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  • Earnouts

    How the rules apply will depend on whether the earnout right is one of the following.

    Look-through standard earnout rights

    The purchaser is required to withhold and pay to the Commissioner 12.5% of the first element of the CGT asset’s cost base just after the acquisition. The first element of the CGT asset’s cost base doesn't include any financial benefit the purchaser provides under a look-through standard earnout right relating to the CGT asset.

    The purchaser is also required to withhold and pay to the Commissioner 12.5% of the market value of the financial benefits provided by the purchaser under the earnout right, unless the entity receiving the financial benefit is not a relevant foreign resident at the time the financial benefit is provided.

    Non-look-through standard earnout right

    The purchaser is required to withhold and pay to the Commissioner 12.5% of the first element of the CGT asset’s cost base. The non-look-through earnout right is property given by the purchaser in respect of acquiring the CGT asset. Therefore, the first element of the CGT asset’s cost base includes the market value of the earnout right. The purchaser must ascertain the market value of the earnout right at the time of acquisition and include that value in calculating the 12.5% withholding.

    The purchaser is not required to withhold 12.5% of the market value of any financial benefits provided by the purchaser under the non-look-through earnout right.

    Look-through reverse earnout right

    The purchaser is required to withhold and pay to the Commissioner 12.5% of the first element of the CGT asset’s cost base just after the acquisition. The first element of the CGT asset’s cost base is not reduced by the amount of any financial benefit that you receive under a look-through earnout right relating to the CGT asset.

    Non-look-through reverse earnout right

    The purchaser is required to withhold and pay to the Commissioner 12.5% of the first element of the CGT asset’s cost base. However, the purchaser has acquired more than one asset. The non-look-through earnout right is a separate CGT asset acquired by the purchaser and not subject to the withholding. Therefore, the first element of the cost base of the CGT asset that is subject to withholding is the amount of the purchase price that is reasonably attributable to that CGT asset.

    Earnout rights do not affect the market value of the underlying asset

    An earnout arrangement may be entered into at the time of sale of an asset where the vendor and purchaser do not agree on a fixed purchase price. However, the market value of an asset is not affected by the existence of an earnout right that is created at the time of the asset’s sale.

    The purchaser cannot use the upfront payment as a proxy for market value

    Purchasers will need to ascertain the market value of the asset on a different basis, such as seeking an independent expert valuation.

      Last modified: 07 Nov 2019QC 48972