ARTICLE 13

Alienation of Property

This Article provides rules for the taxation of certain gains derived by a resident of a Contracting State. In general, it provides that:

(1) gains from the alienation of real property may be taxed where the real property is located;

(2) gains derived from the alienation of ships or aircraft or related property may be taxed only by the State of which the enterprise is a resident, except to the extent that the enterprise has been allowed depreciation of the property in computing taxable income in the other State; and

(3) gains from the alienation of property referred to in paragraph 4 (c) of Article 12 (Royalties) are taxable under Article 12.

Gains with respect to any other property are covered by Article 21 (Income Not Expressly Mentioned), which provides that gains effectively connected with a permanent establishment are taxable where the permanent establishment is located, in accordance with Article 7 (Business Profits), and that other gains may be taxed by both the State of source of the gain and the State of residence of the owner. Double taxation is avoided under the provisions of Article 22 (Relief from Double Taxation).

Paragraph 1 of Article 13 states the rule that gains derived from the alienation of real property situated in a Contracting State may be taxed by that State.

Paragraph 2 defines real property in each of the Contracting States. In the case of the United States, paragraph 2(a) explains that the term "real property situated in the other Contracting State" includes a United States real property interest as defined under the Foreign Investment in Real Property Tax Act, as amended. Thus, the United States retains its full taxing right under the law. In the case of Australia, paragraph 2(b) provides that real property has the meaning it has under Australian law and includes an interest in a company, partnership, trust or estate, the assets of which consist wholly or principally of real property situated in Australia.

Paragraph 3 provides that when an enterprise of a Contracting State derives gains with respect to the alienation of ships, aircraft, or containers operated or used by it in international traffic, the gain shall be taxable only in the State of residence of the enterprise, except to the extent that the enterprise has been allowed depreciation on that property in the other Contracting State. To the extent that depreciation deductions have reduced the tax on income from the operation of such ships, aircraft, or containers in the other State, that other State may recapture those depreciation deductions (but not in excess of the gain realized) when the property is disposed of. This paragraph also provides a cross-reference to paragraph 4(c) of Article 12 (Royalties) and states that gain on royalties described in that paragraph (royalties which are contingent on the use or productivity of the right or property) are taxable in accordance with that Article.

Paragraph 4 clarifies that real property consisting of shares in a company or interests in a partnership, estate or trust referred to in paragraph 2(b) is deemed to be situated in Australia.