Issue

How can I process an Earnout Arrangement in Class? 

Background

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 to subsequent financial benefits that are contingent on the performance of the business for a specified period after the sale.

Refer to the ATO website for more information on Earnout arrangements and CGT. 

Resolution

An earnout arrangement is generally not applicable to SMSFs unless it runs the business through the SMSF. Also, the earnout arrangement is reported by the taxpayers, as business owners, in their individual tax returns or for whatever structure the business is held in.

The proceeds from the CGT asset can be made as contributions to the SMSF using small business contribution concessions.

The fund may be able to accept the contribution, where the member 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.

To process the member contribution, refer to our User Guide on Member Contributions.

You may be required to complete the Capital gains tax cap election form.