Edited version of your written advice

Authorisation Number: 1051178070731

Date of advice: 5 January 2016

Ruling

Subject: GST and supply of an option to purchase property

Question

Are you making a taxable supply when you enter into an agreement granting an option to purchase, as a GST-free supply of a going concern, commercial property located at a specified address?

Answer

No, your supply of the grant to purchase the commercial property will be GST-free pursuant to paragraph 9-30(1)(b) of the A New Tax System (Goods and Services Tax) Act 1999 where upon the exercising of the option, the supply of the commercial property is of a GST-free going concern.

Relevant facts and circumstances

You are registered for GST.

You own commercial property located at a specified address (the Property).

You entered into a Call Option Deed (the Deed) with another entity (the Grantee) granting the Grantee or its nominee an option to purchase the Property.

The Deed provides that upon the exercising of the option, a contract for the sale of the Property (the Contract) shall be deemed to have come into effect between you and the Grantee or its nominee.

The Contract provides that the sale of the Property is a GST-free supply of a going concern.

The Property is currently partly tenanted with an existing lease in force until mmyyyy.

The Special Conditions to the Contract provides that the Property is sold subject to the existing commercial lease.

You are actively seeking a tenant to lease the vacant area of the Property.

The Deed provides should any part of the Property be vacant for any reason during the option period, that you will actively pursue tenants to enter into a new lease to lease all or part of the Property.

The Special Conditions to the Contract provides that should any part of the Property be vacant or become vacant for any reason before completion of the Contract, you will actively pursue tenants to enter into a new lease before completion to lease all or part of the Property.

Relevant legislative provisions

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

Section 9-5

Section 9-10

Subsection 9-30(1)

Section 9-40

Section 38-325

Reasons for decision

Note: In this reasoning, unless otherwise stated,

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

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

Section 9-40 provides that you are liable for GST on any taxable supplies that you make.

Section 9-5 provides 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 the indirect tax zone; 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.

Section 9-10 provides that a 'supply' is any form of supply whatsoever' and includes:

● a creation, grant, transfer, assignment or surrender of any right, and

● an entry into, or release from, an obligation to do anything or to refrain from an act or to tolerate an act or situation.

Goods and Services Tax Ruling GSTR 2006/9, Goods and services tax: supplies (GSTR 2006/9), provides guidance on the meaning of 'supply'.

Paragraph 137 of GSTR 2006/9 states the following:

137. The grant of a right or entry into an obligation may be a term or condition of a larger transaction. Where the grant of the right or entry into the binding obligation is the substance of the transaction it will be the subject matter of a supply.

In this instance the granting of the call option is considered to fall within the definition of a 'supply' for GST purposes and your supply will satisfy the positive limbs of section 9-5 listed above.

Subsection 9-30(1) provides that a supply is GST-free if it is a supply of a right to receive a supply that would be GST-free under Division 38. Section 38-325 provides that the supply of a going concern is GST-free. In this case, the call option is in regard to a supply of a going concern which will be GST-free.

ATO Interpretive Decision 2005/184 Goods and Services Tax GST and supply of a call option over GST-free land (ATO ID 2005/184) provides the ATO view in respect of a call option arrangement. Whilst the underlying supply in ATO ID 2005/184 is in regard to a GST-free supply of farm land, the principle will apply equally to other GST-free supplies including the GST-free supply of a going concern.

ATO ID 2005/184 relevantly states:

The supply of the call option is a supply of a right to receive a supply of a property which would be a GST-free supply under section 38-480 of the GST Act. Therefore, the supply of the call option is also a GST-free supply under paragraph 9-30(1)(b) of the GST Act.

Further issues for you to consider

In the event that the supply of the property does not satisfy the requirements of section 38-325 and the supply of the property is not a GST-free supply of a going concern, the supply of granting of the call option will be a taxable supply where the criteria of section 9-5.

If the supply of the granting of the call option becomes a taxable supply, an adjustment event has occurred pursuant to paragraph 19-10(1)(c) and you will have an adjustment in accordance with section 19-40.