Date of disposal occurred when Heads of Agreement signed
In what seems a surprising result, the Administrative Appeals Tribunal (AAT) has held that the date of disposal of an asset for CGT purposes was the date the Heads of Agreement was signed, not when the contract was signed four months later.
The Facts of the Case
The taxpayer had an interest in a business in Melbourne which he decided to sell in 2008.
The taxpayer, his partner, and the purchaser executed a Heads of Agreement on 7 August 2008, which commenced by stating:
“The Vendor agrees to sell to the Purchaser and the Purchaser agrees to purchase from the Vendor, the Vendors interest in the … business described in the First Schedule below on the terms and conditions set out in such schedule”
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 Contract of Sale of Business was provided to the purchaser’s lawyers on 9 December 2008, and appeared to have been executed by the purchaser on 17 December 2008.
The date was crucial to the taxpayer because, if the earlier date applied, he would not be entitled to access the CGT small business concessions, as he did not satisfy the ‘maximum net asset value test’* just before that date.
(*) The threshold for this test is currently $6 million.
On the basis the disposal occurred in December 2008, the taxpayer claimed the small business active asset exemption and the small business retirement exemption to reduce the net capital gain of $704,129 to zero, but the ATO did not accept this.
The AAT’s Decision
The AAT Member stated that the question was whether the Heads of Agreement was a legally binding document between the vendors and the purchaser which bound the parties to the disposal and acquisition of the business in question.
“In my opinion,” he said, “the Heads of Agreement document in this matter leaves little room for doubt that the parties to that document had agreed to the sale and purchase of the business in question.”
“At this point, it is worthwhile noting that the Heads of Agreement document makes it very clear that the vendors and the purchaser had agreed to the sale of the business as the document expressly states that to be the case. . .”
“I have found that the Heads of Agreement was legally binding on the parties upon its execution. Furthermore, by that agreement, the parties agreed to the sale and purchase of the business. In other words, I have found that the disposal of the taxpayer’s CGT asset comprising his interest in the business occurred on 7 August 2008.”