Acquiring or selling a business? Do earnout amendments affect you?

Acquiring or selling a business?

The much anticipated final ‘earnout legislation’ Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 is now before Parliament. An earnout arrangement is generally a right to future financial benefits linked to the economic performance of the business or an asset after the sale of a business. Under the new rules, payments received or paid under qualifying earnout rights will instead affect the capital proceeds and cost base of the underlying asset or assets.

Director, Tax

KPMG Australia

Contact

Related content

There are a few changes between the Exposure Draft (ED) of 23 April 2015 and the Bill introduced into Parliament in December 2015:

  • Financial benefits provided in 5 years, not 4 years. For a right to be a look through earnout right and receive look through capital gains tax (CGT) treatment, the right must require financial benefits to be provided within 5 years after the end of the income year in which the relevant CGT event occurs (previously 4 years under the ED).
  • Clarity on what financial benefits to take into account for 5 year limitation period. If a deferral in providing a financial benefit is outside your control, then the financial benefits are excluded.
  • Active asset including interests in foreign residents now gets look through CGT treatment. The ED limited the extended definition of active assets that qualify for the look through CGT Treatment on earnout rights to interests in Australian companies. The final Bill now applies to interests in foreign companies.
  • Clarity on amendment timeframe. The period of review is the later of the period of the review that would normally apply and 4 years after the end of the final income year in which financial benefits could be provided under the look through earn out right.
  • Modifications to the ‘maximum net asset value test’ for CGT small business concessions. The final law provides that taxpayers can elect not to include the value of any look through earnout right the entity may hold, but instead take into account any financial benefits that the entity may have provided or received under the look through earnout right.

The new amendments apply to earnout rights entered into on or after 24 April 2015 with protection for taxpayers that applied the 2010 Budget announcements. You should review the rules to see if you have a qualifying look through earnout right. If you do fall within the rules it provides relief on business acquisitions as tax will only be payable once the deferred consideration is received so there is better cash and tax payment matching.

Tax Insights

KPMG Australia's analysis of tax issues and developments.

 
Read more

Deal Advisory – Tax

Deal Advisory – Tax

KPMG offers a range of tax services to corporate and private equity investors to help with local and cross-border transactions.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform