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Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017

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2016-2017

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Treasury Laws amendment (foreign resident capital gains withholding payments) bill 2017

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

(Circulated by authority of the

Treasurer, the Hon Scott Morrison MP)





Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Foreign resident capital gains withholding payments... 5

 

 



 

The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

Commissioner

Commissioner of Taxation

CGT

capital gains tax

ITAA 1997

Income Tax Assessment Act 1997

TAA 1953

Taxation Administration Act 1953



 

Foreign resident capital gains withholding payments

Schedule 1 to this Bill will amend the Taxation Administration Act 1953 (TAA 1953) to modify the foreign resident capital gains withholding payments regime to:

•        increase the withholding rate to 12.5 per cent; and

•        reduce the withholding threshold to $750,000.

Date of effect The measure will apply in relation to acquisitions of property that occur on or after 1 July 2017.

Proposal announced The measure was announced on 9 May 2017 as part of the 2017-18 Budget.

Financial impact The measure, together with the associated measures relating to capital gains tax (CGT) changes for foreign investors that were announced as part of the 2017-18 Budget, has these revenue implications:

2016-17

2017-18

2018-19

2019-20

2020-21

*

150.0m

100.0m

150.0m

170.0m

Note that the revenue gain over the forward estimates has been updated since the 2017-18 Budget announcement to reflect a minor policy change to the associated measure that will ensure only Australian tax residents can access the main residence exemption.

Human rights implications :  This Schedule does not raise any human rights issue. See Statement of Compatibility with Human Rights — paragraphs 1.20 to 1.23.

Compliance cost impact This measure is expected to result in a medium overall compliance cost impact, comprising a medium implementation impact and a medium increase in on-going compliance costs.

 



Chapter 1          

Foreign resident capital gains withholding payments

Outline of chapter

1.1                   Schedule 1 to this Bill will amend Schedule 1 to the TAA 1953 to modify the foreign resident capital gains withholding payments regime to:

•        increase the withholding rate to 12.5 per cent; and

•        reduce the withholding threshold to $750,000.

1.2                   All legislative references in this Chapter are to Schedule 1 of the TAA 1953 unless otherwise specified.

Context of amendments

1.3                   As part of the 2017-18 Budget, the Government announced a range of reforms to reduce pressure on housing affordability. This measure implements one of the reforms in the housing affordability package to change the CGT outcomes for foreign investors.

1.4                   This reform relates to the foreign resident capital gains withholding payments regime. In this regard, Subdivision 14-D of Schedule 1 to the TAA 1953 imposes a non-final withholding obligation on the purchaser of certain Australian real property and related interests where the property is acquired from a foreign resident vendor.

1.5                   The foreign resident capital gains withholding payments regime first came into effect on 1 July 2016 to:

•        assist with the collection of CGT liabilities owed by foreign residents; and

•        address low levels of compliance by foreign residents with their Australian tax obligations.

 

1.6                   Under the current taxation law, if a foreign resident capital gains withholding payments obligation arises, the purchaser is required to pay 10 per cent of the first element of the cost base of the CGT asset to the Commissioner. The first element of the cost base of the CGT asset is usually the purchase price of the asset. This amount may be withheld from the payment the purchaser makes to the vendor.

1.7                   However, a foreign resident capital gains withholding payments obligation does not arise in relation to a CGT asset if, so far as is relevant, the market value of the CGT asset is less than $2 million and the CGT asset is:

•        taxable Australian real property; or

•        an indirect taxable Australian real property interest, the holding of which causes a company title interest to arise.

1.8                   Changes to the foreign resident capital gains withholding payments regime to increase the withholding rate and reduce the withholding threshold will improve the integrity of the regime by capturing more property transactions and encouraging greater compliance with Australia’s CGT rules.

1.9                   Legislation to implement the other reforms in the housing affordability package to change CGT outcomes for foreign investors will be included in a later Bill. These reforms will:

•        ensure that only Australian tax residents can access the CGT main residence exemption (which is contained in Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997)); and

•        for foreign residents with indirect interests in Australian real property, apply the principal asset test (section 855-30 of the ITAA 1997) on an associate inclusive basis for the purpose of determining the market value of a taxable Australian real property asset.

1.10               The package of reforms in the housing affordability package to change CGT outcomes for foreign investors will ensure that foreign investors meet their Australian tax obligations.

Summary of new law

1.11               Schedule 1 to this Bill will amend Schedule 1 to the TAA 1953 to modify the foreign resident capital gains withholding payments regime to:

•        increase the withholding rate from 10 per cent to 12.5 per cent; and

•        reduce the withholding threshold from $2 million to $750,000.

Comparison of key features of new law and current law

New law

Current law

Subdivision 14-D of Schedule 1 to the TAA 1953 imposes a non-final withholding payments obligation on the purchaser of certain Australian real property and related interests where the property is acquired from a foreign resident vendor.

If a foreign resident capital gains withholding payments obligation arises, the purchaser will be required to pay 12.5 per cent of the first element of the cost base of the CGT asset to the Commissioner. The first element of the cost base of the CGT asset is usually the purchase price of the asset. This amount may be withheld from the payment the purchaser makes to the vendor.

However, a foreign resident capital gains withholding payments obligation will not arise in relation to a CGT asset if, so far as is relevant, the market value of the CGT asset is less than $750,000 and the CGT asset is:

•        taxable Australian real property; or

•        an indirect taxable Australian real property interest, the holding of which causes a company title interest to arise.

Subdivision 14-D of Schedule 1 to the TAA 1953 imposes a non-final withholding payments obligation on the purchaser of certain Australian real property and related interests where the property is acquired from a foreign resident vendor.

If a foreign resident capital gains withholding payments obligation arises, the purchaser is required to pay 10 per cent of the first element of the cost base of the CGT asset to the Commissioner. The first element of the cost base of the CGT asset is usually the purchase price of the asset. This amount may be withheld from the payment the purchaser makes to the vendor.

However, a foreign resident capital gains withholding payments obligation does not arise in relation to a CGT asset if, so far as is relevant, the market value of the CGT asset is less than $2 million and the CGT asset is:

•        taxable Australian real property; or

•        an indirect taxable Australian real property interest, the holding of which causes a company title interest to arise.

Detailed explanation of new law

Increase the withholding rate

1.12               Currently, if a foreign resident capital gains withholding payments obligation arises in relation to a CGT asset, t he amount of withholding is 10 per cent of the first element of the cost base of the CGT asset. The first element of the cost base of the CGT asset is usually the purchase price of the asset. This amount may be withheld from the payment the purchaser makes to the vendor.

1.13               These amendments increase the rate of withholding to 12.5 per cent. [Schedule 1, items 1 and 2, paragraphs 14-200(3)(a) and 14-205(4)(a)]

1.14               Consequently, if a foreign resident capital gains withholding payments obligation arises, the amount of withholding will be 12.5 per cent of, generally, the purchase price of the asset.

Reduction in the withholding threshold

1.15               Currently, a foreign resident capital gains withholding payments obligation does not arise in relation to a CGT asset if, so far as is relevant, the market value of the CGT asset is less than $2 million and the CGT asset is:

•        taxable Australian real property; or

•        an indirect taxable Australian real property interest, the holding of which causes a company title interest to arise.

1.16               These amendments reduce this $2 million threshold to $750,000. [Schedule 1, item 3, paragraph 14-215(1)(a)]

1.17               Consequently, if the CGT asset is taxable Australian real property or a relevant indirect taxable Australian real property interest, a foreign resident capital gains withholding payments obligation will arise if the market value of the CGT asset is $750,000 or more.

Application and transitional provisions

1.18               These amendments apply in relation to acquisitions of property that occur on or after 1 July 2017. [Schedule 1, item 4]

1.19               A purchaser is generally taken to have acquired an asset on the date they entered into the contract to acquire it (see Division 109 of the ITAA 1997). Therefore, these amendments will not apply to transfers that occur under a contract entered into prior to 1 July 2017

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Foreign resident capital gains tax withholding payments

1.20               This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

1.21               Schedule 1 to this Bill will amend Schedule 1 to the TAA 1953 to modify the foreign resident capital gains withholding payments regime to:

•        increase the withholding rate to 12.5 per cent; and

•        reduce the withholding threshold to $750,000.

Human rights implications

1.22               This Schedule does not engage any of the applicable rights or freedoms.

Conclusion

1.23               This Schedule is compatible with human rights as it does not raise any human rights issues.