Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015
Mr HAWKE (Mitchell—Assistant Minister to the Treasurer) (11:11): I move:
That this bill be now read a second time.
This bill introduces amendments to Australia's taxation laws to improve the operation of Australia's capital gains tax regime. The measures in this bill are two of the 92 announced but un-enacted measures left by the previous government.
Schedule 1 to this bill clarifies the treatment of earn-out arrangements by making any financial benefits payable under such rights part of the original value of the business or business asset for capital gains tax purposes.
An earn-out arrangement is a sale or purchase of an asset where the consideration includes a right to future financial benefits linked to the performance of the asset. For example, a 'standard' earn-out may involve an up-front payment for the sale, with the seller having a right to future payments that are contingent on the business's performance.
Earn-out arrangements are a legitimate and efficient way of structuring the sale of a business (or business assets) to deal with uncertainty about its value.
Under the Australian Taxation Office's current administration of the law, each earn-out right is a separate and distinct asset from the underlying business and must have its market value estimated for capital gains tax purposes. The complexity involved in this system affects the ability of businesses to efficiently price their business assets.
This bill will result in any payments made under the earn-out right being added to the capital proceeds or the cost base of the original sale, through amendments to the taxpayer's tax return at that time.
This bill will not only help provide certainty for businesses entering into earn-out arrangements, but will also protect any entitlement they have to small business capital gains tax concessions.
This bill will apply to all earn-out arrangements entered into after the draft legislation for this measure was made public on 23 April 2015.
In addition, to protect taxpayers who have reasonably and in good faith anticipated changes to the tax law in this area as a result of the May 2010 announcement by the Labor government, this bill also includes protections to preserve their current tax outcomes, without requiring amendments.
Schedule 2 to this bill introduces a new collection mechanism to support the operation of Australia's foreign resident capital gains tax regime.
Foreign residents are liable to pay tax on capital gains when they dispose of certain Australian assets—broadly direct and indirect interests in real property. The Australian Taxation Office has indicated that voluntary compliance with Australia's foreign resident capital gains tax regime is poor. In addition, there are difficulties in the Australian Taxation Office undertaking effective compliance activity after a transaction takes place, given the funds would likely be offshore and the foreign resident may otherwise have little connection to Australia.
The Australian public rightly expects that foreign investors into Australian property comply with their Australian legal obligations. This is why the government recently enacted reforms to Australia's foreign investment framework to increase scrutiny and transparency over foreign investments into Australian residential property. It is also why the government is implementing this measure.
Under this measure, from 1 July 2016, where the seller of certain Australian assets is a foreign resident, the buyer will be required to withhold and pay to the ATO 10 per cent of the purchase price. The amount collected is an estimate of the vendor's final income tax liability. The vendor is still required to lodge an income tax return and pay any outstanding debt. They may claim a credit for the amount of tax withheld in the income tax return at this time. In this way, the withholding measure also encourages participation and engagement by foreign residents with the Australian Taxation Office.
To ensure that this measure is appropriately targeted at those areas where revenue is at greatest risk, and minimises the impact on other property transactions, the measure does not apply to direct real property transactions below $2 million.
Other design features of this measure have been developed following extensive consultation with stakeholders.
Full details of both measures are contained in the explanatory memorandum.