ARTICLE 16

Limitation on Benefits

This Article limits the benefits of the Convention to bona fide residents of the Contracting States. It is intended to prevent residents of third countries from inappropriately using a company which is a resident of one of the Contracting States as a conduit or similar vehicle to obtain Treaty benefits. Specifically, a person (other than an individual) which is a resident of one of the Contracting States is entitled to relief from taxation from the other Contracting State only if any of three alternative tests is met.

The first two tests are objective tests relating to the entity in question. If more than 75 percent of the beneficial interest in the person receiving the income is owned, directly or indirectly, by any combination of individuals who are residents of the Contracting States, citizens of the United States, the Contracting States themselves, or publicly traded companies which are residents of the Contracting States, the first test is met.

Under the second test a publicly traded company that is a resident of Australia or the United States is considered to have a sufficient nexus with Australia or the United States, respectively, so as to entitle it to Treaty benefits. Under this test, Treaty benefits are not denied if there is substantial and regular trading of the principal class of shares of such a company on a recognized stock exchange in one of the Contracting States. A recognized stock exchange includes the NASDAQ system in the United States.

The third test recognizes that ownership of an entity that is a resident of the United States or Australia by persons resident in third countries is not uncommon. In view of the factors discussed below, granting Treaty benefits to such an entity often is consistent with the goals of the Treaty. Accordingly, under the third test, Treaty benefits are allowed if the establishment, acquisition and maintenance of the person and the conduct of its operations did not have as a

principal purpose the purpose of obtaining Treaty benefits. This test would be met, for example, if an Australian company owned by third country residents conducts business operations in Australia and its U.S. investments are related or incidental to those business activities, or if the Australian tax burden equals or exceeds the tax reduction claimed under the Convention. It could also be met in other situations.

Paragraph 3, inserted at the request of Australia, provides a special rule concerning certain trust situations. The benefits of the Treaty do not apply to income derived by a trustee which under the Convention is treated as income of a resident of one of the Contracting States if a principal purpose of the use of the trust was to obtain a benefit under the Convention. For example, if an Australian resident establishes one or more U.S. accumulation trusts with Australian beneficiaries to receive dividends from Australian corporations in order to reduce the Australian tax on those dividends, the reduced rate provided in paragraph 2 of Article 10 (Dividends) will not apply.

This Article is not meant to impose any added burden on withholding agents, and withholding agents will not be required to verify a person's ownership or purposes.

In applying this Article the normal burden of proof rules apply. For example, under present U.S. procedures an entity that is a resident of Australia and that believes it is entitled, under one of the alternative tests of this Article, to the 10 percent U.S. tax rate on interest provided by Article 11 (Interest) would merely file a U.S. Form 1001 with the appropriate withholding agent to claim the benefit. Of course, the Internal Revenue Service could, on audit, examine the transaction.

In view of a combination of factors - the tax burden imposed by both the United States and Australia; the fact that, even under treaties, Australia imposes source taxation on income of nonresidents of Australia at a level that is not insignificant; the fact that the Treaty’s rate reductions on source taxation of passive income are not as great as those accorded by the United States in many other treaties; and the concerns of both countries about tax avoidance and evasion

• this Convention is not expected to be the subject of abuse. It is, therefore, anticipated that residents of the Contracting States will typically satisfy at least one of the three exceptions. Consequently, it should rarely be necessary to deny Treaty’s benefits under this Article.