Private ruling: Look through earnout right for a sale of company shares
Date of advice: 13 February 2024
Published: 8 April 2024
Ruling period: Income year ended 30 June 2021 | Income year ended 30 June 2022 | Income year ended 30 June 2023 | Income year ended 30 June 2024 | Income year ended 30 June 2025
Date scheme commenced: 1 July 2020

Ruling: Q1: Will the look-through provisions in Subdivision 118-I of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the earnout payments payable under the share purchase agreement? | A1: Yes. | Q2: Will the share consideration received by the taxpayer as part of the look-through earnout be treated as increasing the capital proceeds received under the original CGT event A1 disposal pursuant to section 116-120 of the ITAA 1997? | A2: Yes. | Q3: Can the Taxpayer choose partial roll-over relief under Subdivision 124-M of the ITAA 1997 for exchanging their ordinary shares in Entity A for ordinary shares in Buyer Pty Ltd? | A3: Yes. | Q4: Will any financial benefits received under the look-through earnout right, including Buyer Pty Ltd shares, be treated as increasing the capital proceeds from the disposal of shares in Entity A in accordance with section 116-120 of the ITAA 1997, irrespective of the Taxpayer ceasing to be an Australian tax resident after the CGT event occurred, but prior to the payment of the earnout? | A4: Yes. | Q5: Where Subdivision 124-M rollover has been elected by the taxpayer at the time of the original CGT event, will any Buyer Pty Ltd shares acquired as part of the financial benefits received under the look-through earnout right qualify for scrip-for-scrip rollover under Subdivision 124-M of the ITAA 1997? | A5: Yes. | Q6: Where partial rollover has been elected, will the shares provided to the Taxpayer as part of the look-through earnout right be taxable income for the taxpayer at the time the shares are received? | A6: No. | Q7: Will the Taxpayer be exempt from Australian taxation on the alienation of the Replacement Shares? | A7: Yes. | Q8: Will the transaction constitute a scheme to which Part IVA of the ITAA 1936 applies? | A8: No.

Relevant facts and circumstances: Background Facts The taxpayer was born in the Country A. The taxpayer has dual citizenship of the Country A and Australia. The taxpayer and their husband previously lived in the Country A and moved to Australia in 20XX. The taxpayer and their husband had two children in Australia in 20XX. In around 20XX for personal and family reasons, the taxpayer and their husband made the decision to move back to the Country A. The taxpayer lodged income tax returns as an Australian tax resident from 30 June 2010 year to Day X and Month Y 2022. The taxpayer is an Australian citizen and was an Australian tax resident until Day X Month Y 2022. In 2022, the taxpayer, their spouse and their two young children left Australia to reside permanently in the Country A, with no intention of ever moving permanently back to Australia. In 2022, the taxpayer became a Country A domiciled tax resident. The taxpayer and their spouse made the permanent move to Country A primarily for personal reasons. The predominant reason for the move was to be close to the taxpayer's family, including parents and siblings, so their family could receive support from the taxpayer's family. Neither the taxpayer nor their spouse is a member of an Australian Commonwealth superannuation scheme. Assets Disposed of The taxpayer acquired: • 20,000 shares in Entity A in 201x for $ per share; and • another 5,000 shares in Entity A in 201x for $ per share, thereby holding a total of 25,000 shares in the Entity A. The taxpayer's shareholding of 25,000 shares was equal to 25% of all of the shares in the company as at the date of disposal. Entity A is an Australian resident company set up in 20XX. Entity A only has 100,000 fully paid ordinary shares Each ordinary share entitles the shareholder to a proportionate percentage of the voting power in the company, a proportionate percentage of any dividend that the company must pay and a proportionate percentage of any distribution of capital that the company may make. At all times, the taxpayer held their shares on capital account, with a view to deriving dividend income. In relation to the shares, the taxpayer: • did not hold the shares as a revenue asset (as defined in section 977-50 of the ITAA 1997); • did not hold the shares as trading stock (as defined in subsection 995-1(1) of the ITAA 1997); • was not subject to the taxation of financial arrangements (TOFA) rules under Division 230 of the ITAA 1997; and • did not acquire the shares pursuant to an employee share plan. Entity A Entity A is a company which derives the majority of its revenue from royalties received from the licensing of the products it developed. The intellectual property (IP) held by Entity A includes trademarks, patents and key software. There are no other business activities being conducted by Entity A or its related entities in Australia. In the first few years after its establishment, Entity A's business was in the 'start-up phase' of development and did not earn profits. In more recent times, Entity A's business moved into the growth stage of operations, becoming profitable. At least 80% of all Entity A's assessable income was from the carrying on of the business. The assessable income was not derived from an asset to which paragraph 152-40(4)(d) or paragraph 152-40(4)(e) of the ITAA 1997 applies. This is because while the income was comprised largely of royalties paid for the use of its intellectual property, such intellectual property was developed by Entity A 'so that its market value has been substantially enhanced', and thereby falls within the exclusion in subparagraph 152-40(4)(e)(i). Share Sale General In 2021, the shareholders of Entity A entered into a conditional agreement (the share purchase agreement) for the sale of the entire issued share capital of Entity A to Buyer Pty Ltd for cash and shares in Buyer Pty Ltd (initial consideration) and additional consideration payments upon the satisfaction of certain performance targets (earnouts). The negotiations for the share sale started in 201x. At that time, Entity A's record of historical profitability was limited. The sellers were confident that Entity A's business would continue to grow and that the growth in profits of the company will be on the same trajectory as the past growth. The sellers were not willing to sell Entity A using a valuation based on past profits only. The sellers were of the view that valuing the company based solely on historic earnings would undervalue the business given its record of earnings growth in successive years. As such, they negotiated the inclusion of the earnouts with the buyer. In the absence of the earnouts, the sellers would not have sold Entity A. Buyer Pty Ltd was less certain of the future economic performance of the company and consequently unwilling to pay an earnout amount that did not include an appropriate profit target. It also only wanted to pay out a share of any improved economic performance generated by Entity A. This is reflected in the formula expressed in the agreement for the trigger of, and determination of, the amount of the payments under the earnouts. Initial consideration The amount of the initial consideration effectively represented the value of Entity A based on historic earnings. Earnouts The earnouts are divided into 2 payments: • The first is payable if certain EBITDA targets are met by Entity A in relation to year 1. • The second earnout is payable if certain EBITDA targets are met by Entity A in relation to year 2. The first and second additional consideration payments are capped. Other matters - earnouts The earnout payments (unless otherwise agreed with Buyer Pty Ltd) will be satisfied by delivering 30% of the earnout in Buyer Pty Ltd shares, and the remainder in cash. The sale of Buyer Pty Ltd shares by the taxpayer is restricted in a number of ways by the share purchase agreement. This includes an initial 6-month lock-in period, the stipulation that no more than 20% of shares can be sold in any 3-month rolling period, and the requirement that not more than 3% of a shareholders' initial consideration shares could be sold in a single day. Similar restrictions apply for additional consideration shares. The shares in Entity A are not 'taxable Australian property' (TAP) for the purposes of the ITAA 1997. Tax Returns The taxpayer's returns did not disclose CGT event I1, as the taxpayer made a choice to disregard making a capital gain on non-TAP assets held at that time. Stakeholder The taxpayer is not a common or significant stakeholder for the relevant arrangement. This is because they will have neither 30% or more of the voting, dividend and capital distribution rights in Buyer Pty Ltd at the completion of the arrangement; nor 80% or more of the voting, dividend and capital distribution rights in Buyer Pty Ltd between themselves and their associates at the completion of the arrangement. Relevant legislative provisions Income Tax Assessment Act 1997 subdivision 118-I Income Tax Assessment Act 1997 section 116-120 Income Tax Assessment Act 1997 subdivision 124-M Income Tax Assessment Act 1997 section 152-30 Income Tax Assessment Act 1997 section 104-165 Convention between the Government of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains ('UK DTA') Article 13(5) UK DTA Article 23 International Tax Agreements Act 1953 section 4 Income Tax Assessment Act 1936 section 177A Income Tax Assessment Act 1936 section 177B Income Tax Assessment Act 1936 section 177C Income Tax Assessment Act 1936 section 177D


Reasons for decision: Summary: Question 1 Will the look-through provisions in Subdivision 118-I of the Income Tax Assessment Act 1997 (ITAA 1997) apply to the earnout payments payable under the share purchase agreement? Yes. The look-through provisions in Subdivision 118-I of the Income Tax Assessment Act 1997 (ITAA 1997) will apply to the earnout payments payable under the share purchase agreement. | Detailed Reasoning - Detailed reasoning: Subdivision 118-I of the Income Tax Assessment Act 1997 (ITAA 1997) provides the requirements which an earnout needs to satisfy in order to qualify as a look through earnout right. Subsection 118-565(1) provides as follows: A look-through earnout right is a right for which the following conditions are met: a) The right is a right to future *financial benefits that are not reasonably ascertainable at the time the right is created; b) The right is created under an *arrangement that involves the *disposal of a *CGT asset./p> c) The disposal causes *CGT event A1 to happen; d) Just before the CGT event, the CGT asset was an active asset of the entity who disposed of the asset; Note: For extra ways to be an active asset, see section 118-570 e) all of the financial benefits that can be provided under the right are to be provided over a period ending no later than 5 years after the end of the income year in which the CGT event happens; f) those financial benefits are contingent on the economic performance of: (i) the CGT asset; or ii) a business for which it is reasonably expected that the CGT asset will be an active asset for the period to which those financial benefits relate; g) the value of those financial benefits reasonably relate to the economic performance; h) the parties to the arrangement deal with each other at arm's length in making the arrangement. Each of the above requirements is considered in turn below. | Detailed Reasoning - Subparagraph 118-565(1)(a): he condition in subparagraph 118-565(1)(a) is met in this case as the earnout payments: • fall within the scope of the definition of 'financial benefits' under section 974-160, being things of economic value; and • were not ascertainable at the time the right was created. | Detailed Reasoning - Subparagraph 118-565(1)(b): The requirement in this provision is satisfied as the earnout right was created as part of the sale of the Entity A shares which are a CGT asset under section 108-5 of the ITAA 1997. | Detailed Reasoning - Subparagraph 118-565(1)(c): This requirement in this paragraph is satisfied as the disposal of the Entity A shares causes CGT event A1 to happen under section 104-10 of the ITAA. | Detailed Reasoning - Subparagraph 118-565(1)(d): The relevant active asset tests applicable in this case are contained in section 152-40 and section 118-570 (extra ways a CGT asset can be an active asset for the purposes of Subdivision 118-I) of the ITAA 1997. Where the active asset is a share in a company, subsection 152-40(3) requires that the market values of the active assets, the market values specific financial instruments, and cash of the company total 80% or more of the market value of all the assets of the company. The alternative 'active asset' test prescribed in section 118-570 is satisfied in this case for the following reasons: • Paragraph 118-570(1)(a) is satisfied as the taxpayer owned the Entity A shares just before the disposal of the shares. • Paragraph 118-570(1)(b) is satisfied as the relevant assets are shares. • Paragraph 118-570(1)(c) is satisfied as the taxpayer was a CGT concession stakeholder in the company pursuant to section 152-60 of the ITAA 1997, as they were a ' significant individual ' in the company under section 152-55. • Paragraph 118-570(1)(d) is satisfied as Entity A is carrying on a business and had been carrying on the business for a number of years before the date of the disposal. • It was also not a subsidiary member of a consolidated group at the time of the disposal. • Paragraph 118-570(1)(e) is satisfied as: o the assessable income of Entity A for the income year ended 30 June 2020 was more than nil. o At least 80% of that assessable income was from the carrying on of the business, being one involved in the development and subsequent exploitation of intellectual property. o As described in the facts in this ruling, the assessable income was not derived from an asset to which paragraph 152-40(4)(d) or (e) applies. | Detailed Reasoning - Subparagraph 118-565(1)(e): The requirement in this paragraph is satisfied as the earnout payments are to be made within approximately 5 years from the date of the disposal. | Detailed Reasoning - Subparagraph 118-565(1)(f): The requirement as to contingency is satisfied as earnouts are payable only if Entity A meets certain targets that reflect the economic performance of the business. | Detailed Reasoning - Subparagraph 118-565(1)(g): In considering all the circumstances of this case, the value of the financial benefits in this case reasonably relates to the economic performance of the company. | Detailed Reasoning - Subparagraph 118-565(1)(h): The condition that the parties dealt with each other at arms' length in making the arrangement is satisfied in this case. | Detailed Reasoning - Question 2: Will the share consideration received by the taxpayer as part of the look-through earnout be treated as increasing the capital proceeds received under the original CGT event A1 disposal pursuant to section 116-120 of the ITAA 1997? | Summary: Yes, the share consideration received by the taxpayer as part of the look-through earnout will be treated as increasing the capital proceeds received under the original CGT event A1 disposal pursuant to section 116-120 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Section 116-120 of the ITAA 1997 provides the consequences for capital proceeds when disposing of assets involving look through earnout rights. If *CGT event A1 happens because you *dispose of a *CGT asset, your *capital proceeds from the disposal: (a) do not include the value of any *look-through earnout right relating to the CGT asset and the disposal; and (b) are increased by any *financial benefit that you receive under such a look-through earnout right; and (c) are reduced by any financial benefit that you provide under such a look-through earnout right. This is supplemented by paragraph 118-575(a) of the ITAA 1997, under which a capital gain or capital loss arising from a CGT event C2 in relation to the look-though earnout right is disregarded. In this case, pursuant to paragraph 116-120(b): • the CGT A1 event relating to the disposal of the shares occurred on the date on which the share purchase agreement was entered into (paragraph 104-10(3)(a) of the ITAA 1997); and • the capital proceeds from the A1 event are increased by the financial benefit received under the look-through earnout right (being in this case the Buyer Pty Ltd shares, as something ' of economic value ' as per subsection 974-160(1) of the ITAA 1997). | Detailed Reasoning - Question 3: Can the Taxpayer choose partial roll-over relief under Subdivision 124-M of the ITAA 1997 for exchanging their ordinary shares in Entity A for ordinary shares in Buyer Pty Ltd? Summary Yes. | Detailed Reasoning - Section 124-780: Section 124-780 provides as follows: | Detailed Reasoning - 124-780(1): There is a roll-over if: (a) an entity (the original interest holder ) exchanges: (i) a *share (the entity ' s original interest ) in a company (the original entity ) for a share (the holder ' s replacement interest ) in another company; or (ii) an option, right or similar interest (also the holder ' s original interest ) issued by the original entity that gives the holder an entitlement to acquire a share in the original entity for a similar interest (also the holder ' s replacement interest ) in another company; and (b) the exchange is in consequence of a single *arrangement that satisfies subsection (2) or (2A); and (c) the conditions in subsection (3) are satisfied; and (d) if subsection (4) applies, the conditions in subsection (5) are satisfied. The conditions in each paragraph are examined in further detail below. | Detailed Reasoning - Paragraph 124-780(1)(a): This condition is satisfied in this case. The taxpayer exchanges their shares in Entity A for shares in Buyer Pty Ltd as part of the earnout arrangement. | Detailed Reasoning - Paragraph 124-780(1)(b): This condition is satisfied as the exchange is in consequence of a single arrangement that satisfied subsection 124-780(2), which provides as follows: The *arrangement must: (a) result in: (i) a company (the acquiring entity ) that is not a member of a *wholly-owned group becoming the owner of 80% or more of the *voting shares in the original entity; or (ii)a company (also an acquiring entity ) that is a member of such a group increasing the percentage of voting shares that it owns in the original entity, and that company or members of the group becoming the owner of 80% or more of those shares; and (b) be one in which at least all owners of *voting shares in the original entity (except a company referred to in paragraph (a)) could participate; and (c) be one in which participation was available on substantially the same terms for all of the owners of interests of a particular type in the original entity. | Detailed Reasoning - Paragraph 124-780(1)(c): The condition in this paragraph is met in this case, as the requirements in subsection 124-780(3) are satisfied. Subsection 124-780(3) provides as follows: The conditions are: (a) the original interest holder *acquired its original interest on or after 20 September 1985; and (b) apart from the roll-over, it would make a *capital gain from a *CGT event happening in relation to its original interest; and (c) its replacement interest is in a company (the replacement entity ) that is: • (i) the company referred to in subparagraph (2)(a)(i); or • (ii) in any other case - the *ultimate holding company of the *wholly-owned group; and (d) the original interest holder chooses to obtain the roll-over or, if section 124-782 applies to it for the *arrangement, it and the replacement entity jointly choose to obtain the roll-over; and (e) if that section applies, the original interest holder informs the replacement entity in writing of the *cost base of its original interest worked out just before a CGT event happened in relation to it; and (f) if an acquiring entity is a member of a wholly-owned group - no member of the group issues equity (other than a replacement interest), or owes new debt, under the arrangement: • (i) to an entity that is not a member of the group; and • (ii) in relation to the issuing of the replacement interest. The reasons for the satisfaction, in this case, of each of the various conditions in subsection 124-780(3) are as follows: • The taxpayer acquired the Entity A shares after 20 September 1985. • Apart from the rollover, they will make a capital gain from CGT event A1 which happens on the disposal of the shares (paragraph 124-780(3)(b)). • The replacement interest is shares in Buyer Pty Ltd (paragraph 124-780(3)(c)). • The taxpayer has elected to obtain the roll-over (paragraph 124-780(3)(d)). bull; Section 124-782 does not apply as the taxpayer is not a significant stakeholder or a common stakeholder for the arrangement pursuant to section 124-783 (paragraph 124-780(3)(e)). • Under the arrangement, the only interests issued to the sellers 'in relation to the issuing of the replacement interest ' are the Buyer Pty Ltd shares, issued by Buyer Pty Ltd in exchange for the Entity A shares. Consequently, the requirement in paragraph 124-780(3)(f) is met. | Detailed Reasoning - Paragraph 124-780(1)(d): As the taxpayer and Buyer Pty Ltd dealt with each other at arm's length in respect of the purchase of the Entity A shares (see reasons for decision in relation to question 1), neither subsection 124-780(4) nor subsection 124-780(5) apply. Consequently paragraph 124-780(1)(d) has no application in this case. | Detailed Reasoning - Exceptions: Section 124-795 provides as follows: | Detailed Reasoning - 124-795(1): You cannot obtain the roll-over if, just before you stop owning your original interest, you are a foreign resident unless, just after you *acquire your replacement interest, the replacement interest is *taxable Australian property. | Detailed Reasoning - 124-795(2): You cannot obtain the roll-over if: (a) any *capital gain you might make from your replacement interest would be disregarded (except because of a roll-over); or (b) you and the acquiring entity are members of the same *wholly-owned group just before you stop owning your original interest and the acquiring entity is a foreign resident. | Detailed Reasoning - Example:: An example of a capital gain or loss being disregarded as mentioned in paragraph (2)(a) is because the asset is trading stock. | Detailed Reasoning - Note:: A roll-over may be available under Subdivision 126-B in the circumstances mentioned in paragraph (2)(b). | Detailed Reasoning - 124-795(3): You cannot obtain the roll-over for the *CGT event happening in relation to the exchange of your original interest if you can choose a roll-over under Division 122 or 615 for that event. | Detailed Reasoning - Note:: Division 122 deals with the disposal of assets to a wholly-owned company, and Division 615 deals with business restructures. | Detailed Reasoning - 124-795(4): You cannot obtain the roll-over for the *CGT event happening in relation to the exchange of your qualifying interest if: (a) the replacement entity makes a choice to that effect under this subsection; and (b) that entity or the original entity notifies you in writing of the choice before the exchange. None of the exceptions apply in the circumstances of this case. | Detailed Reasoning - Partial rollover relief: As the conditions in section 124-780 are satisfied and none of the exceptions in section 124-795 apply in this case, the taxpayer may choose a roll-over under Subdivision 124-M of the ITAA 1997. The taxpayer may however only obtain a partial roll-over, as the cash components of the consideration payable under the initial consideration and earnouts are ' ineligible proceeds ' under the terms of section 124-790. | Detailed Reasoning - Question 4: Will any financial benefits received under the look-through earnout right, including Buyer Pty Ltd shares, be treated as increasing the capital proceeds from the disposal of shares in Entity A in accordance with section 116-120 of the ITAA 1997, irrespective of the Taxpayer ceasing to be an Australian tax resident after the CGT event occurred, but prior to the payment of the earnout? | Summary: Yes, financial benefits received under the look-through earnout right, including Buyer Pty Ltd shares, will be treated as increasing the capital proceeds from the disposal of shares in Entity A in accordance with section 116-120 of the ITAA 1997, irrespective of the Taxpayer ceasing to be an Australian tax resident after the CGT event occurred, but prior to the payment of the earnout. | Detailed Reasoning - Detailed reasoning: Subsection 116-120(1) provides broadly that the capital proceeds from the A1 disposal do not include the value of any ' look-though earnout right ' relating to the CGT asset and the disposal; and are increased by any financial benefit received under such a right. As the right to the earnouts arising under the share purchase agreement in this case is a ' look-through earnout right ', having satisfied the conditions in subsection 118-565(1) of the ITAA 1997, subsection 116-120(1) applies to the taxpayer in respect of the financial benefits received under the right. Consequently, on the application of subsection 116-120(1)(b), the capital proceeds from the disposal of the shares are increased by the earnout amounts received. | Detailed Reasoning - Question 5: Where Subdivision 124-M rollover has been elected by the taxpayer at the time of the original CGT event, will any Buyer Pty Ltd shares acquired as part of the financial benefits received under the look-through earnout right qualify for scrip-for-scrip rollover under Subdivision 124-M of the ITAA 1997? | Summary: Yes, where Subdivision 124-M rollover has been elected by the taxpayer at the time of the original CGT event, any Buyer Pty Ltd shares acquired as part of the financial benefits received under the look-through earnout right will qualify for scrip-for-scrip rollover under Subdivision 124-M of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: For the reasons provided in relation to Question 3 of this ruling, the Taxpayer may choose partial roll-over relief under Subdivision 124-M of the ITAA 1997 for exchanging their ordinary shares in Entity A for ordinary shares in Buyer Pty Ltd. As the Taxpayer has made an election under paragraph 124-780(3)(d), the Buyer Pty Ltd Shares they receive, including those acquired both as part of the initial consideration as well as those subsequently received under the look-through earnout right, will qualify for scrip-for-scrip rollover under Subdivision 124-M. | Detailed Reasoning - Question 6: Where partial rollover has been elected, will the shares provided to the Taxpayer as part of the look-through earnout right be taxable income for the taxpayer at the time the shares are received? | Summary: No, where partial rollover has been elected, the shares provided to the Taxpayer as part of the look-through earnout right will not be taxable income for the taxpayer at the time the shares are received. | Detailed Reasoning - Detailed reasoning: A roll-over that satisfies the requirements in section 124-780 will be subject to section 124-785 (and section 127-790 in the case of a partial roll-over), which applies to disregard a capital gain made from the original interest. The effect of the roll-over is to defer the recognition of the capital gain until the replacement interests (in this case, the Buyer Pty Ltd shares) are disposed of. As considered in question 3 of this Ruling, section 124-780 applies to both the Buyer Pty Ltd shares received as part of the initial consideration, as well as those received under the earnouts. As a consequence, pursuant to section 124-785 (as modified by section 124-790), the Buyer Pty Ltd shares received by way of the earnouts will not be subject to CGT at the time they are received. | Detailed Reasoning - Question 7: Will the Taxpayer be exempt from Australian taxation on the alienation of the Replacement Shares? | Summary: Yes, the Taxpayer will be exempt from Australian taxation on the alienation of the Replacement Shares. | Detailed Reasoning - Detailed reasoning: In determining liability to Australian tax on income received by a non-resident, reference is made to tax treaties contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). The UK DTA is given force of law by section 5 of the Agreements Act and has application in this case. Article 13 of the UK DTA deals with the alienation of property. Article 13(5) of the UK DTA operates to avoid the double taxation of income received by residents of Australia and the UK; and provides the following at article 13(5): An individual who elects, under the taxation law of a Contracting State, to defer taxation on income or gains relating to property which would otherwise be taxed in that State upon the individual ceasing to be a resident of that State for the purposes of its tax, shall, if the individual is a resident of the other State, be taxable on income or gains from the subsequent alienation of that property only in that other State. The article applies in this case for the following reasons: • Upon the taxpayer ceasing to be an Australian resident, CGT event I1 happens under section 104-160; the consequence of which, broadly, a capital gain or loss arises in respect of each CGT asset owned by the taxpayer (except particular taxable Australian property) just before the time they stop being an Australian resident (the event). • The relevant CGT asset in this case includes the taxpayer's Buyer Pty Ltd shares received under the initial consideration and which they continued to hold just before the time of the event. Shares subsequently paid to the taxpayer under the earnouts do not fall within the ambit of CGT event I1, as they did not own them just before the time of the event. It is noted that item 2 of the table in subsection 115-30(1) of the ITAA 1997, which deems the acquirer of a replacement asset to have acquired the replacement asset ' when the acquirer acquired the original asset involved in the roll-over ' has no application in this regard, for it applies only in respect of sections 115-25, 115-40, 115-45, 115-105, 115-110 and 115-115 of the ITAA 1997. That is, the deeming rule has no application to section 104-160. Any earnout shares acquired after the taxpayer has ceased to be an Australian resident will not be taxable in Australia, for the reason that the shares are not taxable Australian property. • The taxpayer has made an election to disregard the relevant gain or loss pursuant to section 104-165, thereby effectively deferring the taxing point until the earlier of the events specified in subsection 104-165(3). In the meantime, the Buyer Pty Ltd shares which were owned by the taxpayer just before the time of the event are treated as taxable Australian property. As the taxpayer is no longer a resident of Australia but became a domiciled resident of the UK, they will be taxable on the subsequent disposal of their Buyer Pty Ltd shares in the UK pursuant to the article's stipulation that the individual is ' taxable on income or gains from the subsequent alienation of that property only in that other State'. Note that article 13(5) of the UK DTA will override subsection 104-165(3) of the ITAA 1997 by virtue of subsection 4(2) of the Agreements Act. | Detailed Reasoning - Question 8: Will the transaction constitute a scheme to which Part IVA of the ITAA 1936 applies? | Summary: No, the transaction does not constitute a scheme to which Part IVA of the ITAA 1936 applies. | Detailed Reasoning - Detailed reasoning: The starting point for applying the general provisions in Part IVA is the dominant purpose test in section 177D of the ITAA 1936. Section 177D(1) provides: | Detailed Reasoning - Scheme for purpose of obtaining a tax benefit: 177D(1) This Part applies to a scheme if it would be concluded (having regard to the matters in subsection (2)) that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of: (a) enabling a taxpayer (a relevant taxpayer) to obtain a tax benefit in connection with the scheme; or (b) enabling the relevant taxpayer and another taxpayer (or other taxpayers) each to obtain a tax benefit in connection with the scheme; whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers...' Broadly, the three key requirements of subsection 177D(1) are: • a 'scheme', which is given wide definition in subsection 177A(1); • a 'tax benefit in connection with the scheme', as defined in section 177C together with section 177CB; and • the requisite purpose, the subject matter of section 177D. Each of the requirements is considered further below. | Detailed Reasoning - Scheme: Subsection 177A(1) of the ITAA 1936 defines ' scheme ' broadly as follows: 'scheme means: (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and (b) any scheme, plan, proposal, action, course of action or course of conduct...' Paragraph (b) of the above definition extends to unilateral schemes, plans, proposals, actions, course of action or course of conduct: subsection 177A(3). As highlighted in Practice Statement Law Administration PS LA 2005/24 (PS LA 2005/24) Part IVA must be construed as a whole. What constitutes a scheme is ultimately meaningful only in relation to the tax benefit that has been obtained since the tax benefit must be obtained in connection with the scheme. A scheme can comprise a series of interrelated acts by a person or persons over a period of time, or, within a wider scheme there could also be an alternative narrower scheme that meets the requirement of Part IVA. | Detailed Reasoning - Tax benefit in connection with the scheme: The reference in section 177D to the obtaining by a taxpayer of a tax benefit in connection with a scheme is defined in section 177C. Of particular relevance in this case is the following extract from section 177C: | Detailed Reasoning - 'Section 177C Tax benefits: (1) Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to: (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; ... and, for the purposes of this Part, the amount of the tax benefit shall be taken to be: (c) in a case to which paragraph (a) applies - the amount referred to in that paragraph;...' For schemes entered into on or after 16 November 2012, section 177CB also applies in determining the tax benefit. Section 177CB states: | Detailed Reasoning - 'Section 177CB The bases for identifying tax benefits: (1) This section applies to deciding, under section 177C, whether any of the following (tax effects) would have occurred, or might reasonably be expected to have occurred, if a scheme had not been entered into or carried out: (a) an amount being included in the assessable income of the taxpayer;... (2) A decision that a tax effect would have occurred if the scheme had not been entered into or carried out must be based on a postulate that comprises only the events or circumstances that actually happened or existed (other than those that form part of the scheme). (3) A decision that a tax effect might reasonably be expected to have occurred if the scheme had not been entered into or carried out must be based on a postulate that is a reasonable alternative to entering into or carrying out the scheme. (4) In determining for the purposes of subsection (3) whether a postulate is such a reasonable alternative: >• (a) have particular regard to: >• (i) the substance of the scheme; and >• (ii) any result or consequence for the taxpayer that is or would be achieved by the scheme (other than a result in relation to the operation of this Act); but • (b) disregard any result in relation to the operation of this Act that would be achieved by the postulate for any person (whether or not a party to the scheme). It is considered, for the reasons expressed in the ruling and taking into account the circumstances in this case, that no tax benefit can be identified. | Detailed Reasoning - Dominant Purpose: Subsection 177A(5) clarifies that the 'purpose' referred to in Part IVA includes the dominant purpose where there are two or more purposes. Section 177D(1) of the ITAA 1936 requires the matters in subsection (2) to be considered in forming the conclusion as to purpose: 177D(2) For the purpose of subsection (1), have regard to the following matters: (a) the manner in which the scheme was entered into or carried out; (b) the form and substance of the scheme; (c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out; (d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme; (e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme; (f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme; (g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out; (h) the nature of any connection (whether or a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f). Although the section requires the Commissioner to have regard to each of the eight matters in subsection 177D(2) in reaching an objective conclusion about purpose, not all of the matters will be equally relevant in every case. Having regard to the form, substance and effect of the steps of the scheme as a whole, and for the reasons expressed in the ruling, it is considered that the scheme is not tax-driven but is motivated by commercial and personal reasons. As such, the purpose requirement in section 177D is not met; and the transaction will not constitute a scheme to which Part IVA of the ITAA 1936 applies.

Assumption: The taxpayer has elected the scrip-for-scrip roll-over available to them under paragraph 124-780(3)(d) of the ITAA 1997.