QHA-Review_April_Digital

LEGAL MATTERS with Curt Schatz
OPTION AGREEMENTS
QHA REVIEW | 28
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 20 September 1985, the Federal Government
bought in the wonderful capital gains tax.
This tax is hefty, and while 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 1 April 2024, but the options may
not be exercised until at least 1 July 2024, then the
contracts don’t come into existence until the exercise
of the option which cannot occur until 1 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.