A Bill has been introduced in Parliament that proposes to amend the tax law to change the capital gains tax treatment of the sale and purchase of businesses involving certain earnout rights (ie rights to future payments linked to the performance of an asset or assets after sale). As a result of these amendments, 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.
Clarifying the CGT treatment of earnout rights has been a long time coming – it was first announced on 12 May 2010 as part of the 2010–2011 Budget. The amendments contained in the Bill are proposed to apply from 24 April 2015. However, note there will be protections for taxpayers who have undertaken other actions in reasonable anticipation of announcements made about the amendments in the 2010–2011 Budget.
TIP: The ATO has released details of its administrative treatment pending the formal enactment of the legislation. Please contact our office for further information.
