Edited version of private advice

Authorisation Number: 1052349885276

Date of advice: 21 January 2025

Ruling

Subject: Sale of real property

Issue 1 - GST

Question 1

Will the grant of an option to purchase the Land be a taxable supply?

Answer 1

No. The supply of the underlying rights is not a taxable supply.

Question 2

Will the sale of the Land be a taxable supply?

Answer 2

No. It is not a taxable supply as the supply is not made in the course of an enterprise.

Issue 2 - CGT

Question 1

Will there be capital gains tax (CGT) event when you grant of an option to purchase the Land under subsection 104-40(1) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 1

Yes, however it will be disregarded if the option is exercised.

Question 2

If the option is exercised will there be CGT event on the sale of the Land?

Answer

Yes, however any capital gain will be disregarded in accordance with paragraph 104-10(5)(a).

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a registered proprietor of the Land.

You acquired the Land before 20 September 1985.

There are no buildings or other structural improvements on the Land.

You are not register for goods and services tax (GST).

The Land has been used for primary production by a partnership with your child and the Trust. You are a director and shareholder of the corporate trustee and a beneficiary of the Trust.

The Trust is registered for GST.

There is no lease or licence in place regarding the use of the Land.

You granted to the Grantee an option to purchase the Land for an option fee.

The Option Deed explains that the Option Fee is the initial option amount and any additional option fee if the option is extended by the Grantee.

The schedule of the Option Deed provides the amount of the initial option and additional option fees.

Under the Option Deed the Grantee may give a written notice to the Owner during the Extension Notice Period requiring an extension of the Initial Expiry Date to the Extended Expiry Date. An extension of time is subject to an additional option fee.

The option may be exercised by the Grantee within a prescribed period.

A relevant clause of the Option Deed provides that the option may be exercised at any time during the Option Period by the Grantee serving on the Owner an Exercise Notice.

Under the schedule of the Option Deed provides the option period of X months unless a valid Extension Notice is given in which case the option period will be X months and xx days as from and including the Commencement Date.

Under the Option Deed it is out lined how GST will be handled depending on if it is required to be registered for GST or not.

Upon exercise of the option, the Grantee will be bound to purchase the Land from you for the purchase price minus the option fee.

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 9-17

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

A New Tax System (Goods and Services Tax) Act 1999 section 188-10

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

A New Tax System (Goods and Services Tax) Act 1999 section 195-1

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 104-40

Income Tax Assessment Act 1997 section 116-65

Income Tax Assessment Act 1997 section 134-1

Reasons for decision

Issue 1

Question 1

Summary

No. The supply of the underlying rights is not a taxable supply.

Detailed reasoning

Real property is defined in section 195-1 of the GST Act as:

real property includes:

(a)           any interest in or right over land; or

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

Therefore, the treatment of rights to call for the sale of the Land is treated for GST purposes in the same way as the treatment of the Land sale; even though they are separate supplies.

Under subsections 9-30(1) and 9-30(2) of the GST Act, the law states that where the underlying supply is GST-free or input taxed respectively, the rights receive the same GST treatment. Given this structure, we conclude the GST treatment of the supply of the rights is ultimately decided by the answer to question 2 below regarding whether the land sale is a taxable supply. The supply of the Land is neither taxable, GST-free or input taxed, and it is not included in your GST turnover calculations.

Question 2

Summary

No. It is not a taxable supply as the supply is not made in the course of an enterprise.

Detailed reasoning

You make a taxable supply of real property if you meet the conditions of section 9-5 of the GST Act:

(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 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.

(An asterisk indicates a defined term in section 195-1 of the GST Act.)

You will sell the Land if the option is exercised. The draft Land sale contract appended to the option agreement indicates there will be a supply for the consideration forming the purchase price specified in the option agreement. This is a supply for consideration. The option agreement provides for the option fee and separate consideration for the subsequent sale. Applying section 9-17 of the GST Act, the consideration for the option is separate from the consideration for the sale of the Land. Consideration is therefore supplied, and this condition of a taxable supply is satisfied.

The Land is connected with the indirect zone as it is located in Australia.

You are not registered for GST.

Supply made in the course of your enterprise

You are retiring. You are carrying on an enterprise and the activities you do in the cessation of an enterprise are part of the enterprise due to the definition of 'carrying on an enterprise' in section 195-1 of the GST Act:

carrying on an *enterprise includes doing anything in the course of the commencement or termination of the enterprise.

You do not use the Land for anything. An enterprise is conducted by a partnership between your child and their related entity, the Trust. You are a director and shareholder of the corporate trustee and a beneficiary of the Trust.

There is no formal arrangement in place between you and your child regarding the land use. The Trust is registered for GST and uses the Land for a fully creditable purpose.

As stated above, the sale will form part of your activities carrying on the enterprise as you are ceasing your enterprise and making the sale. You are now selling the Land as you were approached to sell it as a whole block under an option agreement with the purchaser.

Required to be registered

You are not registered for GST, so the question is whether you are required to be registered to determine whether the sale of the Land is a taxable supply.

Section 188-10(1) of the GST Act provides whether your GST turnover meets, or does not exceed, a turnover threshold

(1)           You have a GST turnover that meets a particular * turnover threshold if:

(a)           your • current GST 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.

(2)           You have a GST turnover that does not exceed a particular *turnover threshold if:

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

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

(3)           Each of these is a turnover threshold:

...

(b)           the • registration turnover threshold;

The registration turnover threshold is $75,000 so the sale, if included in your projected turnover calculations, will exceed the turnover threshold.

Section 188-25 of the GST Act provides in working out your *projected GST turnover, disregard:

(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.

As the sale is a sale of capital asset or in the alternative, you are ceasing or permanently reducing the size of your enterprise in making the sale, we consider section 188-25 of the GST Act applies to prevent the sale being included in your turnover calculations. As a result, you will not be required to register for GST.

The policy behind this provision was examined in Ian Mark Collins & Mieneke Mianno Collins ATF The Collins Retirement Fund and Commissioner of Taxation [2022] AATA 628 (Collins). On this point, SM Olding determined that the provision is designed to ensure small businesses making one-off or unusual supplies that are not in keeping with the character or their normal supplies are able to exclude those sales. In that case, the vendor was considered to be engaged in a property development enterprise. On the facts presented, you are not engaged in such an enterprise and the benefit of these provisions are open to you.

The sale of the Land is not a taxable supply as you are not required to be registered for GST.

Issue 2

Question 1

Summary

CGT event D2 occurred when you entered into the Deed of Option.

Detailed reasoning

Capital gains tax (CGT) is the tax you pay on profits from disposing of assets including investments, such as property, shares, and crypto assets. Although it is referred to as 'capital gains tax', it's part of your income tax. It's not a separate tax.

You make a capital gain or capital loss as a result of a CGT event happening (section 102-20 of the ITAA 1997)

Section 104-40 of the ITAA 1997 provides:

(1)           CGT event D2 happens if you grant an option to an entity or renew or extend an option you had granted.

(2)           The time of the event is when you grant, renew or extend the option.

(3)           You make a capital gain if the capital proceeds from the grant, renewal or extension of the option are more than the expenditure you incurred to grant, renew, or extend it. You make a capital loss if those capital proceeds are less.

(4)           The expenditure can include giving property: see section 103-5. However, it does not include an amount you have received as recoupment of it and that is not included in your assessable income, or an amount to the extent that you have deducted or can deduct it.

(5)           Exemptions

(6)           A capital gain or capital loss you make from the grant, renewal or extension of the option is disregarded if the option is exercised.

(7)           This section does not apply to an option granted, renewed or extended by a company or the trustee of a unit trust to acquire a CGT asset that is:

(a)           Shares in the company or units in the unit trust or

(b)           Debentures of the company or unit trust.

(8)           Nor does it apply to an option relating to a person use asset or a collectable.

CGT event D2 occurred when you entered into the Deed of Option and the option was granted by you to the Grantee.

The capital proceed from the granting of the option was the Initial Option Fee.

Under subsection 104-40(3) of the ITAA 1997 you will make a capital gain if the capital proceeds from the granting of the Option is more than the expenditure that you incurred to grant the Option. You will make a capital loss if those proceeds are less.

In this case, you granted the option to the Grantee to purchase the Land.

The Grantee paid you an initial option fee.

The capital gain will therefore be the amount of the option fee less any expenditure incurred to grant the option. Any capital gain made will be required to be included in your income tax return for the 2024 income year.

The capital gain you make from the grant, renewal or extension of the option is disregarded if the option is exercised.

Question 2

Summary

The Land is a pre-CGT asset, and any capital gain or loss made on its sale will be disregarded pursuant to paragraph 104-10(5)(a) of the ITAA 1997.

Detailed reasoning

Section 134-1 of the ITAA 1997 sets out the consequences of an option that is exercised.

Under subsection 134-1(1) of the ITAA 1997 the table sets out the effects of the exercise of an option. Where a call option is exercise, item 1 option binds grantor to dispose of a CGT asset and refers the grantor of the option to the effect in section 116-65 of the ITAA 1997.

Section 116-65 of the ITAA 1997 applies specifically to the disposal of an asset the subject to an option.

(1)           This section applies if:

(a)           You grant, renewed or extended an option to create (including grant or issue) or dispose of a CGT asset: and

(b)           Another entity exercises the option; and

(c)           Because of the exercise of the option, you create (including grant or issue) or dispose of the CGT asset.

(2)           The capital proceeds from the creation (including grant or issue) or disposal include any payment you received from granting, renewing or extending the option.

Therefore, where an option is granted in one financial year and exercised in another financial year, an amendment to the assessment for the year in which the option was granted will be required to exclude the amount you received that relates to CGT event D2.

CGT event A1 happens under section 104-10 of the ITAA 1997 when the owner enters into a contract to sell the Land upon the Grantee exercising the Call Option over the Land.

Section 104-10 of the ITAA 1997 provides:

CGT event A1 happens if you dispose of a CGT asset.

you dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur if you stop being the legal owner of the asset by continue to be its beneficial owner.

the time of the event is:

(a)           when you enter into a contract for the disposal; or

(b)           if there is no contract - when the change of ownership occurs.

You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Exceptions

A capital gain or capital loss you make is disregarded if:

(a)           you acquired the asset before 20 September 1985; or

(b)           for a lease that you granted:

(i)            it was granted before that day; or

(ii)            if it has been renewed or extended - the start of the last renewal or extension occurred before that day.

Application to the circumstances

When the Grantee exercises the Option to purchase the Land a CGT A1 event will happen under section 104-10 of the ITAA 1997. You purchased the Land before 20 September 1985 and continued to own the Land. Therefore, any capital gain or capital loss made on the sale of the Land will be disregarded in accordance with paragraph 104-10(5)(a) of the ITAA 1997.