• Exercise of an option

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    If the option you granted is later exercised any capital gain or capital loss you made from the grant, renewal or extension is ignored. You may have to amend your income tax assessment for an earlier income year.

    Similarly, any capital gain or capital loss that the grantee would otherwise make from the exercise of the option is disregarded.

    The effect of the exercise of an option depends on whether the option was a call option or a put option. A call option is one that binds the grantor to dispose of an asset. A put option binds the grantor to acquire an asset.

    Example - Granting of an option (cont)

    On 1 February 2004, Colleen exercised the option. The capital gain that you made in 2003 is disregarded and you request an amendment of your income tax assessment to exclude that amount. The $10,000 you received for the grant of the option is considered to be part of the capital proceeds for the sale of your property in the 2003-04 income year. Your capital gain or capital loss from the property is the difference between its cost base/reduced cost base and $210,000.

    CGT event D4 happens if you enter into a conservation covenant after 15 June 2000 over land that you own and if you receive capital proceeds for entering into the covenant.

    From 1 July 2002, CGT event D4 also happens if you receive no capital proceeds for entering into the covenant and you can claim a tax deduction for entering into the covenant. One of the conditions for a tax deduction is that the covenant is entered into with a deductible gift recipient or an Australian government agency (that is, the Commonwealth, a state, a territory or one of their authorities).

    A 'conservation covenant' is a covenant that:

    • restricts or prohibits certain activities on the land that could degrade the environmental value of the land
    • is permanent and binding on current and future land owners (by way of registration on the title to the land where possible), and
    • is approved by the Minister for the Environment and Heritage (including those entered into under a program approved by that Minister).

    If CGT event D4 happens, you calculate your capital gain by comparing your capital proceeds from entering into the covenant with the portion of the cost base of the land that is attributable to the covenant.

    Similarly, you calculate your capital loss by comparing your capital proceeds from entering into the covenant with the portion of the reduced cost base of the land that is attributable to the covenant.

    (Note that the market value substitution rule for capital proceeds that generally applies if you receive no consideration for a CGT event does not apply if CGT event D4 happens. Instead, the capital proceeds are equal to the amount you can claim as a tax deduction for entering into the covenant.)

    The relevant portion of the cost base and reduced cost base attributable to the covenant is calculated using this formula:

    Cost base (reduced cost base)

    x

      capital proceeds from entering into the covenant of land  
    those capital proceeds plus the market value of the land just
    after you enter into the covenant

    As the conservation covenant will affect the value of the entire land you must use the cost base of the entire land in calculating the cost base apportioned to the covenant. This is the case even if the covenant specifically states within its terms that the restrictions as to use only apply to part of the land.

    If CGT event D4 does not apply to a conservation covenant you enter into, CGT event D1 will apply.

    End of example
    Last modified: 04 Mar 2016QC 27527