Q. I read your recent comments on earn out rights and the budget changes proposed for their CGT treatment.I previously sold a business in 2003 with an earn out right.It was paid out in December 2007. Will this budget change provide any relief for my situation?

A. Unfortunately the most likely answer is no. At this stage we only have the budget announcement about the change so we will need to wait and see the detail of the legislation to enact the change.

However the budget indicated that the effective date for the change would be the date of Royal Assent to the amending legislation with some transitional arrangements being provided from 17 October 2007. From your information it sounds as though your CGT event and most of your earn out rights occurred prior to this date.

The reason why the Government needs to introduce legislation to change this CGT treatment is because the treatment under existing legislation produces unintended consequences. Unfortunately these changes are not fully retrospective and people caught prior to this time miss out. I presume your primary concern is that the consideration you received for the earn out right was not eligible for the CGT small business concessions.

There is a significant increase in the use of earn rights with the sale of small businesses. Historically this used to be the domain of larger business. Now though it is being used as a bridge between the expectations of buyers and sellers over the agreed price for a business.

The buyer who is unwilling to pay the price being asked by the seller may be prepared to pay an additional amount where the business achieves certain performance targets after the sale. The earn out right, which forms part of the sale contract, is this additional amount that may be paid over two or three years.

From the vendors point of view whilst it is always better to get the full sale price at time of sale, where you have a genuine buyer and you are confident in the continuing performance of the business, an earn out right may allow you to take full value for the business over time rather than accept a discount to achieve a sale.

Businesses that have grown significantly in the lead up to the sale or where there has been some change that has enhanced profitability in the prior year are examples where buyers and sellers may not agree on price. The seller wants the value created in the current business whereas the buyer may be cautious as to whether the improvement is sustainable or whether it was a one off year.

The changes may not assist your earn out position but they will be welcome relief for vendors who use earn outs in the future.