Document ID: chunk:federal_register_of_legislation:C2016A00010:clause:1_4:p1
Version: federal_register_of_legislation:C2016A00010
Segment Type: clause
Provision Reference: sch 1 cl 4 (pt 1/4)
Character Range: 11758–14546

4  At the end of Division 118
Add:

Subdivision 118‑I—Look‑through earnout rights

Table of sections
118‑560 Object
118‑565 Look‑through earnout rights
118‑570 Extra ways a CGT asset can be an active asset
118‑575 Creating and ending look‑through earnout rights
118‑580 Temporarily disregard capital losses affected by look‑through earnout rights

118‑560  Object
 (1) This Subdivision and its related provisions set out special rules for *look‑through earnout rights. The object of these rules is to avoid unnecessary compliance costs and disadvantageous tax outcomes when entities involved in the sale of a business:
 (a) cannot agree on the current value of some or all of the business' assets due to uncertainty about the future economic performance of the business; and
 (b) resolve this uncertainty by agreeing to potentially provide future additional consideration linked to this performance.
 (2) These rules achieve this object by:
 (a) disregarding any *capital gain or *capital loss relating to the creation of a *look‑through earnout right; and
 (b) for the acquirer of the business—treating any *financial benefits provided (or received) under the right as forming part of (or reducing) the cost base or reduced cost base of the business assets; and
 (c) for the seller of the business—treating any financial benefits received (or provided) under the right as increasing (or reducing) the capital proceeds for the business assets.
Note: Sections 112‑36 and 116‑120 are 2 of the more important related provisions that set out these rules.

118‑565  Look‑through earnout rights

Look‑through earnout rights—main case
 (1) A look‑through earnout right is a right for which the following conditions are met:
 (a) the right is a right to future *financial benefits that are not reasonably ascertainable at the time the right is created;
 (b) the right is created under an *arrangement that involves the *disposal of a *CGT asset;
 (c) the disposal causes *CGT event A1 to happen;
 (d) just before the CGT event, the CGT asset was an *active asset of the entity who disposed of the asset;
Note: For extra ways to be an active asset, see section 118‑570.
 (e) all of the financial benefits that can be provided under the right are to be provided over a period ending no later than 5 years after the end of the income year in which the CGT event happens;
 (f) those financial benefits are contingent on the economic performance of:
 (i) the CGT asset; or
 (ii) a business for which it is reasonably expected that the CGT asset will be an active asset for the period to which those financial benefits relate;
 (g) the value of those financial benefits reasonably relates to that economic performance;
 (h) the parties to the arrangement deal with each other at *arm's length in making