Edited version of private advice

Authorisation Number: 1051994337677

Date of advice: 15 June 2022

Ruling

Subject: Is the nomination of call options on property a taxable supply?

Question 1

Are you making a taxable supply as defined in section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) when you nominate another individual, per the nomination clause of your option contracts, for a nomination fee?

Answer

No. In nominating an entity, enabling them to exercise your call options, you made an input taxed supply of the right to purchase a property the supply of which would be input taxed.

Question 2

Will you be entitled to input tax credits for acquisitions relating to the nomination of your call options?

Answer

No. As you are making an input taxed supply, you will not be entitled to input tax credits for acquisitions relating to that supply.

This ruling applies for the following periods:

1 July 20XX to 1 July 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a property developer, who is registered for the goods and services tax (GST), and have recently begun trading in real estate options.

You purchased a number of call options.

You did not claim input tax credits for any of these purchases nor did you report them on your activity statement. You did claim input tax credits for legal fees associated with the purchase of options.

You nominated another party under the nomination clause for the call options on each of the following properties:

The contract for sale & purchase of land that has been appended to the call option deeds specify that each of these properties are residential premises that are neither new nor commercial.

In return for these nominations, you were paid a nomination fee. The fees were not calculated as a percentage of the property value.

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 40-5

A New Tax System (Goods and Services Tax) Act 1999 Section 9-30

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

A New Tax System (Goods and Services Tax) Act 1999 Section 7-1

A New Tax System (Goods and Services Tax) Act 1999 Section 11-15

A New Tax System (Goods and Services Tax) Regulations 2019 Section 40-5.09

A New Tax System (Goods and Services Tax) Regulations 2019 Section 40-5.12

Reasons for decision

Section 9-5 of the GST Act states that 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

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

In supplying real estate options, you have made a supply for consideration, in the course or furtherance of your enterprise, that is connected with the indirect tax zone. Additionally, you are registered for GST. This means that, unless you are making a GST-free or input taxed supply, you will be required to pay GST.

Under section 40-5 of the GST act a financial supply is input taxed and is defined by the A New Tax System (Goods and Services Tax) Regulations 2019 (GST Regulations).

Subsection 40-5.09(1) of the GST Regulations states that the provision, acquisition or disposal of an interest mentioned within the table provided by subsection 40-5.09(3) is considered to be a financial supply.

Item 11 of this table lists a derivative. A derivative is broadly defined by GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and related supplies and acquisitions as a financial instrument whose value is tied to or derived from an underlying security, commodity, currency, liability or index. Some examples of derivatives include forwards, futures, swaps and options. Real estate options may meet the definition of a derivative depending on how the option premium is calculated.

An option contract where the option premium is calculated as a percentage of the property value is a derivative as it has a value derived from the underlying asset. If the premium is independent or indirectly related to the property value, the option contract will not be a derivative, it will be a supply of rights. It's important to note that whether or not the option is a derivative will have no impact on its GST treatment.

Generally, all derivatives will be input taxed as financial supplies however there are some exceptions. A supply mentioned in the table within subsection s 40-5.09(3) of the GST Regulations is not a financial supply if it is the supply of something, or an interest in or under something, that is mentioned in the table contained within section 40-5.12. of the GST Regulations Item 7 of this table is as follows:

An option, right or obligation to make a taxable supply or acquire something the supply of which is a taxable supply, except a mortgage or charge mentioned in item 3 of the table in subsection 40-5.09(3)

Similarly, a supply of a right to receive an input taxed supply is an input taxed supply itself under paragraph 9-30(2)(b) of the GST act. A supply of a right to receive a taxable supply will be taxable under section 9-5 of the GST act.

Essentially, an option contract (regardless of whether it is a financial supply) will share the GST treatment of the underlying asset. An option to receive a taxable supply of property will be taxable while an option to receive an input taxed supply of property will be input taxed. The supply of a call option to receive a supply of a property which would be a GST-free supply is a GST-free supply under paragraph 9-30(1)(b) of the GST Act.

Subsection 40-65(1) of the GST act provides that the sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation.

Subsection 40-65(2) of the GST Act provides that a sale of residential premises is not input taxed to the extent that they are commercial residential premises or new residential premises other than those used for residential accommodation before 2 December 1998.

The properties, for which you hold options, are residential premises that are neither new nor commercial.

Upon nominating another party as the entity that is entitled to exercise the various call options, you essentially provide that party rights to purchase residential premises to which the options pertain.

The provision of the rights under the call options to purchase the residential premises will accordingly be input taxed under paragraph 9-30(2)(b) of the GST act as the supply of rights to receive input taxed supplies.

In short, you will not have to account for GST when nominating a third party under your option contracts as the options themselves constitute a right to receive input taxed supplies and are therefore input taxed themselves.

Subsection 7-1(2) of the GST Act provides that entitlements to input tax credits arise on creditable acquisitions.

Subsection 11-15(1) goes on to specify that you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on your enterprise. Under subsection 11-15(2) of the GST act, you do not acquire a thing for a creditable purpose to the extent that:

(a)  the acquisition relates to making supplies that would be input taxed; or

(b)  the acquisition is of a private or domestic nature

As the supply of rights to a call option (which relates to input taxed property) is input taxed, you are not entitled to input tax credits for acquisitions related to that supply of rights under paragraph 11-15(2)(a).