive and practical solution to a significant flaw in our existing taxation system. A flaw admittedly not entirely our doing (as international tax regimes are not integrated) but one nonetheless that we as a nation, seeking to introduce an internationally competitive taxation regime, should seek to address.

I would welcome any further opportunity to discuss this or any other options with you and to assist wherever possible in any further developments thereof.