A tax indemnity is a contractual promise to cover specified tax liabilities or losses. In a share sale, it may allocate responsibility for tax connected with the period before completion to the seller. The agreement determines its scope.
It is separate from a warranty that the company’s tax affairs are in order. The two provisions may cover related matters but have different triggers, limits and claim procedures.
What tax is being covered?
Check the relevant entities, periods and events. Identify how the clause treats a period that spans completion and whether the price or accounts already allow for the liability.
Read the definition of tax and the losses being covered. Do not assume the heading tells you whether interest, penalties or the costs of dealing with a claim are included.
Which exclusions and limits matter?
Questions for the seller’s lawyer and tax adviser include:
- Could the buyer’s actions after completion create or increase a claim?
- Is a liability already reflected in the price, or recoverable elsewhere?
- How do caps, time limits and notice requirements apply to this indemnity?
- Does the agreement prevent recovery of the same loss more than once?
These are points to negotiate in the actual agreement. There is no universal cap or claim period that can be assumed from the term “tax indemnity”.
Who deals with a tax enquiry?
The conduct provisions can be as important as the payment obligation. Check who receives notices, supplies records, communicates with the authority and decides whether to challenge or settle a matter. Consider what information and cooperation the seller will need after leaving the company.
The indemnity allocates risk between the parties; it does not replace the relevant tax obligations. The ATO’s record-keeping guidance when selling or closing a business is useful background on why records may still be needed after a sale. It does not prescribe the terms of a tax indemnity.