Edited version of your written advice

Authorisation Number: 1012917694223

Date of advice: 26 November 2015

Ruling

Subject: GST and sale of property

Question 1

Will the sale of lots A, B and C which are part of the property located in Australia to the purchaser, be subject to goods and services tax (GST)?

Advice

No. The sale of lots A, B and C which are part of the property located in Australia to the purchaser will not be subject to GST as the sale will not be a taxable supply under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act).

Question 2

Is the supply of the House Lot Call Option in connection to the sale of lots A, B and C to the purchaser subject to GST?

Advice

No. The supply of the House Lot Call Option in connection to the sale of lots A, B and C to the purchaser is not subject to GST as the supply is not a taxable supply under section 9-5 of the GST Act.

Question 3

Is the supply of the House Lot Call Put and Call Option in connection to the sale of lots A, B and C to the purchaser subject to GST?

Advice

No. The supply of the House Lot Call Put and Call Option in connection to the sale of lots A, B and C to the purchaser is not subject to GST as the supply is not a taxable supply under section 9-5 of the GST Act.

Question 4

Will the sale of lots D and E which are part of the property located in Australia to the purchaser, be subject to GST?

Advice

No. The sale of lots D and E which are part of the property located in Australia to the purchaser will not be subject to GST because the supply of the lots is not a taxable supply under section 9-5.

Question 5

Is the supply of the Vacant Lot Option in connection to the sale of lots D and E to the purchaser subject to GST?

Advice

No. The supply of the Vacant Lot Option in connection to the sale of lots D and E to the purchaser is not subject to GST as the supply is not a taxable supply under section 9-5 of the GST Act.

Question 6

Is the supply of the Vacant Lot Call Put and Call Option in connection to the sale of lots D and E to the purchaser subject to GST?

Advice

No. The supply of the Vacant Lot Call Put and Call Option in connection to the sale of lots D and E to the purchaser is not subject to GST as the supply is not a taxable supply under section 9-5 of the GST Act.

Relevant fact

You, in a partnership, own a property in Australia. The property is on separate titles (Lots A, B, C, D and E).

After the purchase less than five dwellings were erected on Z acres of lot B. The dwellings are occupied by the partners as their main residence. Other improvement on the land included large sheds on lot B, cattle yards and fences. The sheds are used for storage and currently one of the sheds has been removed. There is also a cattle crush which is on the boundary of lot A and B.

You are registered as a partnership with the Australian Taxation Office and currently are not registered for GST.

An Australian entity is currently carrying on a farming enterprise on the property and the annual rental income from leasing the property to the Australian entity is well below the GST registration threshold.

You have entered into agreements in regard to selling the property to a purchaser and you do not expect the purchaser to be carrying on a farming business after the purchase. The Australian entity will not continue its farming business after the sale.

You have provided us the following agreements in regard to the sale of the property:

Vacant Lot Call Option Agreement - provides for the sale of lots D and E. The call option fee is well below the GST registration threshold and is exclusive of GST.

On the exercise of the Vacant Lot Call Option, you and the Grantee will simultaneously enter into a put and call option agreement for the sale of the property upon the terms set out in the Vacant Lot Put and Call Option Deed.

Vacant Lot Put and Call Option Deed - provides for the sale of lots D and E. The call option fee is $YY exclusive of GST and the put option fee is $YY exclusive of GST.

This Deed is interdependent with the House Lot Option Deed. On the exercise of the Call Option or Put Option you and the Grantee will enter into a Sale Contract for the purchase and sale of the property.

Sale Contract for vacant lots D and E -The lots will be sold as vacant farm land. The sale contract is interdependent with the House Lot Sale Contract.

House Lot Call Option Agreement - provides for the sale of lots A, B and C. The call option fee is well below the GST registration threshold and is exclusive of GST.

On the exercise of the House Lot Call Option, you and the Grantee will simultaneously enter into a put and call option agreement for the sale of the property upon the terms set out in the House Lot Put and Call Option Deed.

House Lot Put and Call Option Deed - provides for the sale of lots A, B and C. The call option fee is $XX exclusive of GST and the put option fee is $XX exclusive of GST.

This Deed is interdependent with the Vacant Lot Option Deed. On the exercise of the Call Option or Put Option you and the Grantee will enter into a Sale Contract for the purchase and sale of the property.

Sale Contract for House Lots A, B and C- The lots will be sold as vacant possession with the improvements. The improvements relate to the farm land associated farming homesteads, shed, cattle crush and fencing.

The sale contract is interdependent with the Vacant Lot Sale Contract.

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 section 9-20

A New Tax System (Goods and Services Tax) Act 1999 Section 23-5

A New Tax System (Goods and Services Tax) Act 1999 section 188-25

Reasons for decisions

Questions 1 and 4

Characterisation of supply

The Australian property is made up of separate lots. Z acres from lot B was used to build less than five residential premises which are used privately by the partners and the remaining acres are leased to an Australian entity to conduct a farming business. The property will be sold vacant under sale contracts which will be interdependent with each other:

• Sale Contract for vacant lots D and E

• Sale Contract for House Lots A, B and C.

In this instance, we consider that you will be making a number of supplies when the property is sold under these contracts:

• A supply of residential property; and

• A supply of vacant farmland

We will now consider the GST status of each supply

Taxable supply

You are liable for GST on any taxable supply that you make.

A supply is a taxable supply under section 9-5 of the GST Act if:

(a) you make the supply for consideration;

(b) the supply is made in the course of an enterprise that you carry on;

(c) the supply is connected with the indirect tax zone (Australia), and

(d) you are registered or required to be registered for GST.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Sale of residential property

One of the requirements for a taxable supply is that the supply is made in the course or furtherance of an enterprise that the supplier carries on (paragraph 9-5(b) of the GST Act).

The definition of an 'enterprise' in subsection 9-20(1) of the GST Act includes (amongst other things) an activity or series of activities done in the form of an adventure or concern in the nature of trade.

Goods and Services Tax Determination GSTD 2006/6 and Miscellaneous Taxation Ruling MT 2006/1 explain that the mere disposal of a family home does not amount to trade.

The residential premises on lot B are used as private primary residences by the partners in the partnership. In this instance the disposal of the private residences will not amount to trade for GST purposes. You will therefore not be selling the residential premises in the course of an enterprise under paragraph 9-5(b) of the GST Act.

In this instance all the requirements in section 9-5 of the GST Act will not be satisfied. GST will therefore not be applicable when the residential properties are sold.

Sale of vacant farmland

For the supply of the vacant farmland to be a taxable supply, you are required to be registered for GST as currently you are not registered for GST.

Under section 23-5 of the GST Act, an entity is required to be registered for GST if:

a) the entity carries on an enterprise; and

b) the entity's GST turnover meets the registration turnover threshold.

Section 188-25 of the GST Act excludes certain supplies made when working out the projected annual turnover for GST registration. Section 188-25 of the GST Act requires you to disregard the following when calculating your projected annual turnover:

a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and

b) any supply made, or likely to be made, by you solely as a consequence of:

i. ceasing to carry on an enterprise; or

ii. substantially and permanently reducing the size or scale of an enterprise.

The vacant farmland is a capital asset from which rental income is derived from and the ownership of the asset will be transferred when sold. When considering the projected annual turnover for GST registration, the consideration receive from the sale of the property will not be included under section 188-25 of the GST Act. In this instance you will not be required to be registered for GST when selling the vacant farmland as currently you are not registered for GST.

Accordingly, the sale of the vacant farmland will not be a taxable supply as all the requirements in section 9-5 of the GST Act will not be satisfied. GST will therefore not be applicable when the vacant farmland is sold.

Summary

The sale of the residential premises and the vacant farmland will not be subject to GST when sold as the supply of the premises and vacant farmland will not be a taxable supply under section 9-5 of the GST Act.

Questions 2, 3, 5 and 6

Subsection 9-17(1) of the GST Act provides, that if an option to acquire a thing is granted, the consideration for the supply of the thing on the exercise of the option is limited to any additional consideration provided either for the supply or in connection with the exercise of the option.

Goods and Services Tax Determination GSTD 2014/2 provides the Commissioner's view on 'call option'. Paragraphs 15, 16, 17 and 21 state:

15. Where a call option is granted, the grantee provides consideration to the grantor, commonly referred to as a call option fee.

16. Where an entity has exercised a call option to compel the transfer of real property, for GST purposes, the call option fee does not form part of the consideration for the property.

17. This is the case even if the agreement between the parties specifies that the call option fee forms part of the price for the supply of the real property.

21. In the context of a call option over real property, subsection 9-17(1) recognises that the supply of the option is a separate supply to the supply of the underlying property. As a consequence of subsection 9-17(1) of the GST Act, the consideration for the call option is the call option fee, and the consideration for the supply or acquisition of the underlying property is limited to any additional consideration provided.

Accordingly, the call options in the Agreements and the put and call options in the Deeds are to be treated as separate supplies from the supplies of farmland and residential property in the sale contracts.

Vacant Lot Call Option Agreement and Vacant Lot Put and Call Option Deed

The supplies of the Vacant Lot Call Option and the Vacant Lot Put and Call Option are taxable supplies where all the requirements in section 9-5 of the GST Act are satisfied.

You satisfied paragraphs 9-5(a) to 9-5(c) of the GST Act when supplying the call option and put and call option as:

a) you supplied the call option and put and call option for consideration when the grantee paid the option fees to you;

b) the supplies were made in the course of the leasing enterprise that you carry on the farmland;

c) the supplies were connected with Australia.

Currently you are not registered for GST. From the information received, you were not required to be registered for GST as your GST annual turnover was under the GST registration threshold when you received the call option fees and the put and call option fees. Paragraph 9-5(d) of the GST Act is therefore not satisfied.

The supplies of the Vacant Lot Call Option and the Vacant Lot Put and Call Option were not taxable supplies under section 9-5 of the GST Act. GST is not applicable to these supplies.

House Lot Call Option Agreement and House Lot Put and Call Option Deed

The House Agreement and the House Deed relate to the supplies of farmland and residential property.

Supply of residential property

As discussed above, the supply of the residential property is not made through an enterprise that you carry on as the residential were privately used by the partners. Accordingly, the call option and put option and call option deed that relates to the supply of the residential property were not made through an enterprise that you carry on.

The supplies of the call option and put option and call options therefore were not taxable supplies supply under section 9-5 of the GST Act. GST is not applicable to the supplies.

Supply of farmland

From the information received, when you received the call option fees and the put and call option fees that relates to the farmland, you were not required to be registered for GST because your GST annual turnover was under the GST registration threshold.

Accordingly, your supplies of the call option and put and call option were not taxable supplies under section 9-5 of the GST Act. GST is therefore not applicable to the supplies.

Summary

Your supplies of the call option and put and call option were not taxable supplies under section 9-5 of the GST Act. GST is not applicable to the supplies.