Private ruling: Income tax earnout rights
Date of advice: 10 December 2020
Published: March 2021
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: 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? | A1: 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

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