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Stacey Grose

Agents, brokers, vendors and purchasers need to be careful when drafting and signing Heads of Agreement.  Recent cases suggest that the execution of a Heads of Agreement may trigger a disposal for the purpose of CGT event A1.



The Administrative Appeals Tribunal (AAT) has held that the disposal of the taxpayer's interest in a business for the purposes of CGT event A1 occurred when the Heads of Agreement was executed, not when the contract of sale of business was executed.


The taxpayer sold his interest in a business and claimed the small business active asset exemption and the small business retirement exemption to reduce a net capital gain of $704,129 to $0 in the 2009 income year. The Commissioner issued the taxpayer a notice of assessment which included a capital gain of $704,129 in his taxable income for the 2009 income year, as well as a notice of assessment for shortfall penalty, and disallowed the taxpayer's objection to the assessment.


The parties agreed that CGT event A1 occurred when the taxpayer disposed of his interest in the business, but disagreed on when the disposal contract was entered into, as the Heads of Agreement was executed on 7 August 2008 followed by the execution of the contract for the sale of the business on 17 December 2008.


The date on which the disposal of the asset occurred was critical because to be eligible for the small business relief under Division 152-A of the Income Tax Assessment Act 1997 (ITAA 1997), the applicant must satisfy the maximum bet asset value test just before the CGT event. The taxpayer contended that the disposal took place sometime after the parties had agreed to the terms and conditions under a formal contract of sale, while the Commissioner contended that the disposal occurred at the time the parties entered into a Heads of Agreement on 7 August 2008.


The AAT was of the view that the Heads of Agreement document was legally binding on the parties upon its execution, as it contained a clause expressly stating that the parties agreed to the sale and purchase of the business and agreed to be bound by its terms. The fact that there was a special condition which provided that the agreement was "subject to and conditional upon" the parties executing a formal contract of sale as soon as practicable did not negate the existence of a binding legal agreement.


Therefore, the AAT found that the disposal of the taxpayer's CGT asset comprising his interest in the business occurred on 7 August 2008.