Edited version of private advice

Authorisation Number: 1052017240694

Date of advice: 11 August 2022

Ruling

Subject: GST and supplies

Question 1

Is the specified real property (the Property) 'residential premises to be used predominantly for residential accommodation' (but not commercial residential premises and not new residential premises) for the purposes of section 40-65 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)?

Answer

Yes.

Question 2

Will the grant of the Call Option under the Option Agreement in respect of the Property by Entity X to the Purchaser be an input taxed supply under the GST Act?

Answer

Yes.

Question 3

Will the grant of the Put Option by the Purchaser to Entity X under the Option Agreement in respect of the Property be an input taxed supply under the GST Act?

Answer

Yes.

Question 4

Will the supply of the Property under the contract for sale resulting from the exercise of the Call Option or Put Option in respect of the Property be an input tax supply under the GST Act?

Answer

Yes.

Question 5

Will the supply of the Property under the contract for sale resulting from the exercise of the Call Option or Put Option in respect of the Property be a taxable supply under section 9-5 the GST Act?

Answer

No.

Question 6

Will GST be payable by Entity X in respect of the Security Deposit if the Call Option is not validly exercised or if the contract for sale is terminated through no fault of Entity X, pursuant to the terms of the Option Agreement?

Answer

No.

This ruling applies for the specified period.

The scheme commences on the specified date.

Relevant facts and circumstances

Entity X is the registered owner of the specified real property (Property).

The Property comprises land and a house.

Entity X acquired the Property with an existing house on it.

The existing house on the Property at the time of acquisition consisted of bedrooms, bathroom, and car spaces.

Entity X has not undertaken substantial renovations to the Property and has not demolished and rebuilt the house on the Property.

Entity X carries on an enterprise and is registered for the goods and services tax (GST).

On the specified date, Entity X entered a Put and Call Option Deed of Agreement (Option Agreement) with a Purchaser.

The Option Agreement was entered into in respect of the Property. Under the Option Agreement the parties acknowledge and agree that the Property is residential property.

Under the Option Agreement, in consideration of the payment of the Call Option Fee, the Purchaser was granted a Call Option to purchase the Property for the specified Purchase Price, and on the terms and conditions set out in the Option Deed and in the contract for sale.

The Call Option Fee was payable by the Purchaser when the Option Agreement was entered into by the parties. The Call Option may be exercised by the Purchaser during the Call Option Exercise Period.

Under the Option Agreement, in consideration of the payment of the Put Option Fee, the Purchaser granted to Entity X a Put Option to require the Purchaser to purchase the Property for the specified Purchase, and on the terms and conditions set out in the Option Deed and in the contract for sale.

The Put Option is exercisable within 14 days of the Call Option Expiry Date.

The Call Option Fee and Put Option Fee have been paid by the Purchaser and Entity X under the Option Agreement.

The Purchaser must pay the Security Deposit under the Option Agreement to Entity X in accordance with the terms of the Option Agreement.

The Security Deposit is a percentage of the purchase price of the Property under the contract for sale; and is the deposit shown in the contract for sale of the Property.

The parties agree that the Call Option Fee and Security Deposit will be released to the Vendor (Entity X) as and when they are paid and are non-refundable other than as specified under Option Agreement.

Pursuant to the terms of the Option Agreement if the Call Option is not validly exercised or if the contract for sale is terminated through no fault of Entity X the Call Option Fee and the Security Deposit will remain the property of Entity X.

Entity X is the supplier of the Call Option under the Option Agreement, and upon the valid exercise of the Call Option or Put Option and entry into the contract for sale, will be the supplier of the Property (Vendor) pursuant to the contracts for sale.

The Property (comprising land and house) will be sold in the same state as it was acquired from the previous vendor. The existing residential house is habitable, will not be demolished and will remain on the Property at the date of settlement of the contract for sale.

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 subsection 9-30(2)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-30(2)(a)

A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-30(2)(b)

A New Tax System (Goods and Services Tax) Act 1999 Division 40

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-5(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-5(2)

A New Tax System (Goods and Services Tax) Act 1999 section 40-65

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(1)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-65(2)

A New Tax System (Goods and Services Tax) Act 1999 subsection 40-75(1)

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

A New Tax System (Goods and Service Tax) Regulations 1999 subsection 40-5.09(1)

A New Tax System (Goods and Service Tax) Regulations 1999 subsection 40-5.09(3)

A New Tax System (Goods and Service Tax) Regulations 1999 section 40-5.12

Reasons for decision

In this reasoning, unless otherwise stated,

•         all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)

•         all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act

•         reference material(s) referred to are available on the Australian Taxation Office (ATO) websiteat www.ato.gov.au

Questions 1, 4 and 5

GST is payable on taxable supplies.

You make a taxable supply if you meet the requirements of section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), which 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 indirect tax zone; 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.

All of the requirements of a taxable supply under section 9-5 must be met at the time of sale for the sale to be a taxable supply.

On the facts provided, the sale of the Property will meet the requirements of paragraphs 9-5(a) and 9-5(d) above. However, the sale will not be a taxable supply to the extent that it is GST-free or input taxed.

Subsection 40-65(1) provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation.

However, subsection 40-65(2) provides that the sale of real property is not input taxed to the extent that the residential premises are

(a)  commercial residential premises; or

(b)  new residential premises other than those used for residential accommodation before 2 December 1998.

Houses which have been used for residential accommodation before 2 December 1998 (either for rental income production or for owner occupation) are not "new residential premises".

Subsection 40-75(1) provides that residential premises are "new residential premises" if they:

(a)  have not previously been sold as residential premises and have not previously been the subject of a long-term lease; or

(b)  they have been created through substantial renovations of a building; or

(c)   have been built to replace demolished premises on the same land.

Goods and Services Tax Ruling GSTR 2012/5 Goods and services tax: residential premises (GSTR 2012/5) outlines the characteristics of residential premises.

Paragraph 9 of GSTR 2012/5 explains that the requirement that the residential premises are to be used predominately for residential accommodation in section 40-65 is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Paragraph 15 of GSTR 2012/5 continues by stating that to satisfy the definition of residential premises, premises must provide shelter and basic living facilities (bedroom, bathroom, and living facilities).

On the facts provided, the sale of the Property with the existing house attached, at settlement, will be an input taxed supply of residential premises under subsection 40-65(1), and will not be a taxable supply under section 9-5.

Questions 2 and 3

Put and Call Options

Subsection 9-30(2) states:

A supply is input taxed if:

(a) it is input taxed under Division 40 or under a provision of another Act, or

(b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a).

Note: If a supply is input taxed, there is no entitlement to an input tax credit for the things that are acquired or imported to make the supply...

Under subsection 40-5(1), a financial supply is input taxed. Subsection 40-5(2) states that 'financial supply' has the meaning given by the A New Tax System (Goods and Service Tax) Regulations 1999 (GST Regulations).

The provision, acquisition or disposal of an interest mentioned in subsection 40-5.09(3) of the GST Regulations is a financial supply if the requirements of subsection 40-5.09(1) of the GST Regulations are satisfied.

The table in subsection 40-5.09(3) of the GST Regulations lists a 'derivative' at Item 11. A 'derivative' is defined in the GST Regulations to mean an agreement or instrument the value of which depends on, or is derived from, the value of assets or liabilities, an index or a rate. The value or price of an option is determined by a number of factors, including the current price of the underlying asset that is the subject of the option.

Supply of the Call Option

Entity X grants the Purchaser a Call Option to acquire residential premises for a specific amount until a specified date. The Purchaser paid a percentage of the purchase price of the Property to enter into the Call Option. Therefore, the Call Option is an agreement the value of which is derived from the value of the asset, the Property. Accordingly, the Call Option satisfies the definition of a derivative.

Where the requirements in subsection 40-5.09(1) of the GST Regulations are satisfied, the supply of the Call Option is an input taxed financial supply under subsection 40-5(1) of the GST Act.

The sale of the Property by Entity X under the Contract of Sale of the Property (Sale Contract) would be an input taxed supply of residential premises under subsection 40-65(1) of the GST Act.

The supply of the Call Option is a supply of a right to receive a supply of residential premises which would be input taxed under subsection 40-65(1) of the GST Act.

The granting of the Call Option is the supply of a right to receive a supply of Property which would be input taxed under Division 40 of the GST Act.

Accordingly, when Entity X grants a Call Option which entitles the Purchaser to purchase the Property which would be an input taxed supply, the supply of the Call Option by Entity X, under the Deed, would be an input taxed supply financial supply pursuant to subsection 40-5(1), and an input taxed supply under paragraph 9-30(2)(b) of the GST Act.

Supply of the Put Option

The Put Option would satisfy the definition of a derivative and is not excluded from being a financial supply under Item 7 in the table in section 40-5.12 of the GST Regulations.

Where the requirements in subsection 40-5.09(1) of the GST Regulations are satisfied, the supply of the Put Option is an input taxed financial supply under subsection 40-5(1) of the GST Act.

The granting of the Put Option is the supply of a right to make a supply of the Property. Although, the supply of the Property would be an input taxed supply of residential premises under subsection 40-65(1) of the GST Act, the Put Option is not the right to receive an input taxed supply.

Consequently, the granting of the Put Option under the Deed is not the supply of 'a right to receive a supply' and would not be input taxed under paragraph 9-30(2)(b) of the GST Act.

The supply of the Put Option is an input taxed financial supply under subsection 40-5(1) and under paragraph 9-30(2)(a) of the GST Act.

Question 6

The Security Deposit is payable in accordance with the terms of the Option Agreement; is a percentage of the purchase price of the Property; and is the deposit shown in the contract for sale of the Property.

Under the Option Agreement, the Security Deposit becomes the property of Entity X if the Call Option is not validly exercised or if the relevant contract for sale is terminated through no fault of the Vendor.

The security deposit is paid under the Option Agreement and in relation to the Sale Contract. The supply contemplated to be made under the Sale Contract would be an input taxed supply of residential premises.

We consider that the deposit which is forfeited pursuant to the terms of the Option Agreement, is consideration for a supply that Entity X makes when it enters into a contract consisting of the obligations it undertakes and the consequent rights it grants.

Paragraph 9-30(2)(b) of the GST Act provides that a supply consisting of a right to receive another supply that would be input taxed is also input taxed.

The forfeited deposit would be consideration for Entity X's earlier supply of a right to receive a supply of residential premises that would have been input taxed. As the security deposit would be forfeited in relation to a contract where the contemplated supply would have been input taxed, paragraph 9-30(2)(b) would apply.

Consequently, the Security Deposit forfeited in the circumstances set out in the respective Option Agreement would be consideration for an input taxed supply. If a supply is input taxed, no GST is payable on the supply.

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