Disclaimer: THIS IS NOT IN YET, but, we're hopeful and praying to all the gods that it gets put into practice....
Definition of an Earn out Clause in a business sale:
"The main driver of the business is to be on a set time contract and presented with deliverable performance measures. If they achieve these measures, then, the value paid for the business is increased after the transaction date to reflect this effort."
So, what's new?
The ATO has announced practical changes to the treatment of earn out arrangements in the sale/purchase of business assets:
Standard Earn out Arrangements
For the seller - the cost base of the asset sold is reduced by the initial purchase price and subsequent payments. Once the cost base of the asset is reduced to zero, the seller will incur a capital gain in the income year in which the payments are received rather than the income year when the business asset was sold. The capital gain will be eligible for all CGT concessions that the business asset was eligible to receive. If an overall capital loss results the loss cannot be realised until either the end of the earn out arrangement.
For the buyer- the cost base of the business asset will be the total amount paid to the seller.
Reverse Earn out Arrangements
For the seller - Initial proceeds from sale treated as capital gain in the year the business assets sold. Any future repayments made require the original capital gain to amended to reduce the capital proceeds.
For the buyer - Any future repayments reduce the cost base of the asset.
"When will this be implemented?
There is no defined date as to when this will come into effect.
We will keep you updated on the progress of the implementation of this practice statement. If implemented, it will make the earn out process so much more convenient and will become a much wider used method of sale
