Edited version of your written advice

Authorisation Number: 1012971586822

Date of advice: 17 February 2016

Ruling

Subject: GST and acquisition of call option and vacant land

Question 1

Will the grant of the call option by the owners of the property (owners) to you pursuant to the Call Option Agreement be a taxable supply for the purposes of paragraph 11-5(b) of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes, the grant of the call option by the owners to you pursuant to the Call Option Agreement will be a taxable supply under section 9-5 of the GST Act for the purposes of paragraph 11-5(b) of the GST Act.

Question 2

Will the fee of re-assigning the call option by you to another entity be consideration for a taxable supply under section 9-5 of the GST Act?

Answer

Yes, the fee of re-assigning the call option by you to another entity will be consideration for a taxable supply under section 9-5 of the GST Act.

Question 3

Will the sale of the vacant land situated in Australia by the owners to you be a taxable supply for the purposes of paragraph 11-5(b) of the GST Act if the option under the Call Option Agreement is exercised?

Answer

Yes, the sale of the vacant land by the owners to you will be a taxable supply under section 9-5 of the GST Act for the purposes of paragraph 11-5(b) of the GST Act if the option under the Call Option Agreement is exercised.

Question 4

Is the margin scheme applicable to the sale of the vacant land?

Answer

Whether the margin scheme will be applicable to the sale of the vacant land will be a decision to be considered and agreed in writing between the owners and you.

Relevant facts and circumstances

You are registered for GST and carry on a property development business.

You are considering entering into a Call Option Agreement with the owners in regard to the property located in Australia.

You have provided us with a draft copy of the Call Option Agreement you will have with the owners and a draft copy of the sale contract for the land which will be acquired should the call option be exercised.

You have provided the following information to us after contacting the owners:

• The owners purchased the property as a partnership and hold a partnership ABN for the property. The owners are registered for GST.

• After the purchase, the property was tenanted to a business.

• The owners have not done any changes or work on the property apart from general maintenance since its purchase.

• The property subject to the call option is a vacant land and there is no building on the land.

• You are considering re-assigning the call option that you will acquire under the Call Option Agreement to another entity for a fee. You currently do not have any draft agreement in regard to the re-assignment of the call option to another entity.

Draft Call Option Agreement

The draft Call Option Agreements provides the following amongst other things:

• The agreement is between you (referred to as 'buyer') and the owners of the property (referred to as 'seller').

• The seller has agreed to grant the buyer the call option. If the buyer exercises the call option, the seller and the buyer or the buyer's nominee (as the case may be) must enter into the contract.

• In consideration of the execution of the Agreement, the seller grants to the buyer an irrevocable:

a) call option to require the seller to enter into the contract to sell the property to the buyer; or

b) right to nominate a person, as selected by the buyer, to enter the contract with the seller to purchase the property on the terms contained in this Agreement.

• The call option constitutes an irrevocable offer by the seller to enter into a binding contract for the sale and purchase of the property, which may be accepted strictly in accordance with the provisions of this Agreement, otherwise the call option and this offer will lapse.

• On exercise of the call option, the seller and the party exercising the call option will become immediately bound as seller and as buyer respectively under the contract.

• The option fee must be paid by the buyer to the deposit holder …:

Relevant legislative provisions

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

Detailed reasoning

Note: Where the term 'Australia' is used in this document, it is referring to the 'indirect tax zone' as defined in subsection 195-1 of the GST Act.

Question 1

You are entitled to an input taxed credit for any creditable acquisition you make under section 11-20 of the GST Act.

Section 11-5 of the GST Act provides when you make a creditable acquisition. One of the requirements for a creditable acquisition is the supply of the thing to you is a taxable supply (paragraph 11-5(b) of the GST Act).

We will now consider whether the supply of the call option by the owners to you will be a taxable supply.

Taxable supply

A supply is a taxable supply under section 9-5 of the GST Act if:

(a) you make the supply for consideration;

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

(c) the supply is connected with the Australia, and

(d) you are registered or required to be registered for GST.

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

All of the above requirements need to be satisfied for a supply to be a taxable supply.

Paragraph 9-5(a) of the GST Act

Is the grant of the call option a supply?

Under subsection 9-10(2) of the GST Act, amongst other things a supply includes a creation, grant, transfer, assignment or surrender of any right (paragraph 9-10(2)(e) of the GST Act).

A call option is a right to require an owner of property to sell the property to the option holder. The substance of the transaction is the supply of a right, which is a separate transaction from the exercise of the option. The sale of the property involves another supply.

Furthermore, under paragraph 9-10(2)(d) of the GST Act, the definition of 'supply' also includes a grant, assignment or surrender of real property.

The term 'real property' is defined in section 195-1 of the GST Act to include a personal right to call for or be granted any interest in or right over land. As such an option to purchase real property is also a supply of real property. However, this supply is a separate supply to the actual sale of the property.

Accordingly, the owners will make a supply under section 9-10 of the GST Act when they grant the call option to you.

Supply for consideration

When the call option is granted you will have to pay a call option fee to the owners.

In this instance, paragraph 9-5(a) of the GST Act will be satisfied as the owners will make the supply of the call option for consideration to you.

Paragraph 9-5(b) of the GST Act

The supply of the call option is related to the property from which the owners derived rental income while carrying on a leasing enterprise. In this instance the owners will be supplying the call option through the leasing enterprise that they carry on. This paragraph will be satisfied.

Paragraph 9-5 (c) of the GST Act

The supply will be connected with Australia as the right to purchase the land will be done in Australia and the land is in Australia. This paragraph will be satisfied.

Paragraph 9-5(d) of the GST Act

This paragraph will be satisfied as the owners are registered for GST.

Input taxed supply and GST-free

The supply of the call option will neither be GST-free nor input taxed as the supply of a vacant land is neither GST-free nor input taxed under the GST Act.

Summary

The supply of the call option by the owners to you will be a taxable supply as all the requirements in section 9-5 of the GST Act will be satisfied.

Question 2

Based on the information received, you will satisfy all the requirements in section 9-5 of the GST Act when you will re-assign the purchased call option to another entity as:

• You will make the supply for consideration since you will charge a fee to the entity for the re-assignment of the call option;

• In respect of the reselling of the call option, it is considered that the call option will be a trading stock for your business of property development when you decide to sell instead of exercising the call option. In this instance you will be making the supply through the business of property development that you carry on;

• The supply is connected with Australia as it is done in Australia and through the business of property development that you carry on in Australia;

• You are registered for GST; and

• The reassignment of the call option is neither GST-free nor input taxed under the GST Act.

Accordingly, your supply of the call option to another entity will be a taxable supply under section 9-5 of the GST Act and you will be liable for GST for that supply.

Question 3

Based on the information received, the supply of the vacant land by the owners to you will be a taxable supply under section 9-5 of the GST Act as:

• the owners will make the supply of the vacant land to you for consideration;

• the supply of the vacant land will be made in the course of the leasing enterprise carried on by the owners;

• the supply of the vacant land is connected with Australia as the land is in Australia;

• the owners are registered for GST; and

• the supply of the vacant land is neither GST-free nor input taxed under the GST Act.

Question 4

There is no mention of 'margin scheme' in the draft sale contract for the vacant land. Whether to apply the margin scheme for the sale of the vacant land is a decision to be considered and agreed in writing between the owners and you. This written agreement should be reached by the time the vacant land is supplied (usually at settlement).

The following general information on margin scheme is provided to assist you:

Generally, the amount of GST you must pay on property sales is equal to one-eleventh of the sale price.

However, under Division 75 of the GST Act you may be able to use the margin scheme to work out how much GST you must pay. However, certain requirements have to be met for you to use the margin scheme.

You can apply the margin scheme if the sale of the property is a taxable supply. Further, if you purchase property where the margin scheme was applied to the sale, you cannot claim a GST credit for the GST included in the purchase price of the property.

Both the buyer and seller must agree in writing to apply the margin scheme if the contract for sale was made on or after 29 June 2005. The agreement to use the margin scheme must be reached by the time the property is supplied usually at settlement.

When you use the margin scheme, the amount of GST you must pay on a property sale is equal to one-eleventh of the margin. Your margin is generally the difference between the sale and one of the following:

• the amount you paid for the property

• the value of the property provided in an approved valuation of the property as at 1 July 2000 (if certain conditions are satisfied)

Whether you can use the margin scheme depends on how and when you first purchased your property. For GST purposes the date when settlement occurs will be the date that you have purchased the property.

You can use the margin scheme if you purchased the property before 1 July 2000 (the start of GST) or if it is purchased after 1 July 2000 from someone:

• who was not registered or required to be registered for GST;

• who sold you existing residential premises;

• who sold the property to you as part of a GST-free going concern;

• who sold the property using the margin scheme.

You cannot use the margin scheme if when you first purchased the property the sale to you was fully taxable and the margin scheme was not used. In this situation you may be able to claim the GST included in the purchase price if the property is going to be used in your business.

For more information on the margin scheme please refer to the following publications which are available from www.ato.gov.au

• Fact Sheet 'GST and the margin Scheme'

• Goods and Services Tax Ruling GSTR 2002/21 - the margin scheme for supplies of real property held prior to 1 July 2000

• Goods and Services Tax Ruling GSTR 2006/7 - how the margin scheme applies to a supply of real property made on or after 1 December 2005 that was acquired or held before 1 July 2000

• Goods and Services Tax Ruling GSTR 2009/1 - general law partnerships and the margin scheme

• Goods and Services Tax Determination GSTD 2014/2 - 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 GST Act.

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