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 used 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 were 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 Sale Contract. It was also industry practice that a party which had signed a Heads of Agreement could walk away at any time if dissatisfied with the results of a due diligence enquiry.
The AAT decided that despite evidence suggesting the industry did not regard a Heads of Agreement as a binding contract, there was in its view 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 said the final document agreed to by the parties clearly gave effect to the terms set out in the Heads of Agreement.
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 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 August 7, 2008 when the Heads of Agreement was executed.
As I mentioned above, the date on which the disposal of the asset occurred was critical because, to be eligible for the small business relief under the tax law, the taxpayer must satisfy the maximum net asset value test just before the CGT event i.e. the sale of the business. Because the taxpayer did not satisfy that test just before August 7, 2008, he was unable to claim the CGT small business concessions.
The Commissioner’s tax assessment was upheld and the taxpayer would be required to pay tax on his $704,129 capital gain. Of course, the taxpayer may seek to appeal the AAT decision, but the case reminds SMEs to be very careful of dates when contracting to sell assets in relation to which the CGT small business concessions might be sought. In this case before the AAT, four-and-a-half months made all the difference!
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.
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.
