Edited version of private ruling

Authorisation Number: 1011766410054

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Ruling

Subject: Income Tax - Private Ruling Application

Question

Does the granting of an option to the prospective purchaser of your property constitute Capital Gains Tax event D2 as per section 104-40(1) of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commenced on:

1 July 2009

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 have held property for a number of years.

You have received a number of options to purchase payments for the same property over the last number of years and none of these options have been exercised.

You have entered into an option to purchase agreement with an entity in relation to certain parts of your property.

Relevant legislative provisions

Income Tax Assessment Act 1997 104-40(1)

Income Tax Assessment Act 1997 104-40(2)

Income Tax Assessment Act 1997 104-40(3)

Reasons for decision

There is no indication that you are in the business of obtaining property so that you can sell options for purchase by others. You have received a number of option payments for the same property over the last number of years and none of these options have been exercised. It is considered this is not of sufficient scale to constitute the business of obtaining property so that you can sell options for their purchase by others.

It therefore becomes necessary to consider the Capital Gains provisions (CGT) of the Income Tax Assessment Act 1997 (ITAA 1997)

Granting, renewing or extending an option - Overview

CGT event D2 happens if you grant an option to a person or an entity, or renew or extend an option that you had granted.

The amount of your capital gain or capital loss from CGT event D2 is the difference between what you receive for granting the option and any expenditure you incurred to grant the option. The CGT discount does not apply to CGT event D2.

Example

The following example and commentary has come from our website at this address:

http://www.ato.gov.au/individuals/content.asp?doc=/content/36904.htm

CGT event D2 happens if you grant an option to a person or an entity, or renew or extend an option that you had granted.

The amount of your capital gain or capital loss from CGT event D2 is the difference between what you receive for granting the right and any expenditure you incurred on it. The CGT discount does not apply to CGT event D2.

Example

Granting of an option

You were approached by Colleen who was interested in buying your land. On 30 June 2009, you granted her an option to purchase your land within 12 months for $200,000. Colleen pays you $10,000 for the grant of the option. You incur legal fees of $500. You made a capital gain in the 2008-09 income year of $9,500.

Exercise of an option

If the option you granted is later exercised, you ignore any capital gain or capital loss you made from the grant, renewal or extension. You may have to amend your income tax assessment for an earlier income year.

Similarly, any capital gain or capital loss that the grantee would otherwise make from the exercise of the option is disregarded.

The effect of the exercise of an option depends on whether the option was a call option or a put option. A call option is one that binds the grantor to dispose of an asset. A put option binds the grantor to acquire an asset.

Example

Granting of an option (continued):

On 1 February 2010, Colleen exercises the option. You disregard the capital gain that you made in the 2008-09 income year and you request an amendment of your income tax assessment to exclude that amount. The $10,000 you received for the grant of the option is considered to be part of the capital proceeds for the sale of your property in the 2009-10 income year. Your capital gain or capital loss from the property is the difference between its cost base/reduced cost base and $210,000.

Application to your circumstances

In view of the CGT provisions outlined above, it is considered the grant of an option to the prospective purchaser of your property is event D2 as per section 104-40(1) of the ITAA 1997. You will make a capital gain from this event if your capital proceeds from grant of the option are more than the expenditure you incurred to grant the option. You will make a capital loss if the proceeds are less than the expenditure (section 104-40(3) of the ITAA 1997).

You need to include any capital gain made upon the grant of the option as assessable income for the financial years in which the event occurred. The time of the event is when you grant the option (section 104-40(2) of the ITAA 1997).

It should be noted that a capital gain arising under CGT event D2 is not a discount capital gain (section 115-25(3) of the ITAA 1997).