The Tax and Superannuation Laws Amendment (2015 Measures No 6) Bill 2015 was passed by the House of Reps on Thursday 4.2.2016 without amendment and now moves to the Senate.

The Bill proposes the following amendments:

  • Will amend the ITAA 1997 to change the CGT treatment of the sale and purchase of businesses involving certain earn-out rights – rights to future payments linked to the performance of an asset or assets after sale. As a result of these amendments, capital gains and losses arising in respect of look-through earnout rights will be disregarded. Instead, payments received or paid under the earnout arrangements will affect the capital proceeds and cost base of the underlying asset or assets to which the earnout arrangement relates. DATE OF EFFECT: These amendments will apply from 24 April 2015.
  • Will amend the TAA to introduce a new regime that imposes withholding obligations on the purchasers of certain Australian assets. The amendments will impose a 10% non-final withholding obligation on the purchasers of certain Australian assets where they acquire it from a relevant foreign resident. The obligation will apply to the acquisition of an asset that is: (i) TARP (taxable Australian real property); (ii) an indirect Australian real property interest; or (iii) an option or right to acquire such property or such an interest. The purpose of the regime is to assist in the collection of foreign residents’ CGT liabilities. DATE OF EFFECT: 1 July 2016.

[TT Article] [LTN 22, 4/2/16]

Note on 10% CGT withholding

There are effectively two types of dealings under these withholding provisions.

The first is where a ‘clearance certificate’ from the Commissioner can apply. This is for the purchase of all Australian real property (including ‘stratum’ company titles) and options to purchase such property. To avoid having to withhold, the vendor needs to have given the purchaser one of these ‘clearance certificates’ before he/she/it becomes the owner of the property. To get this type of clearance, the Commissioner must certify that the vendor is not, and is not likely to be, a foreign resident over the period certified. There is a ‘de minimus’ exception for the purchase of such properties for less than A$2m (thereby excluding the purchase of most residential properties). Notwithstanding this, the ATO has said it is implementing an “automated” process for issuing these clearance certificates. See ATO website about this.

The second type of dealings are those to which vendor ‘declarations’ can provide ‘safe harbour’ protection. These are dealings with the other types of assets covered by these provisions (indirect Australian property interests and options to acquire such interests). Here there the purchaser does not need to withhold, if the vendor gives the purchaser a declaration, either that the vendor is a resident, or that the membership interest sold (or the interest, the subject of the option to acquire), is not an ‘indirect Australian property interest’. But to rely on one of these declarations, the purchaser must not know that the declaration is false.

These ‘safe harbour’ rules will be the norm, whenever there is doubt about the residency status of the vendor or the Australian property status of the membership interest (as the risk will be too much to take).

The draftsman of this Bill anticipates that the vendor ‘declarations’ could be incorporated into sale contracts for membership interests and used when necessary.

John Morgan (