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Australian Parliament Passes Legislation on Capital Gains Tax Treatment of Earnout Rights and CGT Withholding Obligations — Orbitax Tax News & Alerts

On 22 February 2016, the Australian Senate passed the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015, following passage by the House of Representative on 4 February. The legislation includes changes in the capital gains tax (CGT) treatment of earnout rights and introduces CGT withholding obligations for purchases of certain Australian assets from foreign residents.

CGT on Earnout Rights

Earnout rights are rights to future payments linked to the performance of an asset or assets after sale. Under the new rules, 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.

CGT Withholding

Under the new rules, purchasers of the following asset types are required to withhold 10% of the payment as a non-final withholding tax when the vendor is a foreign resident:

  • Taxable Australian real property, which includes real property situated in Australia; and a mining, quarrying or prospecting right, if the minerals, petroleum or quarry materials are situated in Australia;
  • An indirect Australian real property interest; or
  • An option or right to acquire such property or interest

Exemptions from the CGT withholding requirement include:

  • Transactions involving taxable Australian real property and certain indirect interests valued at less than AUD 2 million;
  • Transactions conducted through a stock exchange or crossing system;
  • An arrangement that is already subject to an existing withholding obligation;
  • A securities lending arrangement; and
  • Transactions involving vendors who are subject to formal insolvency or bankruptcy proceedings.

Exemptions may also apply if the vendor has obtained a clearance certificate or has declared that they are an Australian resident for tax purposes.

Effective Date

The new rules regarding earnout rights are effective in relation to look-through earnout rights created on or after 24 April 2015. The new rules regarding CGT withholding are effective for acquisitions made on or after 1 July 2016.

Click the following links for the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 as passed, and the Explanatory Memorandum.