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Ruling

Subject: GST and option fees

Question 1

Are you entitled to input tax credits on the purchase of a Property Land Option (option):

(a) Where you intend to build residential premises on the land with the intention of earning rental income?

(b) Where you intend to build residential premises on the land with the intention of selling the residential premises?

Advice

Your ability to claim input tax credits is related to what you ultimately decide to do with the land. Please refer to our reasons for decision below.

Relevant facts

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 are the trustee for a self managed superannuation fund (SMSF).

You are registered for goods and services tax (GST).

You purchased a Property Land Option.

You pay an option fee upfront which makes up part of the settlement sum.

Upon exercising of the option, the remainder is to be paid out to settle on the land.

You may build residential premises on the land with the intention of earning rental income or alternatively you may build residential premises on the land with the intention of selling the residential premises.

Relevant legislative provisions

All references are to the A New Tax System (Goods and Services Tax) Act 1999:

Section 9-10

Section 9-17

Division 11

Division 129

Reasons for decision

Issue 1

Question 1

Summary

Your ability to claim input tax credits is related to what you ultimately decide to do with the land

Detailed reasoning

Section 11-20 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) states that you are entitled to the input tax credit for any creditable acquisition that you make.

Section 11-5 of the GST Act provides that you make a creditable acquisition if:

· you acquire anything solely or partly for a creditable purpose

· the supply of the thing to you is a taxable supply

· you provide or are liable to provide consideration for the supply, and

· you are registered or required to be registered for GST.

You acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise (subsection 11-15(1) of the GST Act). However, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making supplies that would be input taxed, or the acquisition is of a private or domestic nature (subsection 11-15(2) of the GST Act).

Your acquisition of the option is a creditable acquisition, provided it is a taxable supply to you. That is, you are considered to be carrying on activities in the course of an enterprise and not making acquisitions that are of a private or domestic nature or that relate to making input taxed supplies (unless you acquire and exercise the option to purchase vacant land for the purpose of building residential premises and then renting them out, see discussion below). Therefore, your acquisition of the option is for a creditable purpose. Further, you provide or are liable to provide consideration for the purchase/granting of the option, being the option fee, and you are registered for GST.

Where a person grants, and another acquires, an option to purchase a property for consideration, the substance of the transaction is the supply of a right, which is a separate transaction from the exercise of the option. The purchase of the property when the option is exercised will involve another supply, which may be a taxable supply if additional consideration is provided (paragraph 9-15(3)(a) of the GST Act). Therefore in this case, the sale of the option by the seller is considered to be a separate supply to the sale of the vacant land by the seller.

Section 9-30 of the GST Act provides that a supply is GST-free or input taxed if it is a supply of a right to receive a supply that would be GST-free or input taxed under the GST Act. As such, the supply of an option to purchase property would be GST-free or input taxed if the sale of the property was GST-free or input taxed.

Therefore, where you acquire the land in the course of your enterprise and for the purpose of building residential premises on the land with the intention of earning rental income, it will not be acquired for a creditable purpose as the supply of residential premises for rent (other than commercial residential premises) is an input taxed supply under paragraph 40-35(1)(a) of the GST Act.

However, where you acquire the land in the course of your enterprise and for the purpose of building residential premises on the land with the intention of selling the residential premises, the supply of the land to the fund is a taxable supply and the fund provides, or is liable to provide, consideration for the supply of the land. In this case as the conditions of section 11-5 of the GST Act are satisfied, you will be entitled to input tax credits on the acquisition of the land.

Please note, if there is a provision where the option fee is refunded or credited against the deposit of any sale contract it is considered to constitute an adjustment event under Division 19 of the GST Act (that is, a change in the consideration for the supply or acquisition of the option). For further guidance on how to account for any adjustments, please refer to Goods and services tax ruling GSTR 2000/29 (Goods and services tax: attributing GST payable, input tax credits and adjustments and particular attribution rules made under section 29-25, which is available on our website ato.gov.au (select Rulings & law and then Public Rulings/GST/2000 etc).

Conclusion

Your ability to claim input tax credits is related to what you ultimately decide to do with the land.

Under Division 129 of the GST Act, you will be required to make a yearly adjustment if there is a change in creditable purpose between the intended application of the land and the actual application of the land. The first 'adjustment period' does not occur until at least twelve months after the acquisition is made. The number of adjustment periods varies depending on the GST exclusive value of the acquisition and whether the acquisition is related to business finance or not (section 129-20 of the GST Act). An acquisition relates to business finance if it relates solely or partly to making financial supplies (and is not solely or partly of a private or domestic nature).

Subsection 129-20(3) states that for an acquisition or importation that does not relate to business finance:

(a) if the GST exclusive value of the acquisition or importation is $5,000 or less only the first 2 tax periods are adjustment periods; or

(b) if the GST exclusive value of the acquisition or importation is more than $5,000 but less than $500,000 only the first 5 tax periods are adjustment periods; or

(c) if the GST exclusive value of the acquisition or importation is $500,000 or more only the first 10 tax periods are adjustment periods.

However, an adjustment cannot arise under Division 129 if the GST exclusive value of an acquisition or importation that does not relate to business finance is $1,000 or less (subsection 129-10(2) of the GST Act).

Therefore, your ability to claim input tax credits on the land is related to what you ultimately do with the land. However, there is also a maximum number of adjustment periods for changes in creditable purpose, which vary depending on the GST exclusive value of the acquisition or importation and whether the acquisition or importation relates to business finance or not. Any changes in creditable purpose that occur after the end of the last adjustment period will not give rise to an adjustment under Division 129 of the GST Act.

Goods and services tax ruling GSTR 2000/24 (Goods and services tax: Division 129 - making adjustments for changes in extent of creditable purpose) provides further explanations on the operation of Division 129 of the GST Act.