CGT: Look-through treatment for earnout rights
On 25 February 2016, legislation was enacted to provide look-through capital gains tax (CGT) treatment for look-through earnout rights created on or after 24 April 2015.
Broadly, under the look-through CGT treatment:
- capital gains and losses arising in respect of look-through earnout rights are disregarded;
- for the buyer, any financial benefit provided (or received) under a look-through earnout right increases (or decreases) part of the cost base or reduced cost base of the underlying asset; and
- for the seller, any financial benefit received (or provided) under the look-through earnout right increases (or decreases) the capital proceeds for the underlying asset.
This new legislation does not apply prior to 24 April 2015. However, transitional protection is provided to taxpayers that have reasonably and in good faith anticipated the changes to the tax law in this area as a result of the announcement by the former Government.
The protection operates 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 the timing conditions.
Any protection will be lost if the taxpayer makes a statement for a later year of income that is not consistent with the anticipated amendments reflected in the taxpayer's original statement in a way that is to the taxpayer's benefit. Assessments may be amended at any time to give effect to the loss of protection.