Earn-Out Disputes After 1 July 2027: How the CGT Regime Change Reshapes the Seller’s Position 

For Australian business owners and directors selling a private company, an earn-out that crosses 1 July 2027 may now carry a dispute risk that was not priced into the original deal. The 2026–27 Federal Budget proposes to replace the 50 per cent CGT discount with cost base indexation and a 30 per cent minimum tax on capital gains from 1 July 2027. Where a seller agreed to deferred consideration before budget night, the after-tax value of that earn-out may be materially different from what was expected when the sale agreement was signed. 

That creates a clear commercial litigation issue. Sellers may argue for variation, contract reformation, tax gross-up protection, or damages where the buyer’s conduct has affected the earn-out outcome. Buyers may respond that tax risk sits with the seller unless the agreement says otherwise. This article explains how CGT changes can affect earn-out disputes in an Australian private company sale, how the CGT regime for seller earn-outs may affect deferred payments, and what parties should review now if a business sale earn-out payment falls after 1 July 2027. 

How Does the 1 July 2027 CGT Change Affect Earn-Outs in an Australian Private Company Sale? 

The legal starting point is Part 3-1 of the Income Tax Assessment Act 1997 (Cth), which contains Australia’s capital gains tax regime. For earn-outs, the key provisions are in Subdivision 118-I. Section 118-560 explains the object of the look-through earn-out rules. Section 118-565 sets out when a right to future financial benefits qualifies as a look-through earn-out right. In practical terms, the law recognises that a seller may transfer a business now, while part of the price remains contingent on future revenue, profit, milestones, or other performance measures. 

Where the look-through earn-out rules apply, the deferred payment is connected back to the original CGT event, rather than treated as a separate asset. That classification is central to any business sale earn-out CGT 2027 issue. If the Federal Budget measure becomes law in its proposed form, sellers with earn-out payments landing after 1 July 2027 may need to reassess whether the deferred portion is taxed under a different CGT outcome from the one assumed when the sale agreement was signed. 

For share sales, the Corporations Act 2001 (Cth) provides the corporate setting because the transaction involves shares in a private company. However, most disputes about CGT changes affecting earn-out disputes in an Australian private company sale will turn on contract law. The court will ask what the agreement objectively means, not what one party privately expected its tax result to be. 

That approach is reflected in Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd [2017] HCA 12, a leading Victorian contract construction authority. The court reads the words of the contract in their text, context, and commercial purpose. For earn-outs, that makes the drafting of tax clauses, adjustment mechanisms, buyer conduct obligations and accounting inputs critical. 

Earn-out disputes also show why precision matters. In Metalicus Pty Ltd v Metwholesale Pty Ltd [2011] VSC 2, the Victorian Supreme Court considered disputes over an earn-out mechanism in a business sale, including how relevant financial inputs were to be assessed. Separately, Simic v New South Wales Land and Housing Corporation [2016] HCA 47 confirms that rectification requires strong evidence that the written agreement failed to record the parties’ true common intention. A seller seeking post-budget earn-out repricing will need more than unfairness. They will need a contractual right, a credible construction argument, or evidence supporting rectification or breach. 

How Do Courts Approach Earn-Out Disputes After a CGT Regime Change? 

Does the sale agreement allocate the tax risk? 

The first issue is whether the sale agreement says who bears tax risk on deferred consideration. In most private company sales, the seller is responsible for their own tax unless the contract contains a tax gross-up, price adjustment, indemnity, or specific variation clause. A court will not usually rewrite the bargain because a later tax change makes the seller’s after-tax position worse. If the agreement fixes the earn-out formula and leaves tax to the seller, the buyer may have no obligation to renegotiate a business sale earn-out CGT 2027 issue. 

Did both parties price the earn-out on a shared tax assumption? 

A stronger dispute may arise where the term sheet, board papers, correspondence, or drafting history show both parties priced the earn-out on the same tax assumption. For example, a seller may argue that the deferred price was accepted because both sides assumed the 50 per cent CGT discount would apply. That does not automatically create a right to post-budget earn-out repricing. It may, however, support a construction, rectification or misrepresentation argument if the written agreement does not reflect the common basis on which the deal was made. 

Has the buyer’s conduct affected the earn-out amount? 

Many earn-out disputes are not only about tax. They are often concerned about how the buyer managed the business after completion. If the buyer changed accounting policies, shifted revenue, increased expenses, delayed sales, altered management, or failed to support the business, the seller may argue that the earn-out was wrongly reduced. Clauses requiring ordinary course conduct, good faith, reasonable endeavours, access to records or consistent accounting treatment can become decisive. This is where a tax-driven complaint may become a broader breach claim. 

Does the look-through earn-out rule protect the seller? 

The look-through rule can assist sellers by connecting a qualifying earn-out payment back to the original CGT event rather than treating the earn-out right as a separate asset. However, it does not guarantee the seller the same after-tax result expected at signing. The practical question is whether the deferred amount is recognised, valued, or taxed after 1 July 2027. Sellers should not assume that the CGT regime for seller earn-outs will preserve the commercial outcome they expected before the Budget announcement. 

When will a court refuse to grant relief? 

A court is likely to refuse relief where the contract is clear, tax risk was left with the seller, and there is no breach, misrepresentation, mistake or shared contrary intention. Commercial unfairness is not enough. Sellers pursuing an earn-out dispute involving CGT changes in an Australian private company sale need evidence that ties the tax impact to a legal right. The strongest claims will usually combine precise drafting, contemporaneous negotiation records, valuation evidence, and a clear link between the alleged conduct or drafting error and the seller’s loss. 

What Disputes Arise When an Earn-Out Crosses the 1 July 2027 CGT Cut-Off? 

Earn-out disputes after 1 July 2027 usually begin with a direct commercial problem: the seller expected one after-tax result, but the deferred payment now produces another. In a private company sale, that difference can be significant where the earn-out forms a large part of the purchase price. 

A common dispute arises where the agreement was signed before the Budget announcement, but the earn-out is calculated or paid after 1 July 2027. The seller may say the deal was priced on the assumption that the 50 per cent CGT discount would apply. The buyer may respond that the agreement allocates tax risk to the seller and contains no obligation to reopen the price. This is the core business sale earn-out CGT 2027 dispute. 

Another issue is whether the buyer must renegotiate. Sellers often assume a material tax change should trigger commercial adjustment. That is not usually the legal position. Unless the contract contains a variation right, tax change clause, gross-up clause, price adjustment mechanism or indemnity, the buyer is unlikely to be required to reprice the earn-out merely because the seller’s tax position has changed. Where the dispute also concerns targets, accounting inputs, or buyer conduct, earn-out disputes often turn on the same evidence. 

Tax gross-up clauses can also create conflict. Some clauses only apply to withholding tax, GST, stamp duty, or buyer-side tax costs. They may not protect a seller from a change to the CGT treatment of deferred consideration. If the clause is broad, the dispute will turn on drafting: does it cover the seller’s CGT, does it apply to earn-out payments, and does it respond to a post-signing law change? 

The ATO classification of the earn-out is another pressure point. If the earn-out qualifies for look-through treatment, the deferred payment is connected to the original CGT event. If it does not, the earn-out right may be treated as a separate CGT asset, which can produce a different tax outcome. That distinction can affect the seller’s position under the CGT regime for seller earn-outs. 

For sellers already mid-earn-out, the immediate issue is evidence. They should preserve the sale agreement, negotiation records, tax advice, valuation materials, board papers, buyer communications, management accounts, and earn-out calculations. Where the earn-out forms part of a broader shareholder, exit or sale disagreement, buy-sell disputes in private companies may also shape the strategy. 

What Should Sellers and Buyers Do Before Pursuing an Earn-Out CGT Dispute? 

Before pursuing or defending an earn-out dispute, the first strategic step is to separate the tax problem from the legal claim. A worse CGT outcome after 1 July 2027 may explain the commercial pressure, but it does not itself prove breach, mistake, misrepresentation, or a right to variation. The legal question is whether the contract, negotiation history or buyer conduct gives the affected party a claim. 

For sellers, the strongest position is built through contemporaneous evidence. That includes the sale agreement, term sheet, tax advice, valuation model, earn-out calculation methodology, board papers, emails about tax assumptions, completion accounts, and post-completion management records. If the seller alleges that the buyer reduced the earn-out by changing business operations, accounting policies, or revenue recognition, that allegation must be supported by financial and operational records, not inference. 

For buyers, the priority is to identify the contractual allocation of risk. If the agreement places tax risk on the seller and contains no gross-up, repricing or variation mechanism, that should be made clear early. Buyers should also preserve records showing compliance with earn-out obligations, especially ordinary course conduct, consistent accounting treatment, and information access clauses. 

Both sides should obtain integrated legal, tax, and accounting advice before correspondence becomes entrenched. In an earn-out dispute involving CGT changes in an Australian private company sale, early letters often shape the later claim. The best strategy is to identify the real issue: construction, rectification, breach, valuation, tax classification, or commercial renegotiation. That framing can determine whether the matter resolves commercially or proceeds as litigation. 

Frequently Asked Questions 

Does the CGT change apply to earn-outs that are already in place? 

It may, depending on the final legislation, the timing of the CGT event, and how the earn-out is classified. If an earn-out payment is calculated or received after 1 July 2027, the seller should not assume the tax outcome will match the position expected when the sale agreement was signed. Existing contracts are not automatically protected from later tax changes unless the legislation, or the agreement provides that protection. Sellers should obtain tax and legal advice before accepting the buyer’s earn-out calculation. 

Can a seller force the buyer to vary an earn-out after the budget? 

Usually, no. A seller cannot force a buyer to vary an earn-out just because the tax result has become less favourable. Variation rights typically come from the contract, such as a price adjustment clause, tax change clause, gross-up clause, or agreed review mechanism. Without that wording, the seller will need another legal basis, such as breach, misrepresentation, mistake, or rectification. 

Do tax gross-up clauses protect sellers from CGT changes? 

They can, but only if the clause is drafted broadly enough. Many tax gross-up clauses are limited to GST, withholding tax, stamp duty, or buyer-side tax liabilities. A clause may not cover the seller’s capital gains tax unless it expressly applies to CGT on earn-out payments or post-signing tax changes. In a business sale earn-out CGT 2027 dispute, the exact words of the gross-up clause will be critical. 

How does the look-through earn-out rule affect CGT? 

The look-through earn-out rule can connect a qualifying earn-out payment back to the original sale for CGT purposes. This can be helpful because the earn-out is not treated as a separate asset. However, it does not guarantee that the seller keeps the same after-tax outcome expected at signing. The CGT regime for seller earn-outs still needs to be assessed against the final law and the terms of the sale agreement. 

What should I do if I am already mid earn-out? 

Review the sale agreement, earn-out formula, tax clauses, buyer obligations, and payment timing immediately. Preserve negotiation records, tax advice, valuation material, management accounts, and communications with the buyer. Do not assume the issue is only a tax issue, because buyer conduct may also affect the earn-out amount. Early advice can help determine whether the matter is a tax classification issue, a contract construction issue or a potential earn-out dispute involving CGT changes in an Australian private company sale. 

What Should a Seller Do About an Earn-Out Dispute After the 1 July 2027 CGT Change?

Earn-outs that cross the 1 July 2027 CGT cut-off can turn a completed private company sale into a live commercial dispute. The key question is not only whether the seller’s tax outcome has changed, but whether the sale agreement, tax clauses, buyer conduct or negotiation history gives the seller a legal basis to seek relief. For buyers, the same issues matter when defending a claim or resisting post-budget earn-out repricing. 

Pentana Stanton Lawyers assists business owners, directors and private company shareholders with complex earn-out, buy-sell and commercial disputes. If you are dealing with an earn-out dispute involving CGT changes in an Australian private company sale, speak with our commercial litigation lawyers or book a consultation to assess your position early.