Pub Transactions Part III – Capital Gains Tax

As featured in the latest edition of the QHA Magazine

More recently in my articles, and also at the recent QHA Symposium, I have been looking at some of the important aspects to be considered when being involved in a pub transaction.

On the 20th September 1985, the Federal Government bought in the wonderful capital gains tax.

This tax is hefty and whilst there are certain concessions available in relation to “rollover relief”, which attaches to particular types of holding entities and/or periods of retention prior to disposal, by and large it’s 49% on the gain.

What is not commonly known is that the capital gains tax liability arises each time there is a capital gains tax event.  A disposal of an asset which is subject to capital gains tax is such an event. 

What is a disposal?

The answer is that the contract which is entered into by the parties is such a disposal event by the seller and in the event that the asset sold under the contract is transferred (in other words the contract settles), then capital gains tax is payable in the financial year that is relevant to the date of the contract.  In other words, it is the date of the contract that formulates the capital gains tax liability.

If you are a seller and you are looking to get a binding agreement with a buyer in a particular financial year but would prefer to defer the creation of the contracts to postpone the capital gains tax liability, then the most commonly used mechanism is either a Put Option, a Call Option or a Put and Call Option.

Types of Agreements

Firstly, let’s consider these different types of agreements.

A Call Option is an option granted to a buyer to exercise based on the conditions of the Option Agreement including the timeframe during which a Call Option can be exercised.

A Put Option is the same type of grant, but in favour of the seller.

You would have heard the term Put and Call Option, and this is an agreement where the buyer and the seller have independent rights to exercise a purchase or a sale by giving notice.

The important part to the capital gains tax deferral is the fact that the Option Agreement can be drafted such that the Call Option and/or the Put Option may not be exercised until a certain date.

For example, if the parties enter into the Put and Call Option Deed on the 1st April 2024, but the options may not be exercised until at least the 1st July 2024, then the contracts don’t come into existence until the exercise of the option which cannot occur until the 1st July 2024 or later.

This pushes the capital gains tax liability out to the following financial year.

Binding Parties to an Agreement

Lastly, you may be concerned an Option Agreement is not as binding on the parties as a formal contract.

The Option Agreement will have annexed to it the contract/s in final and agreed form (but unexecuted), and the parties will confirm in the Option Agreement that upon the exercise of the Call or Put, and even if a party to the Option Agreement refuses to sign the contract, that the party refuses to sign the contract is equally as bound to it as if they had signed that contract.

Of course, security for such performance in the form of money, bank guarantees or other security can be requested by either party from the other to secure the promise to settle the contracts in the event that the Put or Call Options are exercised.

We always insist that clients speak to their accountants about these mechanisms because we are never as familiar with our clients’ personal financial affairs as your accountant and on that basis, this article represents statements of general principal as opposed to the specific advice.

“The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.”
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