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Providing 'look-through' CGT treatment to earnout arrangements

23 April 2015 | Exposure Draft

The attached exposure draft legislation would amend the income tax law to change the capital gains tax (CGT) treatment of the sale and purchases of businesses involving certain earnout rights – rights to future financial benefits linked to the performance of an asset or assets after sale.

The exposure draft would give effect to the Government's announcement on 14 December 2013 that this measure, originally announced in 2010 by the former government, would proceed as part of the announced but unenacted tax measure process.

A discussion paper was released at the time of announcement by the former Government that outlined possible approaches to giving effect to the measure. One of the issues raised in consultation was how the proposed approaches would interact with various CGT concessions, especially the small business CGT concessions and whether these concessions would be available without considerable complexity.

To address these concerns, the exposure draft legislation takes a different approach. A subsequent payment received by the seller will be treated as part of the original capital proceeds (with interest and penalties suspended). This approach is fully consistent with the application of existing CGT concession framework.

Recognising that this change, combined with the lack of detail available to taxpayers at the time, may mean that the draft law differs from what may have been anticipated by taxpayers, it is proposed that the law will apply only from the day of releasing this exposure draft legislation. Prior to this day, taxpayers who reasonably anticipated the application of the initial announcement will receive similar protection to that received by taxpayers who reasonably anticipated announcements of changes to the tax law that did not proceed following the Government’s consideration of these measures in the announced but unenacted tax measures process.

The Government has undertaken targeted confidential consultation on an initial draft of legislation to give effect to this measure. To assist parties in understanding the initial thinking of the Government, a summary of issues raised in consultation and how these have been addressed in the public exposure draft is attached.

Submissions closed on Thursday 21 May 2015

Key Documents

Ref Num: {947E76E9-0BE7-491E-9379-5BE084F4E12C}
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