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Edited version of your written advice
Authorisation Number: 1051256954023
Date of advice: 22 July 2017
Ruling
Subject: Capital Gains Tax
Question 1
If the option to sell the land is exercised prior to lodging your 20XX tax return are you required to record a capital gain in your 20XX return?
Answer
No
This ruling applies for the following periods:
Year ending 30 June 2018
Year ended 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
You own a parcel of land.
You have entered into an option agreement to sell the parcel of land.
You have received option fees in 20XX.
You envisage that both exchange and settlement will take place prior to 20XX.
You anticipate lodging your 20XX tax return post 20XX.
Relevant legislative provisions
Income tax Assessment Act 1997 Section 104-40.
Reasons for decision
Section 104-40 of the ITAA 1997 specifies the following in relation to the granting of an option:
(1) CGT event D2 happens if you grant an option to an entity, or renew or extend an option you had granted.
(2) The time of the event is when you grant, renew or extend the option.
(3) You make a capital gain if the capital proceeds from the grant, renewal or extension of the option are more than the expenditure you incurred to grant, renew or extend it. You make a capital loss if those capital proceeds are less.
There is an exception to the above under section 104-40(5) of the ITAA 1997 which states that a capital gain or capital loss you make from the grant, renewal or extension of the option is disregarded if the option is exercised.
In your case you granted the option and received option fees 20XX. Therefore, the granting of an option by you constitutes a CGT event D2 and the date of the event is when the option was granted.
It may be the following year or a subsequent year before the option is exercised. Provisions of the ITAA 1997 provide that if the option is exercised, the granting of the option on a particular date and the exercise of the option is treated as a single transaction in relation to the grantor.
Taxation Determination TD 16 Capital Gains: What is the date of acquisition (or date of disposal) of an asset acquired (or disposed of) on the exercise of an option? confirms that the date of disposal of an asset under an option is the date of the transaction entered into as a result of the exercise of the option. Accordingly, the date of disposal of the property is the date that the option is exercised. The subsequent sale of the land from exercising the option will be a CGT event A1 under section 104-10 of the ITAA 1997.
In addition, section 116-65 of the ITAA 1997 provides that where you dispose of a CGT asset because another entity exercises an option you granted in relation to the asset, the capital proceeds from the disposal include any payment you received for granting the option. This means that the capital proceeds from the A1 event include any payment you received for granting the option. Therefore, the original CGT event D2 is disregarded under subsection 104-40(5) of the ITAA 1997.
Where an option is given in one financial year and exercised in another financial year, an amendment to the taxpayer’s income tax assessment for the year in which the option was granted will be necessary.
In your case you anticipate that your 20XX tax return will not be lodged until after the option has been exercised, subsection 104-40(5) applies so that the original CGT event D2 is disregarded, therefore the proceeds you received in the 20XX financial year will be disregarded and there is no requirement for you to declare it in your 20XX tax return.
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