In a surprising turn of events, the AAT recently held in Confidential and Commissioner of Taxation  AATA 76 that the date of disposal of a CGT asset occurred on the date that the Heads of Agreement was executed, rather than the date when the Contract for sale was executed some time later.
This may have an impact on the tax you pay because the taxing date has changed to an earlier date and your circumstances as at that date will determine your eligibility for CGT concessions.
In this case, the taxpayer had sold their interest in a business and used the capital gains tax small business concessions to reduce their capital gains tax liability from $704,129 to nil. At the date of the contract for sale, the taxpayer qualified for the small business tax concessions, but at the date of executing the heads of the agreement, they did not. As a result of the AAT’s decision to alter the date of disposal, the taxpayer no longer qualified for the small business tax concessions and the Commissioner subsequently issued a notice of assessment for the full capital gain including a notice of assessment for shortfall penalty.
The AAT Member in this case placed a big emphasis on the fact that the vendor and purchaser had made it very clear that they were intent on carrying through with the sale of the business (even at the Heads of Agreement stage) and also explicitly stated they wished to be bound by the Heads of Agreement. As the Heads of Agreement contained all the essential terms of the sale contract, the AAT Member considered it to be a binding contract.
This was despite the possibility that the Heads of Agreement had been signed, but either party can walk away at any time if unsatisfied with the results of due diligence (carried out by professional advisers) or some other event that the parties are awaiting upon.
Just bear this in mind next time you sign a commercial agreement – it might affect the tax you need to pay!! Always seek professional advice before signing any legal document.
The Quinn Group has the expertise to help you draft your agreements and plan your taxes. For more advice on taxes and contracts, contact our team of experienced tax lawyers by submitting an online enquiry or calling us on 1300 QUINNS to book an appointment today.