How Earnout Arrangement CGT Rules Work
How it works
When a business is sold and part of the purchase price depends on the business's future performance — for example, a percentage of revenue over the next 3 years — the uncertain component is called an earnout. Subdivision 118-I of the ITAA 1997 provides a special look-through treatment that avoids the need to value the earnout right at the time of sale.
Under look-through treatment, each earnout payment is treated as an adjustment to the original disposal proceeds. When you receive a payment, you amend the tax return for the financial year in which the original sale occurred, add the payment to the capital proceeds, and recompute the gain. This means you do not need to obtain a valuation of the earnout right upfront, and you are not treated as receiving a separate CGT asset. The amendment period is extended to the later of 4 years after the disposal financial year or 4 years after the final possible payment year.
To qualify for look-through treatment, the arrangement must meet 8 conditions under section 118-565 — including that the benefits cannot be reasonably ascertainable at creation, the disposed asset must have been an active asset, all payments must fall within 5 years after the end of the disposal financial year, and the dealing must be at arm's length. If the arrangement does not qualify, the earnout right is treated as a separate CGT asset requiring a market valuation at the date of the original sale, and each subsequent payment triggers a separate CGT event C2.
When to use this calculator
- You sold (or are planning to sell) a business with an earnout component where future payments depend on business performance
- You need to check whether your arrangement meets the 8 qualifying conditions for look-through treatment under section 118-565
- You have received an earnout payment and need to calculate the amended capital gain for the original disposal year
- You want to understand the amendment deadline — how long the ATO allows you to amend after the final payment
- Your initial sale resulted in a capital loss and you need to understand the temporary loss disregard rule under section 118-580
Key concepts
- Look-through earnout right
- A special CGT treatment where the earnout right is not treated as a separate CGT asset. Instead, each payment adjusts the original disposal proceeds. This avoids the need for an upfront valuation of the uncertain earnout component and prevents double taxation.
- 5-year payment window
- All benefits under a qualifying earnout must be receivable within 5 years after the end of the financial year in which the original disposal occurred. For a sale in FY 2024–25, all payments must be received by 30 June 2030. If the arrangement is extended beyond this period, look-through treatment is retrospectively denied for all payments.
- Amendment process
- When you receive an earnout payment, you amend the original year's tax return — not the current year's return. The cumulative proceeds are recalculated, the gain is recomputed, and you pay additional tax on the increase (or receive a refund). No shortfall interest applies if you lodge the amendment by the extended deadline.
- Temporary loss disregard
- Under section 118-580, if the initial upfront payment results in a capital loss (because it was less than the cost base), that loss is temporarily frozen. It cannot offset other gains until the earnout arrangement is finalised. If cumulative proceeds eventually exceed the cost base, the loss is released. If a loss remains after all payments, it can then be claimed.
Worked example — business sale with two milestone payments
Priya sold her digital marketing agency in November 2024 (FY 2024–25). The deal included an upfront payment of $800,000 plus two earnout payments tied to revenue targets: $120,000 received in October 2025 (FY 2025–26) and $95,000 received in September 2026 (FY 2026–27). Her cost base for the business goodwill was $200,000. The arrangement meets all 8 qualifying conditions.
After the initial sale (FY 2024–25):
| Step | Detail | Amount |
|---|---|---|
| Capital proceeds | Upfront payment | $800,000 |
| Cost base | Original cost base | $200,000 |
| Capital gain | $800,000 − $200,000 | $600,000 |
| 50% CGT discount | Held > 12 months | −$300,000 |
| Assessable gain | $300,000 |
Amendment after first earnout payment (amend FY 2024–25):
| Step | Detail | Amount |
|---|---|---|
| Revised capital proceeds | $800,000 + $120,000 | $920,000 |
| Cost base | $200,000 | |
| Revised capital gain | $920,000 − $200,000 | $720,000 |
| 50% CGT discount | −$360,000 | |
| Revised assessable gain | $360,000 | |
| Additional tax owed | On $360,000 − $300,000 | On $60,000 |
Amendment after second earnout payment (amend FY 2024–25 again):
| Step | Detail | Amount |
|---|---|---|
| Revised capital proceeds | $920,000 + $95,000 | $1,015,000 |
| Revised capital gain | $1,015,000 − $200,000 | $815,000 |
| 50% CGT discount | −$407,500 | |
| Revised assessable gain | $407,500 | |
| Additional tax owed | On $407,500 − $360,000 | On $47,500 |
Each amendment recalculates the gain for FY 2024–25. Priya can also reconsider CGT choices (such as applying small business concessions) at each amendment if she qualifies. No shortfall interest applies as long as she amends within the extended deadline.