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General tax treatment of earn-out consideration

An earn-out right is a form of deferred consideration, consisting of a right to be issued with shares in or debentures of another company, the value or quantity of which is unascertainable at the time of completion because it relates to future matters. A right to receive unascertainable deferred consideration is an asset for capital gains purposes which is distinct from shares or debentures.

Broadly, where the following conditions are satisfied, an earn-out right can qualify for the 'no disposal' rule¹:

1. Ìý

   •ÌýÌýÌýÌý the deferred consideration must not be able to be taken in a form other than the issue of shares or debentures (eg where a cash alternative is offered), and

2. Ìý

   •ÌýÌýÌýÌý the value or quantity of the right itself must be unascertainable

The conditions are discussed in further detail at D6.208B.

Where these conditions are met, there is no disposal of the shares or debentures in the original company. The new shares or debentures inherit the acquisition cost and acquisition date of the