Tax Law Improvement Act (No. 1) 1998 (46 of 1998)
Schedule 1 Amendment of the Income Tax Assessment Act 1997
1 Part 3-3 Division 134
Division 134 - Options
134-1 Exercise of options
(1) This table sets out the effects of the exercise of an option on the *cost bases and *reduced cost bases of the grantor and the entity that exercises the option (the grantee ).
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Exercise of options |
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Item |
In this situation: |
Effect on cost base and reduced cost base: |
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1 |
Option binds grantor to *dispose of a *CGT asset
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For the grantee The first element of the grantee's *cost base and *reduced cost base for the *CGT asset is what the grantee paid for the option plus any amount the grantee paid to exercise it For the grantor See section 116-65 |
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2 |
Option binds grantor to *acquire a *CGT asset
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For the grantor The first element of the grantor's *cost base and *reduced cost base for the asset acquired is any amount paid to exercise the option reduced by any payment received by the grantor for the option For the grantee The second element of the grantee's *cost base and *reduced cost base for the asset disposed of to the grantor includes any payment the grantee made to *acquire the option |
Note 1: If you granted an option, CGT event C3 or D2 may happen.
Note 2: Item 1 in the table is modified for options granted before 20 September 1985: see section 134-1 of the Income Tax (Transitional Provisions) Act 1997.
(2) All the payments can include giving property: see section 103-5.
Example 1: Steven obtains an option to buy a yacht (for $75,000) from Tom. Steven pays $5,000 for the option.
Steven exercises the option. The first element of his cost base and reduced cost base for the yacht includes the expenditure he incurred for the option.
So, the first element of his cost base and reduced cost base for the yacht is:
$75,000 + $5,000 = $80,000
Example 2: An entity owns 1,000 shares in a company. Bill grants the entity an option which, if exercised, would require him to buy the shares for $2 each. The entity pays Bill 10 cents per share for the option.
The entity exercises the option. Bill paid $2,000 for the shares. He received $100 from the entity for granting the option.
The first element of Bill's cost base and reduced cost base for the shares is:
$2,000 - $100 = $1,900
In working out whether the entity made a capital gain or loss on the sale of the shares, the second element of its cost base (and reduced cost base) includes the $100 the entity paid for the option.
(4) A *capital gain or *capital loss the grantee makes from exercising the option is disregarded.
Note 1: The exercise of the option would be an example of CGT event C2 (about a CGT asset ending).
Note 2: There is an exemption for the grantor if the option is exercised: see subsection 104-40(5).
(5) This Division does not apply to rights or options to which Subdivision 130-B applies.
Note: Subdivision 130-B deals (amongst other things) with rights and options issued by a company or trust where you did not pay or give anything to acquire them.