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Edited version of your written advice
Authorisation Number: 1051209547629
Date of advice: 3 April 2017
Ruling
Subject: Capital gains tax - call options - disposal - date of capital gains tax event
Question:
Will the date of the disposal of the land be when the call option was exercised under subsection 104-10(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Answer:
Yes.
This ruling applies for the following periods
Income year ending 30 June 2015
Income year ending 30 June 2016; and
Income year ending 30 June 2017.
The scheme commences on
1 July 2014.
Relevant facts and circumstances
You are a family partnership which is made up of a number of family members (the Partners).
After 20 September 1985, you purchased some parcels of land (the Properties) with the title of the land being transferred to the Partners shortly after the Properties were purchased.
The ownership of the Properties by the Partners as outlined on the title is as follows:
● Person A and Person B as joint tenants inter se and Person C and Person D as joint tenants inter se as tenants in common in equal shares.
You used the Properties for agricultural purposes.
Person D (the deceased) passed away and their estate became one of the Partners, with Person C and Person E being appointed as the Personal Representatives of the deceased's estate.
Many years after the Properties had been purchased, you entered into a Call Option Agreement with Company A under which:
● the vendor is you
● the purchaser is Company A
● you would sell the Properties to Company A for $X,XXX,XXX, Goods and Services Tax (GST) exclusive
● Company A could assign the benefit of the Call Option to another party in accordance with the provisions of the agreement
● a security of $XXX,XXX, GST exclusive was payable in a number of instalments
● an option fee of $XX.XX was payable; and
● the expiry date was a number of years after the agreement date.
Company A is part of a group of companies.
A number of years after the Call Option Agreement had been entered into, Company A had assigned its interest in the call option to Company B.
A short time later, Company B gave notice of their intention to exercise the Call Option with the contract of sale pursuant to the Call Option being executed by you and Company B around the same time.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 104-40
Income Tax Assessment Act 1997 Section 116-65
Reasons for decision
Date of disposal of an asset disposed of on the exercising of an option
Subsection 104-10(1) of the ITAA 1997 provides that capital gains tax (CGT) event A1 happens on the disposal of a CGT asset. Subsection 104-10(3) of the ITAA 1997 sets the time of CGT event A1 as:
(a) when you enter into the contract for the disposal; or
(b) if there is no contract - when the change of ownership occurs.
A Call Option is, by its very nature, a contract for the disposal of the property. However, the CGT provisions take the general law as it stands and this means that the date you enter into the contract is the date the contract comes into existence for general law purposes. For example, an agreement can be a conditional contract, that is, it might only proceed if a specific condition is fulfilled.
The Commissioner's views on the timing of CGT event A1 are clarified in CGT Determination Number 16 Capital Gains: What is the date of acquisition (or date of disposal) of an asset acquired (or disposed of) on the exercise of an option? It states that where an option is exercised, the date of disposal of the asset is the date the option is exercised and not the date the option was granted.
Application to your circumstances
In this case, it is clear from the wording of the Call Option Agreement that the intention of the parties was for the agreement not to become binding until the option was exercised. Accordingly, we accept that the time of the CGT event arising from the exercising of the Call Option was the date of exercise of the Call Option and the signing of the separate sale contract for the purposes of paragraph 104-10(3)(a) of the ITAA 1997.
Therefore, we view that the date you disposed of the Property was the date the Call Option was exercised.