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Ruling

Subject: GST and supply of a call option

You are not registered for GST.

You entered into a call option to purchase a commercial property.

The contract for the sale of land is an annexure to the option agreement. It provides that the sale of the land is:

· subject to existing tenancies

· commercial, and

· not a taxable supply because the sale is a supply of a going concern under section 38-325.

The call option is for a period of 12 months and the call option fee is $X.

You sought development on the subject property and this was approved.

You assigned the option for a total sum of $X plus GST if applicable.

At the time of assignment of the option to the purchaser, the subject property was still being leased.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-30(1)

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 Division 38

A New Tax System (Goods and Services Tax) Act 1999 Section 38-325

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Question 1:

Section 23-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) provides that you are required to be registered for GST if:

· you are carrying on an enterprise, and

· your GST turnover meets the registration turnover threshold (currently $75,000 unless you are a non-profit body).

Enterprise is defined in section 9-20 of the GST Act which states:

An enterprise is an activity, or series of activities, done:

(a) in the form of a *business; or

(b) in the form of an adventure or concern in the nature of trade…

(* denotes a term defined in section 195-1 of the GST Act)

There is no definition of 'trade' or 'adventure or concern in the nature of trade' in the GST Act. However, Miscellaneous Taxation Ruling MT 2006/1 and Goods and Service Tax Determination GSTD 2006/6 assist in determining whether an entity is carrying on an enterprise. They provide guidance as to the meaning of 'an adventure or concern in the nature of trade.'

Generally a business includes a trade that is engaged in on a regular or continuous basis, while an adventure or concern in the nature of trade may be an occasional or one-off transaction that does not amount to a business.

Paragraphs 234-239 of MT 2006/1 refers to isolated transaction as an adventure or concern in the nature of trade and state:

234. Ordinarily, the term 'business' would encompass trade engaged in, on a regular or continuous basis. However, an adventure or concern in the nature of trade may be an isolated or one-off transaction that does not amount to a business but which has the characteristics of a business deal.

235. In Australia, there are specific income tax provisions that include in assessable income the profit made from an isolated transaction. These have been developed from earlier provisions that ensured that, 'profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme' was included in a taxpayer's assessable income.

236. Prior to their enactment there was judicial recognition that the profit derived from the sale of property acquired in an isolated transaction for the purpose of profit making by sale was of a revenue nature. Justice Isaacs stated in Blockey v. FCT (1923) 31 CLR 503 at 508-509; (1923) 29 ALR 79 at 81:

But if a man, even in a single instance, risks capital in a commercial venture - say, in the purchase of a cargo of sugar or a flock of sheep - for the purpose of profit making by resale and makes profit accordingly, I do not for one moment mean to say he has not received 'income' which is taxable. I intimated during the argument that this is possible; and I leave it open.

237. The term 'profit making undertaking or scheme' like the term 'an adventure or concern in the nature of trade' concerns transactions of a commercial nature which are entered into for profit-making, but are not part of the activities of an on-going business. Both terms require the features of a business deal, see McClelland v. Federal Commissioner of Taxation , in which Lord Donovan, delivering the opinion of the majority, said:

It seems to their Lordships that an 'undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and resale - exhibit features which give it the character of a business deal. It is true that the word 'business' does not appear in the section; but given the premise that the profit produced has to be income in its character their Lordships think the notion of business is implicit in the words 'undertaking or scheme'.

238. A similar view was expressed by Foster J in AB v. FC of T 97 ATC 4945 at 4961; 37 ATR 225 at 242 where he said:

See also the discussion in R W Parsons, Income Taxation in Australia, The Law Book Company Limited, Sydney, 1985, p 159-63 in which the learned author expresses the view that 'an adventure in the nature of trade' is equivalent to an 'isolated business venture' as opposed to a continuing business. I respectfully agree. I also accept that such a transaction must 'exhibit features which give it the character of a business deal' ( McClelland v. FCT (1970) 120 CLR 487 at 495; 2 ATR 21 at 26; 70 ATC 4115 at 4120).

239. The commercial nature of an adventure or concern in the nature of trade can also be shown from the following passage by Gibbs J in Federal Commissioner of Taxation v. NF Williams :

Turning now to the Commissioner's argument that the case comes within s 25(1) of the Act, it seems to me that the co-owners did no more than realise their asset in an ordinary and prudent way. There are no circumstances that could enable it to be said that in so doing they carried on a business or engaged in an adventure in the nature of trade. The Commissioner placed some reliance upon the decision of the House of Lords in Edwards (Inspector of Taxes) v. Bairstow , [1956] AC 14; [1955] 3 All ER 48. That case shows that the fact that a transaction is an isolated one does not necessarily prevent it from being an adventure in the nature of trade, but it has otherwise little bearing on the present question. There the taxpayers bought machinery with the intention, not to use or hold it, but to resell it quickly and make a profit on the deal (see at [1956] AC, pp. 36-37; [1955] 3 All ER, p. 58). The transaction was a commercial one, and nothing but a commercial one, from beginning to end. The case is thus quite distinguishable from the present, where it is impossible to say that the taxpayer began an adventure in the nature of trade when she received her interest in the land. The proceeds which the taxpayer derived from the sale were not income within the ordinary understanding of the term.

You purchased the call option with the intention of selling at a profit. It is considered an adventure or concern in the nature of trade.

On the facts provided your turnover is over $75,000.

As you are carrying on an enterprise and your GST turnover is above the registration turnover you are required to be registered for GST.

Question 2:

GST is payable on taxable supplies. Section 9-5 of the GST Act states:

You make a taxable supply if:

(a)   you make the supply for *consideration; and

(b)   the supply is made in the course or furtherance of an *enterprise that you *carry on; and

(c)   the supply is *connected with Australia; and

(d)   you are *registered, or *required to be registered.

 However, the supply is not a *taxable supply to the extent that it is *GST-free or *input taxed.

In your case, you satisfy the positive requirements of section 9-5 of the GST Act. The supply is for consideration; it is made in the course or furtherance of the enterprise that you carry on and is connected with Australia. The partnership is required to register for GST. There is nothing in the GST Act that would make the supply input taxed. Therefore the sale of the call option is a taxable supply unless it is GST-free.

Subsection 9-30(1) deals with supplies that are GST-free it states:

(1) A supply is GST-free if:

(a) it is GST-free under Division 38 or under a provision of another Act; or

(b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a).

In addition to those supplies which are GST-free under Division 38, including the 'supply of a going concern', the subsection also provides that the supply of a right to receive a supply that would be GST-free under Division 38 is GST-free.

The contract for the sale of the property indicates that the sale of the property is 'GST-free because the sale is the supply of a going concern under section 38-325'.

Paragraphs 187 to 189 of Goods and Services Tax Ruling GSTR 2002/5 state:

187. Subsection 9-30(1) deals with supplies that are GST-free. In addition to those supplies which are GST-free under Division 38, including the 'supply of a going concern', the subsection also provides that the supply of a right to receive a supply that would be GST-free under Division 38 is GST-free.

188. The supply of an option to acquire a 'supply of a going concern' is a supply of a right to receive a 'supply of a going concern'. Whether the supply of the option is GST-free will depend upon the wording of the option. The wording must have the effect that the supply made on the exercise of the option is GST-free, or the option will not be exercised.

189. When this principle is applied to the option to acquire a 'supply of a going concern', the parties to the option must agree that, on the exercise of the option, the supply will be a GST-free 'supply of a going concern'. The parties must specify that, on the exercise of the option, what is supplied will satisfy the conditions of section 38-325.

Clause 9.2 of the Call Option Deed sets out the documents to be annexed, and includes at subclause 9.2(ii) a 'copy proposed contract'. The use of the word 'proposed' infers that the Call Option Deed contemplates that the contract to be applied may not be the same as the contract which is annexed thereto.

Clause 6.1.3 of the Call Option Deed contemplates updated particulars to the Contract in relation to section149 certificates, sewerage connection diagrams and title searches. There is no limit imposed in the Call Option Deed as to what changes can be made to the Contract. Therefore the Call Option Deed can be exercised if the parties altered the terms of the Contract relating to the GST treatment of the supply. The wording of the Call option Deed does not state that the supply of the option is GST-free or the option will not be exercised.

At clause 6.1.1 the parties agree that, if the option is exercised, the parties shall be deemed to have entered into an agreement for the sale of property subject to the terms of the Contract. The contract for the sale of the land does indicate that the sale of the land with the existing tenancies is GST-free because the sale is the supply of a going concern under section 38-325. Therefore the second criterion is met. However, as pointed out above, the Call Option Deed does not prevent the parties from altering any of the terms of the Contract.

Although the contract for the sale of the land shows that the intent of the supply is for the supply of the land with the existing tenancy, the Call Option Deed does not. The parties to the Call Option Deed do not specify that, on the exercise of the option, what is supplied will satisfy the conditions of section 38-325. In particular the parties do not specify that all of the things that are necessary for the continued operation of an enterprise will be supplied. Nor do the parties specify that the supplier will carry on the enterprise until the day of the supply.

You can only assign the option that you have previously acquired. As you did not hold an option that meets the requirements of paragraphs 187 to 189 of GSTR 2002/5, the supply will not meet the requirements of subsection 9-30(1) of the GST Act and will not be GST-free.

As the supply is not GST-free it will be a taxable supply under section 9-5 of the GST Act.

Additional Information

The following information has been provided to show the distinction between a partnership and a joint venture.

Goods and Service Tax Ruling GSTR 2004/2 provides guidance on what is a joint venture for GST purposes. It states at paragraph 11:

11. For the purposes of the GST Act, we consider that a joint venture is an arrangement between 2 or more parties, characterised by the following features:

· sharing of product or output, rather than sale proceeds or profits;

· a contractual agreement between the participants;

· joint control;

· a specific economic project; and

· cost sharing.

For a joint venture to exist for GST purposes, the first feature, sharing of product or output, must be present. The other features are indicative of the existence of a joint venture. While it is expected that the other features will also be present, there may be circumstances where not all are present, for example in a joint venture established by statute there may not be a separate joint venture agreement. The reasons for this view are based on a consideration of the meaning of the term joint venture in the context of the GST Act, drawing on dictionary definitions, judicial comments and the definition of 'non-entity joint venture' in the GST Act, as discussed below. Paragraphs 30 to 41 elaborate on each of these features.

MT 2006/1 gives the view of a tax law partnership for GST purposes. Paragraphs 41-42, and 110 state:

Partnership

41. The term 'partnership' is defined by section 195-1 of the GST Act to have the meaning given by section 995-1 of the ITAA 1997. Section 995-1 defines a partnership to mean:

(a)   an association of persons (other than a company or a limited partnership) carrying on business as partners or in receipt of ordinary income or statutory income jointly; or

(b)   a limited partnership.

42. This definition of partnership is wider than at common law. The first limb of the definition in paragraph (a) reflects the definition of partnership contained in State and Territory partnership Acts. The second limb of the definition in paragraph (a) extends 'partnership' for taxation purposes to include persons in receipt of income jointly. …

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