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A recent Administrative Appeals Tribunal (AAT) case illustrates the requirement to seek quality accounting and legal advice before contemplating the sale of your business.

The 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.

The heads of agreement was poorly drafted including clauses such as "the Vendor agrees to sell to the Purchaser and the Purchaser agrees to purchase from the Vendor, the Vendor's interest in the … business ... on the terms and conditions set out in the Schedule" and that the parties "agree to be bound by the terms of this Heads of Agreement." The document was expressed to be "subject to and conditional upon" various matters and contained a clause stating that the parties "will as soon as practicable execute a formal Contract of Sale."

The AAT decided that the Heads of Agreement was a binding contract which was not conditional upon the execution of the formal Contract of Sale. It was not, as submitted by the taxpayer, simply "an agreement to agree," notwithstanding evidence that it was industry practice to enter into non-binding Heads of Agreement to facilitate the sale of a business.

In this particular case, by the timing of the contract being the earlier date of the signing of the heads of agreement, the taxpayer failed the 'maximum net asset test' which meant he could not access the small business CGT concessions and therefore paid more tax on the disposal than he otherwise would have.

If the taxpayer had sought quality tax advice up front, the taxpayer could have restructured his affairs before entering into a heads of agreement to ensure that he was able to access the CGT concessions. We often come across new clients that have either failed to seek advice, or received poor advice before entering transactions with the result that they pay too much tax, or pay tax too early as a result of the transaction. In some circumstance if we are instructed by a client after the transaction has occurred (eg execution of a contract) it is too late for us to assist.

Accordingly, we recommend clients seek our advice before entering into any major or new transactions to ensure the minimum legal amount of tax is payable.

This article was published in the Autumn 2013 Horizon. For a pdf version of the newsletter please click here.