A new law has changed the capital gains tax (CGT) treatment of the sale and purchase of businesses (or their assets) involving ‘look-through earnout rights’.

A right is a ‘look-through earnout right’ if:

• it is created on or after 24 April 2015
• the right is to future financial benefits, which cannot be reasonably ascertained at the time the right was created
• the right was created under an arrangement involving the disposal (CGT event A1) of a CGT active asset of the seller
• all financial benefits under the right are provided within five years, from the end of the income year in which the CGT event occurred
• the financial benefits are contingent and relate to the future economic performance of the CGT asset or a business for which it is expected that the CGT asset be an active asset; and
• the parties dealt at arm’s length

Under this new law:

• capital gains and losses in respect of look-through earnout rights are disregarded
• financial benefits provided or received under look-through earnout rights affect the capital proceeds and the cost base/reduced cost base of the underlying asset/s to which the right relates

For more information on look-through treatment for earnout rights, visit the ATO website here.