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Edited version of your written advice

Authorisation Number: 1012704501419

Ruling

Subject: GST and assignment of a call option over residential properties

Question

Is an entity making an acquisition of an input taxed supply when the holder of the call option assigns the call option to the entity for the payment of an assignment fee?

Answer

Yes, the entity is making an acquisition of an input taxed supply when the holder of the call option assigns the call option to the entity for the payment of an assignment fee.

Relevant facts and circumstances

    • The entity is registered for goods and services tax (GST) and carrying on an enterprise of building and selling properties.

    • The Option Holder entered into XX separate Deeds of Call Option with XX owners of residential properties (land owners) by paying an option fee to each land owner, respectively.

    • All the XX residential properties are established residential premises and not new residential premises as defined under the GST law.

    • The land owners are not carrying on an enterprise.

    • If the Call Option is exercised up until a specified date, the land owners will enter into a contract for sale of the land with the Option Holder to sell the land owner's interest in the land to the Option Holder for an agreed sum of money.

    • There is no Put Option in favour of the land owners.

    • The Option Holder subsequently entered into an agreement with the entity to assign the Call Option Deeds.

    • Under the Agreement to Assign Option Deeds, the Option Holder has agreed to assign all of the Option Holder's interest in the Call Option Deeds to the entity subject to the entity paying an assignment fee to the Option Holder.

    • The Option Holder is registered for GST.

Relevant legislative provisions

A New Tax System (Goods and services Tax) Act 1999 - subsection 9-30(2)

A New Tax System (Goods and services Tax) Act 1999 - section 38-325

A New Tax System (Goods and services Tax) Act 1999 - subsection 40-5(1) and (2)

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

A New Tax System (Goods and Services Tax) Regulations 1999 -subregulations 40-5.09(1),(3) and (4)

Reasons for decision

Summary

The entity is making an acquisition of an input taxed supply when the holder of the call option assigns the call option to the entity for the payment of an assignment fee.

Detailed reasoning

Under subsection 9-30(2) of the A New Tax System (Goods and services Tax) Act 1999 (GST Act) a supply is input taxed if: (a) it is input taxed under Division 40 of the GST Act 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).

If a supply is input taxed, then no GST is payable on the supply.

The XX land owners of the residential properties have made the supply of a call option to the Option Holder where the Option Holder has the right to purchase the residential properties from these land owners if the Option Holder exercises the call option.

On exercise of the call option, the supply of residential properties by the land owners will be an input taxed supply under subsection 40-65(1) of the GST Act. The supply of the call option by the land owners to the Option Holder also will be an input taxed supply under paragraph 9-30(2)(b) of the GST Act as the underlying supply would be an input taxed supply of residential premises.

The assignment of the call option by the Option Holder to the entity would also be an input taxed supply as the underlying supply will be an input taxed supply of residential premises.

In addition, the assignment of the call option to the entity will be a financial supply which would be input taxed under subsection 40-5(1) of the GST Act.

Subsection 40-5(2) of the GST Act defines a financial supply as having the meaning given by the A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations).

Subregulation 40-5.09(1) of the GST Regulations, provides that the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if the provision, acquisition or disposal of that interest is for consideration, in the course or furtherance of an enterprise and connected with Australia; and the supplier is registered or required to be registered for GST and is a financial supply provider in relation to supply of the interest.

Item 11 in the table in subregulation 40-5.09 of the GST regulations (Item 11), lists a derivative. 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 Option Holder would assign the call option deed to the entity to purchase the residential premises from the XX land owners who have supplied the call option to the Option Holder, for an agreed amount up until a specified date.

The entity will pay the assignment fee to the Option Holder as per the Agreement to Assign Option Deeds. The assignment of call option is an agreement the value of which is derived from the value of an asset, the property. Accordingly, the assignment of a call option satisfies the definition of a derivative.

The assignment of the call option will be made for consideration, in the course or furtherance of the enterprise carried on by the Option Holder and connected with Australia. The Option Holder is registered for GST and as it has agreed to assign the call option, the Option Holder will be a financial supply provider in relation to the assignment of the call option. (regulation 40-5.06 of the GST Regulations). Therefore, the requirements in subregulation 40-5.09(1) of the GST Regulations will be satisfied and the Option Holder's supply will be an input taxed financial supply under subsection 40-5(1) of the GST Act.

Accordingly, the assignment of the call option to the entity by the Option Holder will be an input taxed financial supply, under subsection 40-5(1) of the GST Act, and an input taxed supply under paragraph 9-30(2)(b) of the GST Act.

Please note that the supply of the call option by the XX land owners to the Option Holder also will be a financial supply provided the supply satisfies subsection 40-5(1) of the GST Act.

Supply of a going concern

A supply of a going concern is GST-free if the supply satisfies all of the requirements under section 38-325 of the GST Act. One of the requirements that should be satisfied is that the supplier carries on the enterprise until the day of supply and supplies all the things necessary for the continued operation of the enterprise.

The supply of the properties to the entity by the XX land owners, upon exercise of the call option, will not be a GST-free supply of a going concern if the XX landowners are not carrying on an enterprise. Therefore, the supply of the call option by the XX landowners to the Option Holder will not be a GST-free supply. Accordingly, the assignment of the call option to the entity by the Option Holder will not be a GST-free supply.

Conclusion

The entity makes an acquisition of an input taxed supply when the Option Holder assigns the call option to the entity for the payment of the assignment fee.


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