Bert Van Manen (Forde, Liberal Party) Share this | Hansard source

It was not tax reform. When we came into government, we abolished the carbon tax and left the tax-free threshold at $18,200. That is genuine tax reform and compensation for the Australian people. The other interesting comment the member for Fraser made was when he touched on the fact that the top 10 per cent of income earners receive approximately 38 per cent of superannuation concessions. What he failed to mention in that contribution, which is much more relevant because it is a much higher figure, is that the top 10 per cent of income earners in this country pay approximately 50 per cent of all income tax. So the notion of equity that he talks about when he only focuses on part of the equation is disingenuous in the extreme.

I will now return to the substance of the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015. I rise to speak in support of bill, because it introduces amendments to our taxation laws to improve the operation of our capital gains tax regime. One of the focuses of this government has been looking for opportunities that simplify our tax system and make it easier for compliance to be achieved.

I readily acknowledge that the measures in this bill were two unenacted measures left by the previous government. If they were such good measures, as the member for Fraser has told us in his contribution today, the question becomes, 'Why didn't the previous government enact them?' But, just like many things of the previous government, they were left half done or not done at all.

If there is one thing Australian small businesses deserve, it is certainty and clarity. In my electorate of Forde, where we have more than 11,000 small businesses, it is important we provide legislation that helps our businesses invest, grow and create more jobs. We can best achieve this by reducing red tape and compliance costs that our small business sector frequently struggles with. We want small business to be able to be confident in making their investment decisions.

Schedule 1 of 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. This makes enormous sense, because you never know at the original settlement time of the sale of the business, if there are earn-out rights attached, what the ultimate value of those earn-out rights are going to be.

Earn-out rights involve the sale and purchase of a business or business assets where the value of the underlying asset is uncertain. Earn-out rights can create flexibility and address uncertainty for purchasers and sellers of business assets and are a legitimate and efficient way of structuring the sale of a business to deal with the uncertainty about its value.

A draft ruling by the ATO specified that an 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. However, as I have touched on just before, the market value of an earn-out right is very difficult to quantify as there is no liquid market available to price the right, and it is dependent on the unknown future performance of the underlying business. In addition, a seller may not be able to assess certain capital gains tax concessions that are relevant.

Treating the earn-out right as a separate and distinct asset from the business itself resulted in significant complexity and additional compliance costs for businesses that use earn-outs. The complexity of the current operation affects the ability of businesses to efficiently price their business assets and, following concerns expressed by stakeholders with this treatment of earn-out arrangements, the previous government, to their credit, announced capital gains tax look-through treatment for these earn-out arrangements.

Providing capital gains tax look-through treatment for earn-out arrangements will allow taxpayers to disregard the earn-out right itself, while making any earn-out payments part of the original value of the business or business asset for capital gains tax purposes. This will result in 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 for that period. By providing the look-through treatment to earn-out arrangements, the government will help provide certainty and clarity for businesses entering into earn-out arrangements as well as protect any entitlements they have to small business capital gains tax concessions.

Australian businesses are expected to have a net reduction in compliance costs from the measures in this schedule as it simplifies the system and the market value of the earn-out right no longer needs to be estimated at the time of sale. This is another example of our government's commitment to improving legislation for business, reducing the costs of compliance and uncomplicating tax measures. The amendments made by this schedule will apply to all earn-out arrangements entered into after 23 April 2015. Importantly, to protect taxpayers who have in good faith anticipated changes to the tax law in this area as a result of the announcement by the previous government in 2010, the measure also includes protections to preserve their current tax outcome.

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 who dispose of certain Australian assets—broadly, direct and indirect interests in real property—are liable to pay tax on capital gains. The Australian Taxation Office has indicated that foreign residents' voluntary compliance with our capital gains tax regime is poor. In addition, there are difficulties in the ATO undertaking effective compliance after a transaction takes place, given the funds would likely be offshore and the foreign resident may otherwise have little connection to Australia.

Australian property investors are required to pay capital gains tax on the profits from an investment property sale. Many of these investors are mums and dads on median incomes who are putting these investments towards their retirement. They are required to pay capital gains tax, and do so when completing a tax return. It is unfair that they should be held to account on paying this tax when foreign residents avoid their responsibility of complying with our capital gains tax regime.

The schedule seeks to address these difficulties associated with collecting tax from foreign resident taxpayers. Originally announced in the 2013-14 budget by the previous Labor government, the government announced it would go ahead with the measure on 6 November 2013. Our government is committed to ensuring that foreign residents investing in Australian real property comply with their Australian legal obligations, and this measure is consistent with that effort. It is also consistent with efforts by this government to ensure that multinational companies comply with their tax obligations. It is interesting to note that the member for Fraser in his contribution waxed lyrical about Labor's plan for multinational taxation, yet in the whole six years of government they did nothing and when we introduced our multinational tax package towards the end of last year they voted against it. They can wax lyrical about multinational tax and foreign tax but this was a policy of theirs yet they never did anything. They also talked about multinational tax but, as usual, did not do anything. It is this government that is putting the time and effort into making the changes to protect and increase the integrity of our taxation system.

The schedule in this bill also complements recent changes to Australia's foreign investment framework to increase scrutiny and transparency with respect to foreign investment in residential real estate. Under this measure, 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. Withholding regimes are a common part of Australia's and other countries' taxation systems. Countries such as the United States and Canada have similar withholding tax regimes in place to support their foreign resident capital gains tax requirements.

Broadly, this measure applies to transactions where a foreign resident disposes of direct or substantial indirect interests in Australian real property. Australian residents and foreign residents should be on a level playing field when it comes to meeting their tax obligations. The measure does not apply to direct real property transactions below $2 million, in order to appropriately target those areas where revenue is at greatest risk and minimise the impact on other property transactions.

Foreign resident sellers will no longer have the full amount paid to them until they lodge their tax return under this new measure. It requires the buyer of such property to withhold and remit to the ATO the 10 per cent withholding amount. The government, through the Australian Taxation Office, will continue to work with industry to assist them in preparing for the commencement of this measure. Once effective, it will prevent foreign residents from avoiding paying their fair share of capital gains tax when selling real property in Australia. They will be on a level playing field with Australian residents, and the measure will ensure that our capital gains tax regime is fair and sellers from overseas meet their obligations. This is another bill in a long list of bills that demonstrate the government is ensuring the integrity of our taxation system for all concerned.

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