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Overview:

Business Succession Agreements

 

Types of Agreement:

Types of Agreement

Cross Ownership:

Cross Ownership

Self Ownership:

Self Ownership

Related Party Vendors

Deemed Dividends

Risks If No Agreement

Trust Ownership:

Trust Ownership

Tax Implications

"Business Family Will"

Changing Needs

Benefits

Choice of Trustee

Super Buy/Sell

 

Drafting Issues:

Put Options

Call Options

Put and Call Options

Conditions Precedent

Put and Call Options vs. Conditions Precedent

 

Other Issues:

Pre-Agreed Purchase Price

Inadequate Insurance Proceeds

Trauma Buy/Sell Strategy

Simultaneous Deaths

 

Debt Reduction Agreement:

Debt Reduction Agreement

 

 

 

 

 

 

 

 

 

 

Put and Call Options vs. Conditions Precedent

 

The drafting of Business Succession Agreements must take into account the tax implications of the disposal of the Proprietor's Equity.

This affects the "trigger events" that result in an obligation to buy and sell the Equity upon the occurrence of an Insured Event.

The drafting of the "trigger event" provisions affects the Date of Disposal of the Equity for CGT purposes and therefore the date upon which any CGT is payable.

 

Date of Disposal for Capital Gains Tax Purposes

The date of Disposal for CGT purposes is the date of contract, not the date of disposal.

Most Business Succession Agreements traditionally provided that, if an Insured Event occurred, there would be a sale of the Equity.

When CGT was first introduced, many Lawyers and Advisers were concerned that CGT might be imposed on a sale of the Equity at the date of execution of the Business Succession Agreement, even though no Insured Event or actual sale had occurred yet.

 

Drafting Alternatives

There are two alternative methods of drafting that effectively postpone the date of disposal for CGT purposes:

Put and Call Options

Click here to read about Put and Call Options.

Conditions Precedent

Click here to read about Conditions Precedent.

 

ATO Interpretative Decisions

The ATO has accepted that both methods work, as long as they are drafted properly.

The drafting is actually quite sophisticated.

Unfortunately, it is not enough to simply provide that, if an Insured Event occurs, there will be a sale of the Equity.

Put and Call Options

Click here to see the ATO's views with respect to Put and Call Options.

Conditions Precedent

Click here to see the ATO's views with respect to Conditions Precedent.

 

Comparing the Alternatives

Put and Call Options require a party to know it has an Option and then to exercise it within the required time.

The Contract of Sale will only be created when the Option has been exercised.

However, in the case of a Death or Disability, there can be delays in locating a valid Will, identifying the Executor (or Trustee or Attorney in the case of a Disability), becoming aware of the existence of the Option and exercising it.

This can frustrate the intention of the Option and prejudice the interests of the parties.

In the case of Conditions Precedent, the Contract of Sale will be created automatically upon the occurrence of the Insured Event.

There is no need to exercise an Option.

Therefore, a party cannot be prejudiced by their ignorance of the existence of the Option.

 

IGS Drafting Preferences

IGS prefers Conditions Precedent where possible, because it is not necessary for one of the parties to physically exercise an Option.

However, the use of Conditions Precedent will incur stamp duty in NSW, SA, WA and NT.

IGS uses Put and Call Options in these jurisdictions.

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

"Conditions Precedent" and "Put and Call Options" are just methods of legal drafting that postpone the date of disposal of the Equity in the Business from the date of the Business Succession Agreement to after the date of occurrence of the Insured Event.

If correctly drafted, both methods are acceptable to the ATO.

See more Adviser Tips

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