The small business capital gains tax concessions are valuable to many SMEs. They can reduce the value of capital gains on which tax must be paid. However, there are tricks and traps involved in obtaining those concessions.
A recent case before the Administrative Appeals Tribunal illustrates the point and provides a valuable reminder to SMEs of the importance of dates when an asset is sold.
The AAT decided that a CGT asset was disposed of for CGT purposes when a Heads of Agreement was executed and not when the formal Contract of Sale was executed. So what, you say! Well, this meant the taxpayer could not access the CGT small business concessions because when the Heads of Agreement was executed, he did not satisfy certain conditions.
The taxpayer had an interest in a business in Melbourne and in 2008 he decided to sell his interest in that business. He made a capital gain of $704,129 when he sold his interest in the business. He claimed he was eligible for the CGT small business concessions which, when applied along with the general 50% CGT discount, reduced his assessable capital gain to nil.
Sounds good so far, but there’s more.
The Tax Commissioner reviewed the man’s 2009 tax return and determined that his capital gain of $704,129 was to be included in his assessable income.
The crucial question was when did the CGT event happen – when the taxpayer, his business partner and the purchaser executed a Heads of Agreement on August 7, 2008 or when the Contract of Sale of Business was executed on December 17, 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 the tax law requires.
The Heads of Agreement recorded that the taxpayer and his business partner would sell their interests in the business to the purchaser on the terms and conditions set out in the schedule to the agreement.
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 Agreement also stated that the parties “hereby agree to be bound by the terms of this Heads of Agreement”.
A schedule in the Heads of Agreement identified the name and location of the business as well as the value of goodwill, fixtures, fittings and equipment, and estimated stock at valuation, totalling $5,850,000.
It stated a deposit of $20,000 was payable on the signing of the Heads of Agreement and a further $20,000 (described as the balance of the deposit) was to be paid on the signing of the formal contract.
The residue of the purchase price was to be paid for goodwill, fixtures, fittings and equipment plus a further amount on account of stock in trade on or before the settlement date. The balance of the purchase money for the stock was to be paid within 10 days from the date when copies of the stock sheets were delivered.
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Terry Hayes is the editor-in-chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.
