The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2016 was introduced in the House of Reps on Thursday 3.12.2105 and was passed without amendment on Thursday 4.2.16.
Capital gains tax treatment of earnout rights
Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 to change the capital gains tax (CGT) treatment of the sale and purchase of businesses involving certain earnout 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 (s112-36(1)(a), s116-120(1)(a), s118-575 & s118-580). Instead, payments received or paid under the earnout arrangements will affect the capital proceeds (s116-120(1)(b)&(c)) and cost base (s112-36(1)(b)&(c)) of the underlying asset or assets, to which the earnout arrangement relates.
Date of effect: These amendments apply from 24 April 2015 (Part I, item 38).
However, taxpayers that have made statements to the Commissioner of Taxation (Commissioner) or undertaken other actions in reasonable anticipation of announcements made about the amendments in the 2010-11 Budget are protected against the Commissioner applying the law in a way that is inconsistent with what they have anticipated (s170B of the ITAA36 & Part I, item 39).
Proposal announced: This measure was first announced on 12 May 2010 in Press Release No. 98 of 2010 as part of the 2010-11 Budget.
On 14 December 2013, in a media released titled ‘Integrity restored to Australia’s tax system’ the then Assistant Treasurer announced that the Government would proceed with this measure.
[Extract from ‘Explanatory Memorandum’]
Foreign resident capital gains tax withholding regime – 10% of purchase price
Schedule 2 to this Bill introduces a new regime that imposes [non-final] withholding obligations on the purchasers of certain Australian assets. The purpose of the regime is to assist in the collection of foreign residents’ capital gains tax (CGT) liabilities.
Compliance and collection
2.9 Foreign residents are required to lodge tax returns if they have derived Australian assessable income, including from a capital gain that is not disregarded under Division 855. Compliance with this obligation is very low in the case of foreign resident CGT liabilities. The Commissioner of Taxation (Commissioner) has a number of powers to assist in the collection of these liabilities; however, it can be difficult to apply these measures when funds from disposing of an asset have left the country, and there are no other assets in Australia to meet the tax liability.
Summary of new law
2.19 The amendments in Schedule 2 to the Bill impose a 10 per cent non-final withholding obligation on the purchasers of certain Australian assets where they acquire it from a relevant foreign resident (Subdiv 14-D, s14-200 and following of the TAA1).
2.20 The obligation does not require withholding as such, but does require the purchaser to pay 10 per cent of the first element of the cost base (usually, the purchase price) to the Commissioner (s14-200(3) TAA1). This amount may be withheld from the payment the purchaser makes to the vendor (s16-20(2) TAA1).
2.21 The obligation will apply to the acquisition of an asset that is:
- Taxable Australian Real Property (‘TARP’) (s14-200(1)(c)(i) TAA1);
- an indirect Australian real property interest (s14-200(1)(c)(ii) TAA1); or
- an option or right to acquire such property or such an interest (s14-200(1)(c)(iii) TAA1).
Summary of exemptions
2.22 To minimise the compliance costs that arise from these amendments, no obligation is imposed in any of the following situations:
- transactions involving TARP and certain indirect Australian real property interests, valued less than $2 million (s14-215(1)(a) TAA1);
- the transaction is on an approved stock exchange (s14-215(1)(b) TAA1);
- a transaction that is conducted through a stock exchange or a crossing system (s14-215(1)(c) TAA1);
- an arrangement that is already subject to an existing withholding obligation;
- a securities lending arrangement (s14-215(1)(d) TAA1); or
- transactions involving vendors who are subject to formal insolvency or bankruptcy proceedings (s14-215(1)(f)&(g) TAA1).
2.23 In addition, no obligation is imposed in any of the following
- in the case of TARP and certain indirect Australian real property interests, where the vendor obtains a clearance certificate from the Commissioner [that he/she/it will not be a resident during the period for which the certificate will apply] (s14-220 TAA1); or
- in the case of other types of property covered by the amendments, the vendor has made one of the following types of ‘declaration’:
- where the vendor has made a declaration that they are an Australian resident for income tax purposes (s14-225(1) TAA1); or
- where, if the CGT asset acquired is a membership interest, the vendor has made a declaration that the interest is not an indirect Australian real property interest (s14-225(2) TAA1).
2.24 The vendor declarations only exempt a specific vendor and withholding may still apply if the transaction involves multiple vendors.
Combined effect of the above for withholding obligation arising
2.30 Purchasers are only required to pay an amount to the Commissioner when the following conditions are satisfied:
- the asset acquired is a relevant Australian asset [Schedule 2, item 1, paragraph 14-200(1)(c) in Schedule 1 to the TAA 1953];
- the acquisition is not an excluded transaction [Schedule 2, item 1, subsection 14-200(1) in Schedule 1 to the TAA 1953]; and
- any vendor of the property is a relevant foreign resident, and:
- where the asset is TARP or a certain type of indirect Australian real property interest, the vendor has not obtained a clearance certificate from the Commissioner [Schedule 2, item 1, paragraph 14-210(1)(e) and subsection 14-210(2) in Schedule 1 to the TAA 1953];
- in the case of other assets covered by the amendments, the purchaser has not received a declaration from the vendor that they are an Australian resident, and the purchaser satisfies the knowledge condition – that is the purchaser knows or has reason to believe the vendor is a foreign resident [Schedule 2, item 1, subsections 14-210(1) and 14-210(3) in Schedule 1 to the TAA 1953];or
- in the case where the asset is a membership interest, the vendor has not made a declaration that the membership interests are not indirect Australian real property interests [Schedule 2, item 1, subsection 14-225(2) in Schedule 1 to the TAA 1953].
DATE OF EFFECT: Acquisitions on or after 1 July 2016 (Part II, item 30).
[Extract from ‘Explanatory Memorandum’]