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New Tax Laws

New Tax Laws

New Tax Laws make their way through the Senate

Editor: Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 (‘the Bill’) has been passed by the Senate and should receive Royal Assent shortly.

This Bill makes amendments to the taxation law to:

  • Change the 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); and
  • Impose withholding obligations on the purchasers of certain Australian assets – generally property purchased from a non-resident.

CGT changes for earnout rights

Where a business is sold, parties to the transaction may find it difficult to set a firm price because of a difference in expectations between the vendor and the purchaser, or because of particular fluctuations that could impact the value of a business.

As a result, an agreement may be made to make part of the sale price variable.

One common way to achieve this is where vendor agrees to accept a more conservative up-front cash amount ib the sale of their business, but has a right (i.e., an ‘earnout right’) to a further amount or amounts if the business achieves certain targets. This is referred to as a ‘standard earnout arrangement’.

Unfortunately the CGT implications flowing from the use of an earnout right have traditionally been uncertain, and often unfavourable to both vendors and purchasers.

Editors: To understand the need for recent amendments relating to the CGT treatment of these types of transactions, it is worth taking a short history lesson!

May 2010 – Discussion (proposal) paper and ATO administrative treatment

Following the 2010/11 Federal Budget, the government released a Discussion paper in May 2010 which outlined a number of proposed changes in this area.

Specifically, the discussion paper suggested a ‘look-through’ approach when dealing with earnout rights, whereby the earnout right was basically ignored, and all payments made in relation to the earnout right were treated as relating to the sale of the underlying business.

This approach was also confirmed by the ATO, which provided for an administrative practice to allow taxpayers to implement the discussion paper’s proposed CGT treatment, despite the fact that no legislation had been implemented.

December 2015 – Tax and Superannuation Laws Amendment (2015 Measures No.6) Bill 2015

On 3 December 2015 (approximately five and a half years after the release of the discussion paper!), the government finally introduced a Bill (which was passed by the Senate on 22 February 2016), to provide a legislated look – through CGT treatment for earnout rights.

This legislation is applicable for look-through earnout rights created on or after 24 April 2015, although transitional protection has been afforded to taxpayers that have reasonably, and in good faith, anticipated the change to the tax law in this area, as summarised in the ATO fact sheet entitled “CGT: Look-through treatment of earnout rights”.

New legislated look-through treatment

For the new legislation to apply, amongst other conditions, earnout arrangements need to be made in relation to active assets (such as goodwill), and involve a look-through earnout right that spans for no more than five years.

If these conditions are met then, in short, any capital gains and losses arising in respect of look-through earnout rights will be disregarded.

Instead, payments made under earnout arrangements will affect the capital proceeds and cost base of the underlying asset (and original CGT event) to which the earnout right related.

This approach results in the original capital gain needing adjustment when financial benefits (i.e., earnout payments) are provided or received in subsequent income years.

As this will often require retrospective amendments, the new legislation also amends the period of review to allow for such adjustments.
Additionally, interest is not applied to any shortfall that arises from amendments, as long as the taxpayer requests the amendment within the period they must lodge their income tax return for the year in which the earnout payment was provided or received.

Amendments have also been made to the CGT legislation to ensure that, where applicable, the small business CGT concessions can be applied to both the original and amended capital gains.

Buyers to withhold tax when buying certain ‘Taxable Australian Property’

Editor: The following is a very “scaled down” version of the new provisions. Members who have clients who may buy property directly or indirectly from a non-resident (which, admittedly could happen to any client) are urged to review the law itself, or possible a better option may be to attend our Tax Hot Spots 2016 seminar, and get the accompanying detailed notes.

 

 

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