On Friday 7 April 2017, the Commissioner of Taxation issued a draft determination: the Taxation Administration (Remedial Power-Foreign Resident Capital Gains Withholding Tax) Determination 2017.
This is a draft of the first determination under the Commissioner’s power, in s370-5 of Sch 1 to the TAA (TAA1) to remedy defects in the taxation law by making such a determination (the power is known as the ‘Commissioner’s Remedial Power’ and, so, this draft determination is called CRP 2017/D1). Section 370-5 is set out in full below.
The determination relates to the foreign resident CGT withholding regime, in subdiv 14–D of the TAA1. Under this regime, the purchaser of real estate from a foreign vendor, must withhold 10% of the purchase price and remit it to the Commissioner. The vendor then gets a credit for the amount withheld, against the amount of CGT assessed to that foreign vendor. The credit arises under s18-15 of the TAA1 (and some subsequent provisions).
The problem arises when the contract for sale and the settlement straddle year end. The foreigner’s CGT liability will arise in the year in which the contract was made (the previous year) and the withholding will be made at settlement (the subsequent year). The foreigner’s credit will not be available until the year after the CGT liability arises. This draft determination will modify the credit provisions (s18-15 etc) so that the credit arises in the previous year, when the CGT liability arises.
There are several matters of interest about the Commissioner issuing these determination.
(a) The first is the date of its effect. It is expressed to have retrospective effect back to 1 July 2016, so as to coincide with the start of the CGT withholding legislation. This is not interesting in itself. What is of more interest is that the Determination is backdated at all, given that legislative instruments generally can’t have effect until the last day they could be disallowed by Parliament under s42 of the Legislation Act 2003. This is to protect civilians from having obligations imposed on them retrospectively. However, the exercise of this ‘remedial’ power is designed to only benefit taxpayers, and s370-5(4) ensures that the modification has no effect on taxpayers who would be worse off. Accordingly, this determination satisfies s12(2) of the Legislation Act and can have retrospective operation.
(b) The other matter of interest is that s17(1) of the Legislation Act requires the Commissioner to be satisfied that appropriate and reasonably practicable consultation has been made. Accordingly, this draft determination has been issued with an express invitation for interested parties to consult and the Commissioner has asked specific questions for a response.
[ATO website: CRP 2017/D1; Explanatory Material; LTN 66, 7/4/17]
Subdivision 370-A – Commissioner’s remedial power – TAA1
370-5(1) The Commissioner may, by legislative instrument, determine a modification of the operation of a provision of a *taxation law if:
(a) the modification is not inconsistent with the intended purpose or object of the provision; and
(b) the Commissioner considers the modification to be reasonable, having regard to:
(i) the intended purpose or object of the provision; and
(ii) whether the cost of complying with the provision is disproportionate to that intended purpose or object; and
(c) any of the following persons advises the Commissioner that any impact of the modification on the Commonwealth budget would be negligible:
(i) the Secretary of the Department, or an APS employee in the Department who is authorised by the Secretary for the purposes of this paragraph;
(ii) the *Finance Secretary, or an APS employee in the *Finance Department who is authorised by the Finance Secretary for the purposes of this paragraph.
370-5(2) If the Commissioner determines a modification of the operation of a provision of a *taxation law under subsection (1), the provision operates with the modification.
Scope of determination
370-5(3) A modification applies generally, unless the determination states that the modification only applies:
(a) to a specified class of entities; or
(b) in specified circumstances.
370-5(4) An entity (the first entity ) must treat a modification as:
(a) not applying to the first entity; and
(b) not applying to any other entity;
if the modification would produce a less favourable result for the first entity.
370-5(5) If the Commissioner determines a modification of the operation of a provision of a *taxation law, the modification (as applied by subsection (2)) does not affect a right or liability under an order (including any judgment, conviction or sentence) made by a court before the commencement of the determination.