Whether we are individuals looking to make a purchase or a business trying to get our balance sheet right, the end of financial year provides a number of opportunities and challenges in relation to our tax obligations, particularly in managing tax liabilities against cash flow.
In a property context, one of the common taxes that sellers wish to defer is capital gains tax.
Capital Gains Tax – What is it and when do I have to pay it?
Capital gains tax is calculated and payable on profits made on the sale of certain property.
A CGT event is the event that triggers the capital gain or loss and occurs at the date of signing a contract for the sale of property and not at the date of settlement. For this reason, sellers may want to avoid entering into a contract leading up to 30 June otherwise they may be liable for capital gains tax in that current financial year and before settlement actually occurs.
So, how can I avoid entering into a Contract but still secure my Buyer?
A put and call option agreement (put simply) is a document whereby a prospective purchaser and a seller of a property enter into an agreement to execute a contract of sale at a later date.
Typically, the parties will lock in the purchase price and other essential terms of the transaction and the buyer will pay some form of a deposit upon entering into this agreement. However, the key takeaway is that the parties do not enter into a formal contract of sale until such time as the call option or put option is exercised. This can secure the sale of property now but without triggering the CGT event until a later date.
Conclusion
There are many other reasons why a put and call option agreement might be relevant to you when purchasing or selling property. Whilst these agreements are not in itself a contract of sale, they are binding in nature and create strict obligations on the parties. As such, it is important to ensure that any agreement is properly drafted and is favourable to your rights whether that be as a seller or buyer.
Get in touch
If you have any questions about a put and call option agreement or would like to discuss strategies around tax time, our property and private advisory team at Redchip will be happy to assist.
Please contact one of our lawyers on 07 3223 6100 or email redchip@redchip.com.au.
