Published: 17 March 2007.

Leading up to the end of each financial year, there are many Managers who wish to sell their management rights, however for tax and other reasons do not wish to do so until the start of the next financial year.

Likewise there are also many Buyers out there who wish to purchase management rights, however would prefer that the acquisition occurs in the following taxation year.

There are many perceived avenues open to such persons, which can be summarised as follows:

(a) Sign the Contracts after 1 July

This strategy involves allowing the Contracts to remain unsigned until the 1st July in order to delay the Capital Gains Tax implications, or to provide better tax concessions in the following year. There is an inherent risk in following this strategy. In the case of Sellers, your finding of a suitable Purchaser, who is able to pay the purchase price, will be put on the backburner until the 1 July meaning that you may lose that prospective purchaser. Further if you enter into the Contract now then you may lose out on potential Capital Gains Tax savings and providing for that income in the next taxation year.

As a Buyer by not signing the Contract now, you may lose the right to buy that property as another Buyer may come along and present a higher offer.

(b) Enter into an offer and acceptance or heads of agreement

The problem with this strategy is that an Offer and Acceptance or Heads of Agreement are not binding, as generally they are reliant on the parties entering into a formal Contract at a later date. Case law on this would strongly suggest that the Offer and Acceptance or Heads of Agreement is merely an intention of the parties to, at a later date, enter into a Contract, and therefore are not binding.

(c) Enter into a Contract now, but don’t settle until after 1 July.

The main problem with this strategy is that there will still be Capital Gains Tax implications. The Tax Office considers that the Capital Gain was made at the date, which the Contracts were entered into. Therefore if the date of the Contract is prior to 1 July, the Capital Gain was received on the date the Contract was formed.

The Solution

The ideal way to avoid all these pitfalls is for the parties to enter into an agreement, which is known as an “Option Deed�.

These Deeds can give the Buyer the right, but not the obligation, for a short period of time to buy a Management Rights business for a price and on other conditions agreed upon now.

A Put Option gives the “Seller� the right, but not the obligation, to sell a Management Rights business for a price and on other conditions agreed upon now.

A Put and Call Option Deed gives each party the right to sell and the other party the right to buy the business on terms and conditions which have already been agreed upon. This means that almost always, one party will exercise their Option and therefore there is very little risk the sale will not proceed.

Usually this Option Deed is given to a Buyer for a small Option Fee. That fee is usually deductable from the sale price of the business if the sale goes ahead.

The benefits of entering into an Option Deed are twofold. Firstly the Seller gets to sell their business for an agreed amount, however does not attract a Capital Gain until the actual Contract is entered into (after the Option has been exercised).

Secondly the Buyer gets to tie up a property at a price and on terms agreed upon, effectively taking that property off the market. Further if the Buyer believes that they have obtained the business below market value, then the Buyer can include or incorporate a provision into the Option Deed, allowing the Buyer to assign the rights of that Option to another person. The benefit of this to the Buyer is that the Buyer only pays stamp duty on the Option Fee, rather than the contract price.

It may appear a little confusing, however with proper experienced legal advice, the Option Deed can be a significant tool in your armoury, to enable you to think outside the square in purchasing or selling Management Rights businesses.

Like any legal document or strategy implemented, it is important that good legal, financial and accounting advice is obtained, to ensure that the Option Deed is suitable to your needs.

Clayton Glenister
McDonald Balanda & Associates
clayton@mba-lawyers.com.au

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