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About Patrick Cussen

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So far Patrick Cussen has created 13 blog entries.

Business restructuring and share buy-backs

When a shareholder in a company wishes to leave, and the remaining shareholders are happy for this to occur, basically there are two ways the separation can occur:

  • The remaining shareholders can purchase the shares from the departing shareholder; or
  • The company can buy back its shares.

The tax implications for the company, the departing shareholder and the remaining shareholders from these two approaches are very different.

 

Transfer of shares

With a transfer of shares, there is a CGT event for the departing shareholder, and the remaining shareholders must find funds for the purchase.

With the general CGT discount, the effective tax rate for the departing shareholder on the CGT event should not exceed 23.5%.

The major issue in this approach is how the remaining shareholders fund the acquisition.  Ultimately the remaining shareholders will need to fund the acquisition from after-tax funds.

If the shareholders are on the top marginal rate of tax, they will need to generate income of $1.89 to pay each $1 of purchase price.

If the company has retained profits, the remaining shareholders may wish to use the company’s funds for the acquisition of the shares.  After taking account of the imputation credits, a shareholder on the top marginal rate of tax will need $1.37 of dividends to pay each $1 of purchase price.

Where there is a transfer of shares, effectively there is double taxation – tax on a capital gain for the departing shareholder that reflects the departing shareholder’s proportionate share of the retained profits and tax on a dividend received by the remaining shareholders on the distribution of those retained profits.

 

Share buy-back

If the company undertakes a buy-back of shares there will be a CGT event and a deemed dividend for the departing shareholder, and the company will use its funds to undertake the buy-back.

On a share buy-back, that part of the proceeds that does not represent a return of share capital of the company is deemed to be a dividend that can be franked.

If the departing shareholder receives funds by way of share buy-back, the effective tax rate for the departing shareholder should not exceed 26.9%.

The company should need just $1 of its retained profits to fund each $1 of share buy-back proceeds.

 

Other considerations

The rules relating to share buy-backs in the Corporations Act are very prescriptive.  It is important that the share buy-back is carried out in accordance with those rules.

We have acted for a number of clients who have undertaken restructures of companies using share buy-backs.  Please call Patrick Cussen or Rob Warnock to discuss the tax implications of such restructures and Patrick Cussen to discuss the procedures to implement share buy-backs.

By |July 31st, 2019|News|0 Comments

Proposed changes to duty for property developers

Following the recent State budget, the Victorian government has introduced proposed amendments to the Duties Act 2000 that are likely to have a major impact on property developers.

The State Taxation Acts Amendment Bill 2019 contains provisions that operate so that developers will be required to pay duty where they acquire an “economic entitlement” in land in Victoria valued at more than $1 million.

There currently are such provisions where a person acquires an interest of 50% or more in such land.

Under the proposed changes, a person will be assessed to duty as if the person has acquired an interest in underlying property if the person will be directly or indirectly entitled to participate in:

  • the income, rents or profits;
  • the capital growth;
  • the proceeds of sale;

related to the property.

The duty liability also arises if the person is entitled to receive any amount determined by reference to those amounts or to is entitled to acquire any entitlement to any of those amounts.

These provisions may affect you or your clients looking to engage in any arrangement involving the development of property.

Please call Patrick Cussen or Rob Warnock if you want to discuss these proposed changes.

By |July 31st, 2019|News|0 Comments

Let’s Talk Business

Estate planning involves identifying assets and putting in place the necessary documents to pass control of those assets.

Individuals who own and operate a business often will consider their personal estate planning by preparing a Will and powers of attorney but overlook business succession planning.

Passing control of business assets should be included in the estate planning of business owners.

Recognising the influencing factors in business succession planning and associated risks is a key starting point.

 

Some of the factors that influence business succession planning include:

  • the legal ownership and structure of the business;
  • legal consequences of transferring a business;
  • the tax implications of transferring a business;
  • the politics within the business;
  • whether it is a family business and is intended to remain a family business;
  • when and to whom control of the business is to pass;
  • the existing constituent documents and other agreements of the business;
  • key personnel and drivers of the value of the business;
  • the level of understanding about the business and the business structure of the persons to whom the business may be transferred;
  • whether there is a conflict between what is written on paper and what it intended to occur and can this be resolved.

 

More importantly, some of the risks in failing to plan include difficulties in:

  • transferring ownership;
  • preserving and increasing the value of the business;
  • dealing with unforeseen events.

For example, a person may have gone to considerable trouble to establish particular legal structures for operating a business but has failed to properly explain those structures to members of the family with the result that disputes arise between members of the family.

For some business owners, a business succession plan may involve a gradual transition in passing control whereas for others it may involve a swift exit strategy.

As a legal practice that focusses on estate planning and tax, Bernie O’Sullivan Lawyers is well placed to properly address the issues that arise in planning for business succession.

If you wish to obtain further information about business succession planning for the business of you or your clients, please contact Patrick Cussen on 1300 267 529.

By |July 31st, 2019|News|0 Comments

When is a Memorandum of Understanding or a Heads of Agreement Legally Binding?

We often see matters where clients have negotiated the terms of a business deal with another person and the parties then sign a short form document (usually called a Heads of Agreement or Memorandum of Understanding) that embodies the terms of the deal with the intention of executing a more formal agreement later.

What happens if the parties cannot agree on the terms of the formal agreement?  Can a party that wants to proceed with the deal force the other party to go ahead? Or can the party that doesn’t want to proceed walk away?

The answer to this question is the lawyer’s standard answer: “It depends”.

The document needs to be clear about the parties’ intentions as that will determine the issue.

 

Masters v Cameron

The leading decision in this area is the High Court case of Masters v Cameron (1954) 91 CLR 353.

That case established that there are 3 possible scenarios:

  • The parties have reached agreement and intend to be immediately bound. However, the parties propose to have the terms restated in a form which will be fuller or more precise but not different in effect.
  • The parties have completely agreed on the terms of their bargain and intend no departure from or addition to those terms. However, the parties have made performance of one or more of the terms conditional on the execution of a formal document.
  • The intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

The High Court then identified that determining which scenario applies depends on “the intention disclosed by the language the parties have employed, and no special form of words is essential to be used in order that there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape”.

Later cases have established a fourth category – that is, cases where the parties are content to be bound immediately and exclusively by the terms on which they have agreed, while expecting to make a further contract in substitution for the first contract containing additional terms.

 

Cahill v Kiversun

A recent case that considered a Masters v Cameron scenario was the Supreme Court case of Cahill v Kiversun Pty Ltd; Molonglo Group (Australia) Pty Ltd v Cahill [2017] VSC 641.

Kiversun owned property in Collingwood.  Cahill and Molonglo were both property developers.

On 15 July 2016 Kiversun and Cahill signed a document headed “Agreement to Purchase”.  This document contemplated that there would be a formal contract prepared, but did not clearly state whether the parties intended the Agreement to Purchase to be legally binding.

On 29 July 2016, Kiversun signed a second document agreeing to sell the property to Molonglo for $10.15 million.

On 31 July 2016, Kiversun’s solicitors provided a formal contract to Cahill (this contract was prepared by Molonglo’s solicitors).  Under the Agreement to Purchase, Cahill had 5 days to accept the terms of the contract provided to it or Kiversun had a right to “withdraw from the sale”.  This contract included terms that Molonglo and Kiversun knew Cahill would not accept.

On 4 August 2016, Kiversun and Molonglo signed a formal contract by which Molonglo agreed to purchase the property.  This contract was conditional on Cahill failing to sign the other contract.

When Cahill did not return the signed contract with the deposit by 8 August 2016, Kiversun indicated that unless Cahill returned the signed contract by close of business, Kiversun would withdraw from the sale.  Cahill lodged a caveat over the property that day.

Molonglo lodged a caveat over the property the following day.

The court held that the Agreement to Purchase between Kiversun and Cahill was a binding contract.

Kiversun and Molonglo argued that the Agreement to Purchase was not a binding agreement.  Their major argument was that the document included the words “[t]his offer is conditional upon the purchaser’s solicitor’s approval of the final contract of sale and [s 32 statement]”.  They submitted that the use of the word “offer” indicated that there was no binding agreement.  However, the court held that the fact that Kiversun had a right to “withdraw from the sale” if the documents were not returned within 5 days was inconsistent with the claim that the document was only an offer rather than an agreement.

Molonglo has appealed to the Victorian Court of Appeal in this case.  Interestingly, Kiversun has not appealed.

This case highlights that it is extremely important that if:

  • someone has negotiated a deal but does not want to be legally bound until some other event has occurred or a formal document is prepared; or
  • someone has negotiated a deal and wants the other party to be legally bound

that any document that is signed reflects the desired outcome.

Ideally, the document should clearly state whether or not the document is intended to be binding.

 

Contact Patrick Cussen, Nicole Wilson or Konnie Lontos if you or a client are about to sign a Heads of Agreement or Memorandum of Understanding and you want advice about the legal effect of the document.

By Patrick Cussen

By |March 19th, 2018|Uncategorised|0 Comments