Australia: New double tax treaty with Slovenia and foreign resident CGT withholding amendments

Introduction

The Australian government released details of the proposed new double tax treaty with the Republic of Slovenia on 9 September 2024. While Slovenia is one of Australia’s smaller trading partners, the proposed treaty provides further evidence of Australia's tax policy with respect to the extensive treaty reform process, including critical aspects such as the limitation of benefits article (Article 28) and specific reference in the attached protocol to the treaty to incorporate Australian integrity or anti-avoidance provisions, including thin capitalisation, dividend stripping, and transfer pricing.

Following the enactment of a similar double tax treaty with Iceland in 2023, the key aspects of the treaty with Slovenia can be summarised as follows:

• an introductory objects clause dealing with purported tax evasion or avoidance, including through treaty-shopping arrangements;
• a concessional dividend withholding tax of 5% (where at least a 10% voting interest in an Australian company is held) or generally 10% withholding in Australia or Slovenia (subject to franking benefits in Australia);
• a 5% interest withholding tax limit on interest derived by financial institutions; otherwise, potentially 0% for certain government entities and recognised pension funds, or 10% withholding;
• a 10% withholding tax on royalties;
• a comprehensive non-discrimination clause and exchange of information clause, and assistance with the collection of taxes;
• a mutual agreement procedure, including prescribed protocols for submission and conducting arbitration, as outlined in Article 13 of the protocol to the Slovenia treaty; and
• a limitation of benefits article based on best practice, as outlined in the OECD’s Multilateral Instrument; i.e., where it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining a benefit under the treaty was one of the principal purposes of the arrangement that resulted directly or indirectly in that benefit, the benefit may not be granted under the treaty (for example, reduced withholding taxes).

The proposed new Slovenia–Australia double tax treaty is expected to progress through each country's parliament and to enter into law in the coming months.

Australia has an extensive treaty renewal and/or expansion programme, including proposed new treaties with Luxembourg, Greece, and Brazil, where initial progress has been made and further progress is expected in the coming months. Furthermore, the Australian Taxation Office has recently released synthesised texts for, among others, the Spanish, Vietnamese, and Thai treaties.

 

Foreign resident CGT withholding tax

As indicated, the government introduced legislation into the Australian Parliament on 12 September 2024 that will:

• Change the existing non-resident capital gains tax (CGT) withholding regime in Subdivision 14-D of Schedule 1 of the Taxation Administration Act 1953 to increase the withholding tax rate to 15% from 12.5%; and
• Remove the existing withholding threshold (i.e., AUD750,000).

These amendments are intended to apply to acquisitions made on or after 1 January 2025 (at the latest).

The above amendments do not cover the reforms announced in July 2024 that deal with, among other things, extending the potential application of Australian non-resident CGT to a broader range of economic interests in taxable Australian real property (including via indirect interests).