Goods and Services Tax Determination
Goods and services tax: where real property is acquired following the exercise of a call option, does the call option fee form part of the consideration for the acquisition for the purposes of subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999?
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4. The supply of the call option and the supply of the vacant land are two separate taxable supplies and as a consequence of subsection 9-17(1), the consideration for the supply of the vacant land is limited to any consideration provided in addition to the call option fee. This means that the consideration for the supply of the call option is the fee of $22,000 and the consideration for the vacant land is $660,000.
5. SlamRock constructs six strata titled residential units on the vacant land. Once the development is complete, SlamRock makes taxable supplies of the six new residential premises to various third party purchasers who agree that the amount of GST is to be worked out under the margin scheme. One of these units is purchased by Sandy for $550,000.
6. In order to work out the amount of GST on the supply to Sandy, section 75-10 states that the amount of GST on the supply is 1/11th of the margin, which is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest, unit or lease.
7. Under paragraph 75-15(2)(a), the consideration for the acquisition is the corresponding proportion of the consideration provided to Martin by SlamRock for the purchase of the vacant land that is applicable to the sale of the unit to Sandy. As there are six residential units, SlamRock decides that it is reasonable that the relevant proportion of the consideration for the acquisition will be $110,000.
10. Under section 75-20, SlamRock is not entitled to input tax credits relating to the acquisition of the land as it was acquired under the margin scheme. SlamRock is however entitled to an input tax credit of $2000 relating to the acquisition of the call option.
Date of effect
11. This Determination applies both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10).
Commissioner of Taxation
5 February 2014
Appendix 1 - Explanation
|This Appendix is provided as information to help you understand how the Commissioner's view has been reached. It does not form part of the binding public ruling.|
Meaning of 'call option'
- the right to buy a specified commodity, parcel of shares, foreign exchange, etcetera, at a set price on or before a specified date (Macquarie Dictionary).
- an option to buy assets at an agreed price on or before a particular date (Oxford Dictionary of English).
13. Options have been described as irrevocable offers or conditional contracts or sui generis arrangements. For the purposes of this Determination, a call option is an agreement between the grantor and the grantee, the exercise of which allows the grantee to compel the grantor to transfer real property to the grantee within a specified period of time.
14. Subsection 75-10(1) provides that the amount of GST on a taxable supply of real property made under the margin scheme is 1/11th of the margin for the supply. In circumstances where subsection 75-10(2) applies, the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the real property in question.
Consideration for the acquisition
17. This is the case even if the agreement between the parties specifies that the call option fee forms part of the price for the supply of the real property. The operation of section 9-17 varies what may be the outcome under contract law.
18. Subsection 9-17(1) relevantly provides, that if an option to acquire a thing is granted, then the consideration for the supply of the thing on the exercise of the option is limited to any additional consideration provided either for the supply or in connection with the exercise of the option.
19. In discussing former subsection 9-15(3), the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 stated:
The supply of a right or option will be taxed when it is supplied. The later exercise of the right or option will be another supply. That later supply will not be taxable unless there is further consideration when the right or option is exercised.
20. Section 195-1 provides that consideration for a supply or acquisition means any consideration within the meaning given by sections 9-15 and 9-17, in connection with the supply or acquisition. Subsection 9-17(1) prescribes what is consideration in option situations, and section 195-1 incorporates these rules into the meaning of consideration for a supply or acquisition. Accordingly, subsection 9-17(1) is relevant to determining what is consideration for an acquisition under subsection 75-10(2). The Note to the definition of 'consideration' in section 195-1 does not refer to subsection 75-10(2) as a provision that affects the meaning of the definition.
21. In the context of a call option over real property, subsection 9-17(1) recognises that the supply of the option is a separate supply to the supply of the underlying property. As a consequence of subsection 9-17(1), the consideration for the call option is the call option fee, and the consideration for the supply or acquisition of the underlying property is limited to any additional consideration provided.
22. The interaction of subsections 9-17(1) and 75-10(2) of the GST Act results in the consideration for the acquisition of the interest, unit or lease being limited to the additional consideration provided on exercise of the call option. Therefore, the entity does not include the call option fee as part of the consideration for the acquisition in calculating the margin under subsection 75-10(2).
23. Subsection 75-16(1), which applies where real property has been acquired through several acquisitions, is not applicable in the circumstances of this Determination. This is because the acquisition of the rights under a call option is not subject to any margin scheme provision listed in paragraph 75-16(1)(c).
You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).
See Laybutt v. Amoco Australia Pty Ltd (1974) 132 CLR 57 at 70 to 76; CTI Joint Venture Co Ltd v. Chief Commissioner of State Revenue  NSWSC 20 at  to ; Fowler v. Commissioner of Taxation (2013) 212 FCR 149;  FCAFC 69 at ; and Principal Properties Pty Ltd v. Brisbane Broncos Leagues Club Ltd  QSC 148 at .
Subsection 9-15(3) was repealed and re-enacted as section 9-17 by the Tax and Superannuation Laws Amendment (2012 Measures No. 1) Act 2012.
An entity will not include the call option fee as part of the consideration for the acquisition of real property in calculating the margin under section 75-11.
Not previously issued as a draft
GST margin scheme
GST sale of real property
ANTS(GST)A 1999 9-15
ANTS(GST)A 1999 9-15(3)
ANTS(GST)A 1999 9-17
ANTS(GST)A 1999 9-17(1)
ANTS(GST)A 1999 75-10
ANTS(GST)A 1999 75-10(1)
ANTS(GST)A 1999 75-10(2)
ANTS(GST)A 1999 75-11
ANTS(GST)A 1999 75-15(2)(a)
ANTS(GST)A 1999 75-16(1)
ANTS(GST)A 1999 75-16(1)(c)
ANTS(GST)A 1999 75-20
ANTS(GST)A 1999 195-1
Tax and Superannuation Laws Amendment (2012 Measures No. 1) Act 2012
CTI Joint Venture Co Ltd v. Chief Commissioner of State Revenue
 NSWSC 20
Fowler v. Commissioner of Taxation
(2013) 212 FCR 149
 FCAFC 69
Laybutt v. Amoco Australia Pty Ltd
(1974) 132 CLR 57
Principal Properties Pty Ltd v. Brisbane Broncos Leagues Club Ltd
 QSC 148
Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998
The Macquarie Dictionary, [online], viewed 14 October 2013, www.macquariedictionary.com.au
The Oxford Dictionary of English, [online], viewed 14 October 2013, www.oxfordreference.com