In terms of tax rulings, the last ATO pronouncement was Draft Taxation Ruling TR2007/D10. This Draft Ruling was released on 17 October 2007 however it appears unlikely that this ruling will ever be finalised given, as part of the 2010 Federal Budget, it was announced there would be proposed arrangements to so-called 'qualifying earn out arrangements'. The proposed arrangements were expanded upon in a discussion paper released by Treasury on 12 May 2010. There is also a subsequent administrative announcement by the ATO and hence remains in force.
The 'look through' approach outlined in the Treasury paper represents a positive development as all payments are treated as related to the sale (or purchase) of the asset being disposed of (being either shares or business assets). Historical treatment created the fiction of an 'earn out right' in respect of which tax might be payable even though no cash is received. However the discussion paper is largely silent on a whole series of issues. Currently, there does not appear any likelihood to seeing draft or final legislation in respect of earn outs in the near future.
In any transaction involving an earn outs it is key that vendors and purchasers look to understand each other’s position early to ensure issues do not arise which may jeopardise the transaction.