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Edited version of your written advice
Authorisation Number: 1012808438297
Ruling
Subject: CGT - granting an option
Question 1
Will the payments for the weekly option fee be ordinary income?
Answer
No
Question 2
Will the payments for the weekly option fee be capital in nature?
Answer
Yes
Question 3
Will any capital gain from the grant of the option be a discount capital gain?
Answer
No
Question 4
If the option is exercised, will any capital gain from the disposal of the property be a discount capital gain?
Answer
Yes
This ruling applies for the following periods:
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commenced on:
1 July 2014
Relevant facts and circumstances
This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.
You acquired a residential property (the Property) more than 12 months ago.
The Property has been used as a rental property from the date of purchase.
You propose to enter into a Deed of Option in relation to the disposal if the Property. The terms of the Deed of Option stipulate:
• The buyers will have the option to purchase the property for $X.
• Prior to the commencement date, you will enter into a residential tenancy agreement with the buyer that will entitle them to use and occupy the Property for the term of the option.
• An option fee of $X per week is payable by the buyer.
• The weekly option fee is non-refundable.
• If the option is exercised, the buyers will receive a credit of the accumulated weekly option fees towards the deposit on the purchase price.
• If the option lapses, the buyers forfeit and option fees paid.
• No credit will be applied for any rental payments paid under the tenancy agreement and it is agreed that the rental payments are separate and distinct from the option fees.
• The buyer cannot transfer or assign the option.
• You will continue to insure and pay council rates for the term of the option.
The rent payable under the tenancy agreement will be at the market rate.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 104-40
Income Tax Assessment Act 1997 Paragraph 115-25(3)
Income Tax Assessment Act 1997 Section 116-20
Income Tax Assessment Act 1997 Section 116-65
Reasons for decision
Weekly payments
It is generally accepted that rent is ordinary income and included in assessable income under section 6-5 of the Income Tax Assessment Act 1997 ITAA 1997.
However, if weekly payments represent instalments of the sale price they will be capital receipts and not ordinary income (Foley v. Fletcher (1858) 157 ER 678).
In this case, the buyer will be paying rent under a tenancy agreement and a separate weekly option fee under the Deed of Option. The option fees will be credited against the purchase price if the option is exercised.
Accordingly, the option fees will not be ordinary income; rather they will be payments of a capital nature.
Capital gains tax (CGT)
As the payments will be capital in nature, it is necessary to determine what the relevant CGT event is.
CGT event D2 occurs if you grant an option to an entity (section 104-40 of the ITAA 1997). The timing of the event is when you enter into the option.
Accordingly, CGT event D2 will occur when you enter into the Deed of Option. The capital proceeds for the event will be any amount you receive or are entitled to receive under the Deed of Option, including the weekly option payments (section 116-20 of the ITAA 1997).
As per paragraph 115-25(3) of the ITAA 1997, any capital gain or loss from CGT event D2 is not a discount capital gain.
However, any capital gain or loss made from CGT event D2 can be disregarded if the option in exercised (subsection 104-40(5) of the ITAA 1997). If the exercising of the option results in the disposal of an asset (CGT event A1), your capital proceeds for the A1 event will include any payment you received for granting the option (section 116-65 of the ITAA 1997).
Accordingly, if the option is exercised by the buyer you can disregard any capital gain from CGT event D2. If the tax return for the relevant year has already been lodged, you will need to amend your return to exclude the amount relating to the D2 event.
CGT event A1 will occur as you will have disposed of the Property; the timing of the event will be the date of the contract for the disposal (CGT Determination TD 16). Your capital proceeds for CGT event A1 will include all of the weekly option payments paid by the buyer.
As the disposal date will be more than 12 months from your date of acquisition any resulting capital gain from CGT event A1 will be a discount capital gain.
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