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Overview: Business Succession Agreements
Types of Agreement: Cross Ownership: Self Ownership: Trust Ownership:
Drafting Issues: Put and Call Options vs. Conditions Precedent
Other Issues:
Debt Reduction Agreement:
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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.
Clover Law Drafting Preferences Clover Law 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. Clover Law uses Put and Call Options in these jurisdictions. |
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.
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