The Government has announced proposed amendments to the tax laws to take account of earnout arrangements in relation to sales of businesses.
Earnout arrangements are used to structure the sale of a business or business assets to manage uncertainty about the value of the business. The earnout right may entitle the buyer or seller to additional payments depending on the subsequent performance of the business.
Currently these arrangements cause difficulties because the ATO treats an earnout right as a separate CGT asset rather than part of the underlying business assets. The effect of this may be to reduce access to the CGT small business concessions available in relation to the sale of the underlying asset.
The Government will allow all payments under a qualifying earnout arrangement to be treated as relating to the underlying business asset. The measure will have effect from the date of Royal Assent of the enabling legislation, with transitional provisions available in certain cases from 17 October 2007. This measure has an ongoing cost to revenue that is estimated to cost $15 million over the forward estimates period.