Time to review older earnout arrangements?

Time to review older earnout arrangements?

Tim Lynch cautions taxpayers to consider whether recent changes to the rules regarding earnout payments may affect them.

Partner, Tax

KPMG Australia

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Law changes in early 2016 have removed some of the longstanding uncertainty that surrounded the tax treatment of earnout payments / receipts. The legislation provided a ‘look-through’ capital gains tax treatment for earn-out rights whereby:

  • capital gains and losses arising in respect of look-through earnout rights will be disregarded and
  • 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.

The new earnout rules apply to arrangements entered into on or after 24 April 2015 (the first working day on which draft legislation to give effect to rules was made public). However, taxpayers that “reasonably and in good faith” anticipated the changes to the earnout rules as a result of announcements by the former Government in May 2010 are also protected via transitional rules.

The transitional provisions (which are somewhat complex via the interaction of 170B as modified by Subdivision 118-I and subject to certain timing conditions) operate by placing a statutory bar on the Commissioner amending an income tax assessment in relation to a particular contained in a statement, to the extent that the particular represents the taxpayer’s reasonable anticipation of the announced changes to the law and satisfies timing conditions.

Taxpayers who cannot satisfy the legislative requirements may need to consider the Commissioner’s views on treatment of earnout arrangements in Draft Taxation Ruling TR 2007/D10 and the withdrawn Taxation Ruling TR 93/15.

If you have made or received payments under an earnout relating to an arrangement prior to 24 April 2015, consider whether the transitional protection could apply to your circumstances.

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