Treasury has released exposure draft legislation to amend the income tax law to change the capital gains tax (CGT) treatment of the sale and purchases of businesses involving “earnout rights”, ie where the seller’s right to future payment is linked to the performance of the business or business asset or assets after sale.

Under the exposure draft legislation a subsequent payment received by the seller will be treated as part of the original capital proceeds (with interest and penalties suspended).

It is proposed that the law will apply only from the date of release of the exposure draft legislation (23 April 2015).

The definition of a ‘look-through earnout’ right also requires all payments to be made within four years.

The measure would only cover sales to which CGT event A1 (disposal of a CGT asset) applies.

It will only apply to active (not passive) investments but shares in a company or interest in a trust will be treated as an active asset if the shareholder held a holding of 20 per cent or more.

The earnout measure does not apply to depreciating assets.