Look-through treatment for earnout arrangements

On 12 May 2010, the Assistant Treasurer announced 'Look-through treatment for earnout arrangements to simplify sale of business assets as part of the 2010-11 Budget announcements.

Under this measure:

• additional payments made under a 'standard' earnout arrangement will be treated as relating to the original asset for the seller and will be added to the cost base for the buyer
• payments made under a 'reverse' earnout arrangement will be treated effectively as a repayment of part of the capital proceeds.

This change will apply to earnout arrangements any taxpayer enters into on or after royal assent of the amending legislation. Optional transitional relief will be provided, in certain cases, back to 17 October 2007 - the date of release of a relevant ATO draft ruling.

Media release

Refer to Media release No. 098 on the Assistant Treasurer's website.

Administrative treatment This measure will take effect on the day of royal assent. However, the following transitional arrangements will be available: Taxpayers will have the choice to apply the proposed look-through treatment for earnout arrangements entered into between 12 May 2010 and the date of royal assent (inclusive). In addition, the buyer in a standard earnout arrangement will have the choice to apply the proposed look-through treatment for earnout arrangements entered into on or after 17 October 2007. We will accept returns as lodged during the period up until the amending law is enacted. We will not review assessments until the outcome of the proposed amendment is known. If a taxpayer chooses to apply the first transitional arrangement explained above and the amending law is enacted, no further action is required. If the amending law is not enacted, taxpayers will need to review their positions and seek amendments accordingly. Taxpayers who wish to apply the second transitional arrangement should review their positions once the amending law is enacted and then seek amendments to take advantage of the transitional arrangement. If the amendment reduces the amount of tax they are liable to pay, they will be entitled to interest on any overpayments. In both cases, we will not apply any tax shortfall penalties and we will remit any interest accrued at the base interest rate up to the date the amending law was enacted. We will remit any interest that accrues in excess of the base rate after that date if taxpayers actively seek to amend their assessments within a reasonable timeframe.

More information For more information, refer to the Treasury discussion paper.