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CGT small business concessions and contributions to super

Contributions relating to earnout arrangements

Section: 8.13

Earnout arrangements are a way of structuring the sale of a business to deal with uncertainty about its value. The contract for the sale of the business (or assets of the business) provides for an initial lump sum payment by the buyer, and a right (a 'look-through earnout right') to subsequent financial benefits that are contingent on the performance of the business for a specified period after the sale.

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 occurs. This means the CGT event and the receipt of proceeds may occur in different financial years. These differing timeframes are accommodated in a number of ways:

  • The two year timeframe that a company or trust has to make a payment to a CGT concession stakeholder under the 15-year exemption may be extended to 6 months after the latest time a financial benefit becomes, or could become, due under a look through earnout right.
  • An individual under the age of 55, claiming the retirement exemption, may also have until the time they receive the proceeds under an earnout arrangement to contribute the amount to superannuation.
  • Where an earnout arrangement is involved, a super fund may be able to accept a contribution of an amount which qualifies for the 15-year exemption or retirement exemption where it would otherwise have not been able to accept the contribution.

In these situations the fund may be able to accept the contribution, where the client was eligible to make a contribution in the financial year in which the CGT event occurred but not in the actual year of contribution (when proceeds are received). This is most relevant for clients aged 65 or over who are not otherwise able to contribute to superannuation.

For example, if the client is age 65 or over when the CGT event occurred, and is not otherwise eligible to contribute in the year of contribution (e.g. because they don't meet the work test), they are eligible to contribute if they instead satisfied the work test in the financial year in which the CGT event occurred.

When contributing amounts subject to an earnout arrangement, where normal contribution rules cannot be met, a trustee may accept the contribution, if the amount:

  • counts towards and does not exceed the member's lifetime CGT cap amount, and
  • qualifies for either the 15-year exemption or the retirement exemption (or proceeds that would have qualified but the asset was a pre-CGT asset, or there was no capital gain or the asset was sold early due to permanent incapacity), and
  • the capital proceeds from the relevant CGT event were, or could have been, affected by one or more financial benefits received under a look-through earnout right, and
  • the member making the contribution would have been eligible to make the contribution had the contribution been made in the financial year in which the CGT event happened.

Last modified: Thursday, November 15, 2018