Disposal date critical for CGT small business concessions
The Administrative Appeals Tribunal (AAT) has decided that a CGT asset was disposed of for the purposes of CGT event A1 when a “heads of agreement” was executed, and not when the formal contract of sale was executed.
Background
The taxpayer made a capital gain of $704,129 when he sold his interest in a business. He claimed he was eligible for the CGT small business concessions which, when applied along with the general 50% CGT discount, reduced the assessable capital gain to nil.
The crucial question was: when did CGT event A1 happen? Was it when the taxpayer, his business partner and the purchaser executed a ”heads of agreement” on 7 August 2008, or when the contract of sale for the business was executed on 17 December 2008? If the earlier date applied, the taxpayer would not be entitled to access the CGT small business concessions because he did not satisfy the maximum net asset value test just before that date (as required by s 152-15 of the ITAA 1997).
The opening clause of the heads of agreement read as follows:
The Vendor [ie the taxpayer and his business partner] agrees to sell to the Purchaser and the Purchaser agrees to purchase from the Vendor, the Vendor’s interest in the … business described in the First Schedule below on the terms and conditions set out in such schedule.
The heads of agreement was expressed to be “subject to and conditional upon” various matters and contained a clause stating that “[t]he Vendor and the Purchaser will as soon as practicable execute a formal Contract of Sale”. The heads of agreement also stated that the parties “hereby agree to be bound by the terms of this Heads of Agreement”.
The contract of sale was a standard document, which dealt in more detail with matters included in the heads of agreement. The evidence indicated that, following the execution of the heads of agreement, there were protracted negotiations between the parties’ legal representatives before final agreement was reached on the terms of the contract of sale.
There was also evidence that it was a long-standing practice in the particular industry concerned for an intending purchaser and vendor to enter into an “in-confidence” period of exclusivity during which the intending purchaser would use professional advisers to carry out due diligence. This practice was embodied in a variety of documents, often called a heads of agreement. The parties to a heads of agreement would be aware that it conferred rights to exclusive dealings and obliged confidentiality, and if the purchaser chose to proceed with the sale, the parties would be required to enter into a contract of sale. It was also industry practice that a party who had signed a heads of agreement could walk away at any time if dissatisfied with the results of a due diligence enquiry.
Decision
The AAT decided that, despite evidence suggesting that the industry did not regard a heads of agreement as a binding contract, there was little doubt that the parties to the heads of agreement had agreed to the sale and purchase of the business in question. The heads of agreement was a binding contract and not simply, as submitted by the taxpayer, “an agreement to agree”. The AAT added that the agreement reached by the parties to the heads of agreement was not conditional upon the execution of the formal contract of sale. The condition in the heads of agreement that the parties would execute a formal contract of sale did not mean that there was no binding agreement until such time as the formal contract of sale was executed.
Accordingly, the AAT held that the CGT asset in question (the taxpayer’s interest in the business) was disposed of for the purposes of CGT event A1 on 7 August 2008 when the heads of agreement was executed.
Re Confidential and FCT [2013] AATA 76, www.austlii.edu.au/au/cases/cth/AATA/2013/76.html.
