Income Tax Assessment Act 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES  

PART 3-1 - CAPITAL GAINS AND LOSSES: GENERAL TOPICS  

Division 118 - Exemptions  

Subdivision 118-I - Look-through earnout rights  

SECTION 118-565   Look-through earnout rights  

Look-through earnout rights - main case

118-565(1)    
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;

(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 relates to that economic performance;

(h) the parties to the arrangement deal with each other at *arm ' s length in making the arrangement.

Matters affecting the 5-year maximum period

118-565(2)    
The condition in paragraph (1)(e) is not met, and is treated as never having been met, for the right if:

(a) the *arrangement includes an option to extend or renew the arrangement; or

(b) the parties to the arrangement vary the arrangement; or

(c) those parties enter into another arrangement over the *CGT asset or a business for which it is reasonably expected that the CGT asset will be an *active asset;

so that a party could, or does, provide *financial benefits under the right (or one or more equivalent rights) over a total period ending later than 5 years after the end of the income year in which the *CGT event happens.

118-565(3)    
For the purposes of paragraph (1)(e) or subsection (2), in working out the period over which *financial benefits under a right can be provided, disregard any part of an *arrangement that allows for an entity to defer providing such a financial benefit if:

(a) the deferral is contingent on an event happening that is beyond the control of the parties to the arrangement; and

(b) the deferral cannot change the amount of any financial benefit provided, or to be provided, under the right; and

(c) when the arrangement is entered into, the contingent event is not reasonably expected to happen.

Look-through earnout rights - rights for ending other rights

118-565(4)    
A look-through earnout right is a right to receive one or more future *financial benefits that:

(a) are for ending a right to which subsection (1) applies; and

(b) are certain.

Note:

This subsection will not apply if the old right ends as described in subsection (2), as subsection (2) causes the old right to be treated as if it had never been a right to which subsection (1) applies.