House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)

General outline and financial impact

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. 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 apply from 24 April 2015.

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.

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.

Financial impact: This measure has the following estimated financial impact over the forward estimates ($m). The impact of the measure was first reported in the 2010-11 Budget.

Human rights implications: This Schedule does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 1, paragraphs 1.156 to 1.162.

Compliance cost impact: This measure will result in a small reduction in compliance costs for businesses utilising earnout arrangements, due to the reduced complexity of such arrangements.

Foreign resident capital gains tax withholding regime

Schedule 2 to this Bill introduces a new regime that imposes 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.

Date of effect: 1 July 2016.

Proposal announced: This proposal was announced in the 2013-14 Budget.

Financial impact: This measure is estimated to have a gain to revenue of $330 million over the forward estimates period.

Human rights implications: Schedule 2 does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.140 to 2.143.

Compliance cost impact: These amendments have a medium compliance cost totalling $770,000 per year over a 10 year duration, comprising medium implementation impact and medium impact in ongoing compliance costs.

Compliance assessment: impact on business

Impact: This measure will affect individuals and entities that purchase certain types of taxable Australian property from a foreign resident, with an exemption for all transactions involving taxable Australian real property CGT assets below $2 million. Further affected are intermediaries involved in the property or share/unit settlement process, particularly conveyancers.

Main points:

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There is expected to be an overall increase in compliance costs, falling mainly on the purchaser and their representative. Individuals and entities will need to understand the new withholding regime and will need to take steps in order to fulfil their obligation as part of the transaction process.

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The extent of the compliance burden placed upon purchasers is limited by the application of the clearance certificate process, which is completed by vendors.

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Purchasers, or conveyancers working on their behalf, will need to fill out a mandatory 'foreign resident withholding purchaser remittance form' and remit the withholding obligation.

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There will be a continual need for new entities purchasing taxable Australian property from foreign residents to evaluate their business arrangements. Purchasers will be liable for the amount not withheld; they will need to maintain records with the declaration/clearance certificate of a vendor's residency status and retain receipts of amounts withheld.