Ozbanana Case Study
Semester two 2013
Unit Code: CLAW6026
Unit Title: Taxation Law and Practice
Stream: Tuesday 6-9PM
Lecturer: Tania Goodmund
Question Title: Question 1 – Earnout Rights
Group members:
Zhu Du 420152686
Huadi Wang 420019921
Norachai Pattanavanichkul 430015090
Adam Bottle 307141691
Jun Li 311052665
Word count: 2,494 words
In determining the tax implications of Gary’s sale of Ozbanana Pty Ltd (Ozbanana) to Matt, an examination of the capital gains tax (CGT) effects on the sale of an asset must be conducted. There are two key elements to the sale of Ozbanana, a lump sum payment of $8 million and …show more content…
3). The receipt of this amount is not certain as it is depended on the performance of the asset. Earnout rights are common in the structuring of business sales when there is uncertainty about the value of the business (Discussion paper 2010 pg. vi). According to TR2007/D10, the Ozbanana sale is a standard earnout arrangement, as opposed to a reverse earnout arrangement. “A standard earnout arrangement is any transaction in which an income earning asset is sold for consideration that includes the creation of an ‘earnout right' in the seller of the asset” (TR2007/D10 para. 2). In this case, Gary, the seller of the asset, has sold his share in the business for consideration that includes an earnout right, the 20% entitlement to any company revenue over $3 million, consistent with a standard earnout arrangement. In a reverse arrangement, Gary would be required to pay an amount, or amounts, to Matt calculated by reference to the earnings generated by the asset during a specified period after the completion of the sale. Now that the type of earnout arrangement applicable to the Ozbanana case has been identified, the tax implications of such as arrangement can be …show more content…
On 30 June 2014 and 2015, CGT event C2 will happen to a part of the earnout right. On 30 June 2016, CGT event C2 will happen to the whole of the CGT asset (Kolliou 2008). Key to determining the capital gains or losses is determining the market value of the earnout right at the end of each period. At the time of making the contract for Ozbanana (30/06/2013), the earnout right has a market value of $1,800,000. At 30 June 2014 the market value of the remaining earnout right is $900,000 and at 30 June 2015 the market value of the remaining earnout right is $200,000. Determining market value is a largely subjective process that is left to the taxpayers discretion.
For year 1, the year ending 30 June 2014, Gary receives $800,000 under the earnout arrangement. This is his capital proceeds for year 1. The cost base for this part of the CGT asset must be apportioned under s 112-30(3) as follows:
(Cost base/reduced cost base of the right) x (Capital proceeds from the CGT event happening to the part / those capital proceeds plus the market value of the remainder of the asset)
= $1,800,000 x [$800,000 / ($800,000 +
Unit Code: CLAW6026
Unit Title: Taxation Law and Practice
Stream: Tuesday 6-9PM
Lecturer: Tania Goodmund
Question Title: Question 1 – Earnout Rights
Group members:
Zhu Du 420152686
Huadi Wang 420019921
Norachai Pattanavanichkul 430015090
Adam Bottle 307141691
Jun Li 311052665
Word count: 2,494 words
In determining the tax implications of Gary’s sale of Ozbanana Pty Ltd (Ozbanana) to Matt, an examination of the capital gains tax (CGT) effects on the sale of an asset must be conducted. There are two key elements to the sale of Ozbanana, a lump sum payment of $8 million and …show more content…
3). The receipt of this amount is not certain as it is depended on the performance of the asset. Earnout rights are common in the structuring of business sales when there is uncertainty about the value of the business (Discussion paper 2010 pg. vi). According to TR2007/D10, the Ozbanana sale is a standard earnout arrangement, as opposed to a reverse earnout arrangement. “A standard earnout arrangement is any transaction in which an income earning asset is sold for consideration that includes the creation of an ‘earnout right' in the seller of the asset” (TR2007/D10 para. 2). In this case, Gary, the seller of the asset, has sold his share in the business for consideration that includes an earnout right, the 20% entitlement to any company revenue over $3 million, consistent with a standard earnout arrangement. In a reverse arrangement, Gary would be required to pay an amount, or amounts, to Matt calculated by reference to the earnings generated by the asset during a specified period after the completion of the sale. Now that the type of earnout arrangement applicable to the Ozbanana case has been identified, the tax implications of such as arrangement can be …show more content…
On 30 June 2014 and 2015, CGT event C2 will happen to a part of the earnout right. On 30 June 2016, CGT event C2 will happen to the whole of the CGT asset (Kolliou 2008). Key to determining the capital gains or losses is determining the market value of the earnout right at the end of each period. At the time of making the contract for Ozbanana (30/06/2013), the earnout right has a market value of $1,800,000. At 30 June 2014 the market value of the remaining earnout right is $900,000 and at 30 June 2015 the market value of the remaining earnout right is $200,000. Determining market value is a largely subjective process that is left to the taxpayers discretion.
For year 1, the year ending 30 June 2014, Gary receives $800,000 under the earnout arrangement. This is his capital proceeds for year 1. The cost base for this part of the CGT asset must be apportioned under s 112-30(3) as follows:
(Cost base/reduced cost base of the right) x (Capital proceeds from the CGT event happening to the part / those capital proceeds plus the market value of the remainder of the asset)
= $1,800,000 x [$800,000 / ($800,000 +