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Edited version of private advice
Authorisation Number: 1051788607244
Date of advice: 10 December 2020
Ruling
Subject: Income tax earnout rights
Question
Will the look through earnout provisions in Subdivision 118-565 of the ITAA 1997 apply to the earnout payments payable under the share purchase agreement?
Answer
Yes. The look-through earnout provisions in subsection 118-565 of the ITAA 1997 apply to the earnout payments payable under the share purchase agreement as the share sale meets all of the requirements of subsection 118-565 of the ITAA 1997. Further information about earnout arrangements and the CGT look through treatment can be found by searching 'QC 52706' on ato.gov.au
This ruling applies for the following periods:
Year ended 30 June 20XX
Year ended 30 June 20XX
Year ended 30 June 20XX
The scheme commences on:
1 July 20XX
Relevant facts and circumstances
• You are an individual who is a resident of Australia for tax purposes
• You held over 80% of the shares in a non-resident company.
• On XX XXX 20XX, you and the other shareholder, sold all the shares of the non-resident company to an unrelated third party. According to Clause X.X of the Share Purchase Agreement (attached to this ruling), the Purchase Price is:
(a) The completion payment (which shall be paid in accordance with Clause Y on account of the purchase price
(b) The Earn-out Consideration (which shall be paid subject to and in accordance with Schedule Z and clause Y
• According to Schedule Z, you and the other shareholder shall be entitled to receive a share of (foreign currency) X, in your Agreed Proportions from the Escrow Account in respect of each Earn-out year provided if the Actual Sales revenue for the relevant earn-out year is more than the Target Sales revenue. Hence unless that Schedule is satisfied then the Earn-out payment in respect of that Earn-out year shall be zero.
• There are 3 earn-out years mentioned as part of the Share Purchase Agreement where the First Earn-out year is the 12-month period ending on the date that is 12 months after the completion date (agreement date).
• The non-resident company had at least 80% active assets for at least 7.5 years.
• The non-resident company carried on a business in its own right at XX XXX 20XX.
• The non-resident company had less than $X net asset value at XX XXX 20XX, including assets owned by entities connected to and affiliates of the non-resident company.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 118-560
Income Tax Assessment Act 1997 section 118-565
Income Tax Assessment Act 1997 section 118-570
Income Tax Assessment Act 1997 section 102-25
Income Tax Assessment Act 1997 section 152-40