Historical Development of Australia's International Taxation Rules
![handle is hein.journals/mulr19 and id is 819 raw text is: HISTORICAL DEVELOPMENT OF AUSTRALIA'S
INTERNATIONAL TAXATION RULES
BY JOHN AZZI*
[7he rapid internationalisation of Australian businesses over the past two decades has created
many opportunities for the manipulation of Australia 's tax system. The argument canvassed in this
paper is that utilisation of the 'corporate veil' doctrine in the taxation arena has facilitated the
avoidance of Australia's traditional taxation rules, especially with respect to international
transactions. A complete change in approach to the taxation of offshore investments was required.
Such a change occurred with the recent introduction of the controlled foreign corporation ('CFC')
and foreign investment fund ('FIF') regimes. In developing this argument, the article traces the
historical development of Australia's international tax rules and highlights instances of manipula-
tion of those rules which were in existence prior to the CFC and FIF rules. Moreover, the two
traditional means by which international double taxation is alleviated, such as the foreign tax
credit system (the 'FTCS) and double tax agreements ('DTAs ') are also discussed. However, it will
be shown that even those measures are susceptible to abuse.]
I INTRODUCTION
The purpose of this paper, as the title suggests, is to trace the historical devel-
opment of Australia's international tax rules, particularly as they apply to
companies. In doing so it will become evident that traditional rules which have
been developed to tax income that is derived through international transactions
are inadequate since they are subject to manipulation.' The basis for such
* B Ec, LLB (Sydney); Solicitor of the Supreme Court of New South Wales.
l The reference to 'traditional rules' of taxation is a reference to the parameters of Australia's
taxation powers as embodied in, for example, one of the central taxing provisions contained in
the Income Tax Assessment Act 1936 (Cth) (the 'Act') - s 25(I). The broad effect of s 25(1)
of the Act is that Australian residents are taxed on their worldwide income (ie, whether derived
from sources in or out of Australia). This is commonly referred to as the 'residence principle of
taxation'. Whereas, non-residents are only subjected to Australian tax liability in respect of
income derived in Australia (this is commonly referred to as the 'source principle of taxation').
Underlying either principle of taxation is the need to ascertain the source from which income is
derived.
The need to ascertain the source of income in the case of Australian residents arises by virtue of
the fact that residents under the foreign tax credit system (the 'FTCS') are entitled to a credit in
respect of 'foreign taxes paid' and for which they are 'personally liable' (see s 160AF of the
Act). The credit which arises in such a case is utilised to offset the resident taxpayer's Austra-
lian tax liability (which is imposed on the resident taxpayer's domestic and foreign source
income).
Prior to the introduction of the FTCS, Australia had in existence an exemption system whereby
generally, foreign income which was subject to tax in a foreign jurisdiction was exempt from
Australian tax (see the now repealed s 23(q) of the Act).
The determination of source of income is also relevant in applying double tax agreement
('DTA') clauses designed to alleviate international double taxation which occurs where the
same income is subjected to tax in one or more jurisdictions. More will be said on the role of
DTAs later in the paper.
A common factor underlying both residence and source principles of taxation is the recognition
of the separate identity of a subsidiary company from its parent company (this is commonly](ViewImageLocal?handle=hein.journals/mulr19&div=54&collection=&method=preview&ext=.png&size=3)
What Is HeinOnline?
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most
Historical Development of Australia's International Taxation Rules
Contact us for annual subscription options:
Already a HeinOnline Subscriber?
profiles profiles most