Mitch Fifield (Victoria, Liberal Party, Manager of Government Business in the Senate) Share this | Hansard source

I thank colleagues for their contribution to the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill debate. As has been canvassed, the bill does make two important changes to improve the operation of Australia's capital gains tax regime. Schedule 1 to the bill clarifies the treatment of earnout arrangements by making any payments under the arrangement part of the original value of the business or business asset for capital gains tax purposes in lieu of applying capital gains tax to the right itself—try saying that three times quickly, Mr President!

An earnout arrangement involves a sale or purchase of an asset with a right to future financial benefits linked to the performance of the asset. Earnout arrangements create flexibility for purchasers and sellers of business assets, especially where the value of the underlying asset is uncertain; however, the current system has significant complexities which affect the ability of businesses to efficiently price their business assets. This measure will result in any payments made under the earnout right being added to the capital proceeds or the cost base of the original sale through amendments to the taxpayers' tax return for that period.

Generally, taxpayers and the commissioner will not be liable for interest on, respectively, any shortfall and overpayment as a result of any amendment to a tax return made as a consequence of these earnout changes. This bill will not only help provide certainty for businesses entering into earnout arrangements but will also protect any entitlement they have to small business capital gains tax concessions. On 14 December 2013, the government announced that it would proceed with a measure to provide CGT look-through treatment to earnout arrangements, which have been announced but 'unenacted'by the previous government as part of their 2010-11 budget. This bill will apply to all earnout arrangements entered into after 23 April 2015. In addition, in some cases the bill also includes protections to preserve taxpayers' current tax outcomes without requiring amendments. These protections are available where taxpayers 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 previous government.

Schedule 2 to this bill amends the taxation laws to improve the integrity of Australia's foreign resident capital gains tax regime. In doing so, it is consistent with the government's broader efforts to ensure that foreign investors into Australian real property comply with their Australian legal obligations. 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 ATO has indicated that voluntary compliance with Australia's foreign residents CGT regime is low. In addition, there are difficulties with the ATO undertaking effective compliance activity after a transaction takes place.

To address this, this bill introduces a withholding measure which will impose an obligation on a purchaser to withhold 10 per cent of the proceeds, and to pay that amount to the ATO at the time that they acquire certain taxable property from a foreign resident vendor. In doing so, the measure will improve compliance by foreign residents with Australia's CGT obligations, and with the tax system more broadly, by encouraging appropriate interaction with the ATO where necessary. The measure does not apply to direct real property transactions valued at under $2 million. This ensures that the measures are properly targeted at those areas where revenue is at greatest risk, and minimises the impact on other property transactions. The measure has undergone extensive consultation to ensure that it achieves a high level of integrity, whilst balancing administrative considerations including increased certainty around its application. On behalf of the Minister for Finance and on behalf of the Treasurer, I commend the bill to the Senate.

Question agreed to.

Bill read a second time.