The draft follows the release of a discussion by the former government outlining possible approaches that would give effect to the measure.
One of the issues raised in subsequent consultations was how the proposed approaches would interact with some CGT concessions, especially small business CGT concessions, and whether these would be available without considerable complexity.
Treasury has said that to address these concerns, the exposure draft legislation takes a different approach where subsequent payment received by the seller will be treated as part of the original capital proceeds (with interest and penalties suspended).
This approach is fully consistent with the application of the existing CGT concessions framework, Treasury said.
BDO tax partner Mark Molesworth welcomed the move and said that although the draft legislation was long overdue, it was a positive step towards helping resolve some of the complex taxation outcomes that have burdened thousands of business sale transactions to date.
“When a buyer and seller cannot agree on the appropriate value of the assets of a business they often enter into an earnout arrangement under which payments for the business are linked to the future performance of the business assets," Mr Molesworth said.
“However, the taxation treatment that has been applied to these arrangements has been complex and has given rise to unfair outcomes for taxpayers."
Mr Molesworth warned taxpayers to consider their circumstances prior to business sales since the draft legislation was narrower than previous versions.
“The new draft legislation proposes a maximum time limit for earnout arrangements of four years, one year less than originally suggested,” he said.
“While today’s draft legislation is a promising sign of change, there does still appear to be some anomalies in the treatment of earnouts due to the restrictive way in which the proposal has been drafted.
“Moving forward, BDO encourages the federal government and ATO to comprehensively consult business and taxation experts on the appropriate treatment of such arrangements to deliver outcomes that are workable and effective for all parties involved.”