Edited version of your written advice

Authorisation Number: 1051520381538

Date of advice: 21 May 2019

Ruling

Subject: GST and sale of property

Question 1

Are you making a taxable supply pursuant to section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you grant a call option in regard to the sale and purchase of property situated at a specified location?

Answer

Yes, to the extent your supply of the call option is not input taxed.

Question 2

Are you making a taxable supply pursuant to section 9-5 of the GST Act when you sell property situated at a specified location?

Answer

Yes, to the extent your supply of the Property is not input taxed.

Relevant facts and circumstances

You are not currently registered for GST.

In xxxx, you purchased xx acres of land situated at a specified location (the Property) and constructed your principal place of residence.

You operated a small scale primary production business (vegetable growing) on the Property, registering for GST effective from 1 July 2000.

You ceased carrying on your primary production enterprise in yyyy and your GST registration was cancelled.

You still reside on the Property as your principal place of residence.

You currently lease approximately xx% of the Property to an unrelated party for use in their primary production business. Turnover from leasing xx% area of the Property is $xx annually. You have leased this section of the Property for approximately xx months.

You use the remaining area of the Property as your main residence and your personal enjoyment.

You are retired and do not carry on any other enterprise.

You have entered into a Heads of Agreement (HoA) with a prospective purchaser of the Property.

The HoA provides the following:

● Payment of a $xx ‘Exclusivity Fee’ payable on signing of the HoA

● Option period of two years plus a one year extension

● Payment of $xx payable on the date of signing the Call Option Agreement

● Payment of $ xx payable on first anniversary of the date of signing the Call Option Agreement

● Payment of $xxx payable on second anniversary of the date of signing the Call Option Agreement in the case an extension period is required

● Sale price for the Property is $xx

● In the event that the purchaser exercises their rights under the Call Option Agreement, the Exclusivity Fee and option fees paid will form a part of the deposit for the purchase of the Property

● Where the purchaser does not exercise the call option, the option fees paid are non-refundable

● Settlement of the Property is to occur 12 weeks from the exchange of sale contract

● GST is payable by the purchaser if applicable.

The option fees are exclusive of GST.

A Call Option Deed and Sale Contract have not been entered into to date. These documents will contain a clause providing that if the supply is subject to GST, the recipient will pay the supplier an additional amount equal to the amount of GST.

You do not have any knowledge as to the process involved, or on what basis, the prospective purchaser determined the monetary amounts of the Option Fees. You received the proposal from the prospective purchaser and are not aware of the reasoning behind amounts presented in the offer.

Relevant legislative provisions

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

Section 9-5

Section 9-10

Section 9-20

Subsection 9-30(2)

Paragraph 9-30(2)(a)

Paragraph 9-30(2)(b)

Section 9-40

Section 23-5

Division 40

Section 40-65

Subsection 188-10(1)

Section 188-15

Paragraph 188-15(1)(a)

Section 188-20

Paragraph 188-20(1)(a)

Paragraph 188-25(a)

Section 195-1

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.

In the first instance we need to determine whether you are making a taxable supply when firstly, you enter into the Call Option Agreement and secondly, where the call option is exercised, the subsequent sale of the Property.

We then need to consider whether the supply/supplies are made in the course or furtherance of an enterprise that you carry on and if so, whether you are required to be registered for GST.

Supply

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

● a grant, assignment or surrender of real property;

● 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.

Real property is defined in section 195-1 to include:

(a) any interest or right over land; or

(b) a personal right or call for or be granted any interest in or right over land; or

(c) a licence to occupy land or any other contractual right exercisable over or in relation to land.

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

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 case the entering into the Call Option Deed granting an option for the purchase of the Property is considered to be the substance of a separate transaction between you and the Grantee and is considered to fall within the definition of a ‘supply’ for GST purposes.

Goods and Services Tax Determination GSTD 2014/2: Goods and services tax: where real property is acquired following the exercise of a call option, does the call option fee form part of the consideration for the acquisition for the purposes of subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999? discusses the meaning of a call option at paragraphs 12 and 13:

12. According to the Macquarie Dictionary and the Oxford Dictionary of English, a call option is:

a. the right to buy a specified commodity, parcel of shares, foreign exchange, etcetera, at a set price on or before a specified date (Macquarie Dictionary).

b. an option to buy assets at an agreed price on or before a particular date (Oxford Dictionary of English).

13. Options have been described as irrevocable offers or conditional contracts or sui generis arrangements. For the purposes of this Determination, a call option is an agreement between the grantor and the grantee, the exercise of which allows the grantee to compel the grantor to transfer real property to the grantee within a specified period of time.

Paragraphs 15 to 19 and paragraph 21 of GSTD 2014/2 contain further clarification of the ATO view in regard to call options:

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. The operation of section 9-17 varies what may be the outcome under contract law.

18. Subsection 9-17(1) relevantly provides, that if an option to acquire a thing is granted, then 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.

19. In discussing former subsection 9-15(3)¹, the Explanatory Memorandum to the A New Tax System (Goods and Services Tax) Bill 1998 stated:

The supply of a right or option will be taxed when it is supplied. The later exercise of the right or option will be another supply. That later supply will not be taxable unless there is further consideration when the right or option is exercised.

…

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), 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.

Where the call option is exercised, the subsequent supply of the Property would also constitute a ‘supply’ for GST purposes.

In this case, we consider there are two supplies being the granting of the Call Option and a subsequent supply of the Property.

Supply of the Property

Subsection 9-30(2) provides that a supply is input taxed if:

(a) it is input taxed under Division 40 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 Division 40 or a provision of another Act.

Division 40, specifically section 40-65, provides that the sale of real property is input taxed to the extent that the property is residential premises to be used predominately for residential accommodation. However, the sale will not be input taxed to the extent that the residential premises are either ‘commercial residential premises’ or ‘new residential premises’.

In this case the Property contains your principal place of residence that you have resided in since xxxx. We do not consider the premises to be either ‘commercial residential premises’ or new residential premises’ as defined in the GST legislation.

Goods and Services Tax Ruling GSTR 2012/5; Goods and Services Tax: residential premises discusses at paragraph 46 the amount of land supplied with the residential dwelling:

46. There is no specific restriction, in the definition of residential premises, on the area of land that can be included with a building. The extent to which land forms part of residential premises to be used predominantly for residential accommodation is a question of fact and degree in each case. A relevant factor in determining this is the extent to which the physical characteristics of the land and building as a whole indicate that the land is to be enjoyed in conjunction with the residential building. The use of the land is not a determining factor in deciding if the land forms part of the residential premises.

In this case we would accept that the residential dwelling (your principal place of residence) together with the areas of the Property that are not being leased would constitute an input taxed supply of residential premises for the purposes of section 40-65. As such, the supply will be input taxed pursuant to paragraph 9-30(2)(a).

Your supply of the vacant areas of the Property that are being leased would be neither a GST-free supply nor an input taxed supply.

Supply of the granting of the Call Option

As discussed above, the supply of the portion of the Property consisting of the residential dwelling and the areas not being leased will be an input taxed supply pursuant to section 40-65.

Accordingly, your granting of the call option that relates to your supply of the area of the Property considered as ‘residential premises will be an input taxed supply pursuant to paragraph 9-30(2)(b).

In considering whether the granting of the option that relates to the vacant areas of the Property that are being leased would be considered an input taxed supply, ATO Interpretative Decision ATO ID 2005/183; GST and supply of a call option over residential premises provides relevant guidance.

In the first instance ATO ID 2005/183 examines whether the granting of the option is an input taxed financial supply of a derivative. ATO ID 2005/183 explains that for GST purposes, a ‘derivative’ is defined as 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. Given the scenario in ATO ID 2005/183, the granting of the option is considered a derivative as the option fee payable was stated as a set percentage of the purchase price. The rationale being that the value of the option (option fee) was derived from the value of an asset (5% of the purchase price).

In this case, the Option Fee stated in the HoA is a specified monetary amount with the arbitrary amount being determined by the Grantee. You did not have any input, and do not have any knowledge as to the process involved, or on what basis, determined the monetary amounts of the Option Fees. As such, we do not consider the granting of the option to fall within the definition of a ‘derivative’ and therefore is not considered to be an input taxed financial supply.

Your granting of the call option in relation to your supply of the vacant area of the Property that is being leased will not fall within the scope of being GST-free.

Consideration

The HoA provides:

● consideration for the supply of granting of the call option is $xx payable in two instalments (with the possibly of a further $xx instalment being payable)

● consideration for the subsequent supply of the Property is $xx.

Enterprise

Section 9-20 provides that the term ‘enterprise’ includes, among other things, an activity or series of activities done on a regular or continuous basis, in the form of a lease, licence or other grant of an interest in property.

In this case, you acquired the Property in xxxx and currently lease approximately xx% of the Property to an unrelated entity for the purpose of use in their primary production business. The remainder of the Property is used as your primary place of residence.

We consider that you are a tax law partnership for GST purposes as you are an association of persons in receipt of ordinary income (rent) jointly in relation to a leasing enterprise you are carrying on.

Section 195-1 states that the phrase ‘carrying on’ in the context of an enterprise includes ‘doing anything in the course of the commencement or termination of the enterprise’.

As such we regard the entering into the Call Option Agreement and the subsequent sale of the Property to be, at least in part, in the course or furtherance of an enterprise you carry on.

GST registration

As you are not currently registered for GST, the issue is whether you are required to register for GST.

Section 23-5 provides that you are required to register for GST if you are carrying on an enterprise and your GST turnover meets the GST registration turnover threshold (currently $75,000).

Subsection 188-10(1) provides that your GST turnover will meet the registration turnover threshold if:

(a) your current turnover is at or above the turnover threshold and the Commissioner is not satisfied that your projected GST turnover is below the turnover threshold; or

(b) your projected GST turnover is at or above the turnover threshold.

The definitions of ‘current GST turnover’ and ‘projected GST turnover’ are contained in sections 188-15 and 188-20 of the GST Act respectively. Both provisions exclude the value of input taxed supplies in the calculation of the respective turnovers.

As discussed above, both your supply of the Property considered as ‘residential premises’ and your supply of granting of the call option in relation to your supply of residential premises are input taxed supplies. Therefore the turnover attributed to these supplies is disregarded when assessing whether your current and projected GST turnovers meet the registration turnover threshold of $75,000.

In this case, there will be a need to apportion the consideration to be received in connection with your supply of the granting of the call option between your supply of the residential premises and your supply of the leased vacant portion of the Property.

Goods and Services Tax Ruling GSTR 2001/8: Goods and services tax: Apportioning the consideration for a supply that includes taxable and non-taxable parts discusses at paragraph 26 that you can use any reasonable method to apportion consideration. GSTR 2001/8 is drafted in the context of apportioning consideration received for a supply that contains both taxable and non-taxable components for the purpose of determining the mount of GST payable (and input tax credits potentially available). However the same principles contained in GSTR 2001/8 can be applied when apportioning turnover for the purposes of establishing whether a particular threshold is met or exceeded.

Paragraph 97 of GSTR 2001/8 discusses using a direct method of apportionment such as the relative area in a supply of property. Paragraph 106 of GSTR 2001/8 further discusses this method stating:

106. In some cases, it is reasonable for you to allocate the consideration for a mixed supply by reference to the relative floor area of the property being supplied. To make an allocation on this basis, you also need to consider the relative price of different types of floor space (for example, floor space in residential, retail and industrial property are often priced differently). That is, you may simply work out the proportionate floor area if the value per square metre does not vary. However, if the value per square metre is variable, then you can reasonably apportion on a basis of each area and its relative value. You may also need to take into account external features, such as the value of recreational areas.

In relation to the eventual sale of the Property, whilst a portion (approximately xx%) of the consideration would be excluded from your current and projected turnover calculations due to the supply being input taxed pursuant to paragraphs 188-15(1)(a) and 188-20(1)(a) respectively, we consider the remaining xx% from the sale of the Property would be also be excluded from your projected turnover calculations as a result of the application of paragraph 188-25(a).

Paragraph 188-25(a) provides that in working out your projected GST turnover you disregard any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours. In this case we consider the area of the Property that is being leased to fall within the scope of being regarded as a capital asset.

However the consideration received in relation to your supply of granting a call option relating to the leased portion of the Property would not be considered the transfer of ownership of a capital asset. As such, this amount would not be excluded from your GST turnover calculations (either current or projected).

In summary, the turnover generated from your supply of the granting of the call option in relation to the portion of the Property currently being leased will be included in your current GST turnover and projected GST turnover threshold calculations.

In this case the call option fee is $xm payable in two instalments (with the possibly of a further $xxx instalment being payable). Whilst this amount is to be apportioned using a reasonable method of your choice, the amount apportioned to be included in your GST turnover calculations would meet the GST registration threshold of $75,000.

Therefore you are required to register for GST pursuant to section 23-5 as:

● you are carrying on an enterprise of leasing on approximately xx% of the Property; and

● your supply of the call option in relation to that portion of the Property is in the course of carrying on that enterprise; and

● turnover from leasing a portion of the Property together with turnover from your supply of the call option in relation to that portion of the Property would, using a reasonable method of apportionment, meet the GST registration turnover threshold.

Summary

Call option

You will be making a taxable supply pursuant to section 9-5 when you grant a call option in regard to the sale and purchase of the Property, to the extent your supply of the call option is not input taxed.

Property

You will be making a taxable supply pursuant to section 9-5 when you subsequently sell the Property to the extent your supply of the Property is not input taxed.