In the event of cancellation of business acquisition
Scenario:
My company wants to sell our business to Company B. Company B paid $10,000 for the option fee to my company to secure the right of offer. This option fee will reduce the amount paid if the option was exercised. Company B just notified us that they would not proceed with the acquisition.
Will this cancellation trigger CGT event C3?
The option fee payment ($10,000) will be considered as a proceed and all the costs incurred in setting up the agreement (e.g. legal fees) will reduce the proceed. Is this the correct treatment?
Explanation:
The question reads that Company B had a call option to acquire the business of your company. If so, CGT event D2 applies. If Company B had a call option to acquire shares in your company, then
CGT event C3 would apply. CGT event D2 is different from C3. In CGT event D2, the capital gain arises on the grant of the option but can be reversed later should the option be exercised with the option fee forming part of the capital proceeds of the sale of the asset "called" in the case of a call option. In this case (understanding CGT event D2 applies), the timing of the capital gain is on the entry into the option agreement with the option fee as capital proceeds and incidental costs allowed in cost. The D series taxable capital gains apply to assets created out of agreements