Capital Gains Tax improvements in the 2010-2011 Federal Budget

The Federal Budget, handed down on 11 May 2010, prescribed some changes in the treatment of Capital Gains Tax (CGT) relevant to corporate entities.

1 ‘Look-through’ treatment for earnout arrangements

Earnout arrangements are used to structure the sale of a business (or business assets) to manage uncertainty about the value of the business. An earnout right may entitle the buyer or seller to additional payments depending on the subsequent performance of the business.

Currently, an earnout right is treated as a separate CGT asset which can result in ‘anomalous outcomes’ for taxpayers where the actual payments under the earnout right differ from the amounts estimated at the start of the arrangement.

All payments under a qualifying earnout arrangement will be treated as relating to the underlying business asset. This measure will avoid the need for taxpayers to amend prior year assessments.

The measure will have effect from the date of Royal Assent of the enabling legislation, with transitional provisions available in certain cases from 17 October 2007.

2 Extending CGT rollover relief

Demerger relief will be allowed where the ‘head entity’ of a demerged group is a corporation sole or a complying superannuation entity – where the head company does not have ‘ownership interests’ to apply the rules.

Conversions of a body to an incorporated entity by way of a wind-up and reincorporation will not have immediate CGT consequences, allowing taxpayers to receive shares that reflect the value of interests and rights they held in the body.

Australian resident shareholders holding interests in entities that restructure will not have immediate CGT consequences where an entity undertakes a restructure in order to deal with its foreign shareholders using a share or interest sale facility. The Australian resident shareholders will not have a CGT liability until they dispose of their shares.

If you have any queries about these changes and how they may affect you and your business, please contact Kevin Shields, Partner, on (08) 9288 6909 or email kevin.shields@lavanlegal.com.au.