Australia: Application of taxation of financial arrangement rules to earn-outs (Federal Court decision)
A Federal Court decision concerning the application of taxation of financial arrangement rules to earn-outs.
Application of taxation of financial arrangement rules to earn-outs
The Federal Court on May 14, 2024, held that the taxpayer was not entitled to deduct losses with respect to an earn-out arrangement entered into by the taxpayer in connection with a sale of shares under the taxation of financial arrangements (TOFA) rules in effect for the tax year in question, but implied that the taxpayer could be entitled to such losses in subsequent tax years after the TOFA rules were amended.
The case is: Merchant v. Commissioner of Taxation (2024) FCA 498.
Summary
The taxpayer sold shares under an agreement providing for various earn-out amounts contingent on future events, such as certain capital expenditure approvals, the supply of more than stated volumes of product to customers, and gross sales above certain levels. When no amounts were payable under the earn-out arrangement, the taxpayer claimed the right to deduct losses under the TOFA rules.
The Federal Court found that the TOFA rules in effect in 2015, which was the tax year at issue in the case, did not apply to the taxpayer’s earn-out arrangement because it came within the earn-out exception as then drafted. The earn-out exception to the TOFA rules was amended in 2016, however, such that it could have applied to the taxpayer’s earn-out arrangement in subsequent years.
For more information, contact a KPMG professional in Australia:
Julian Humphrey | jrhumphrey@kpmg.com.au
James Macky | jmacky@kpmg.com.au
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