The long awaited exposure draft on the tax treatment of earn-outs has been released and presents a new way of testing earn-outs for tax purposes. Under the new regime, relevant earn-outs will not be treated as creating a new CGT asset, and payments under report-out and reverse earn-out arrangements will alter the CGT consequences of the underlying business sale. Amendments that preserve the small business CGT concessions where earnouts are used have also been proposed.
This is a significant change to the way in which earn-out arrangements had been treated and it will be important for all commercial advises to understand the impact of these new changes, which take effect from the date of release of the exposure draft legislation, 23 April 2015.
Changes to the treatment of earn-outs were originally announced on 12 May 2010 and significant consultation and development of draft legislation has occurred since that date, including when the Government reviewed the then announced unenacted measures in December 2013.
This event provided valuable insight into how the new rules will apply to business sales going forward.