ATO ID 2005/184: GST and supply of a call option over GST-free land
Date of decision: 26 August 2004
Business line: Indirect Tax

Issue
Is the entity, a supplier of real property, making an input taxed financial supply under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it grants a call option that entitles the grantee to purchase real property, the supply of which would be a GST-free supply?

Decision
No, the entity is not making an input taxed financial supply under section 40-5 of the GST Act. Due to the operation of subsection 9-30(3) of the GST Act, the supply of the call option is GST-free under paragraph 9-30(1)(b) of the GST Act .

Facts
The entity is a supplier of real property and is registered for goods and services tax (GST). The entity grants the purchaser a call option to purchase a property for a specific amount up until a specified date. The purchaser paid 5% of the purchase price of the property to enter into the call option. The purchaser may sell the call option to another entity. The supply of the real property would be a GST-free supply of farmland under section 38-480 of the GST Act. The supply of the call option is connected with Australia and is made in the course or furtherance of the entity's enterprise.

Reasons for decision
Summary: Under subsection 40-5(1) of the GST Act, a financial supply is input taxed. Subsection 40-5(2) of the GST Act defines a financial supply as having the meaning given by the A New Tax System (Goods and Service Tax) Regulations 1999 (GST Regulations). Subregulation 40-5.09(1) of the GST Regulations, provides that the provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) or 40-5.09(4) of the GST Regulations is a financial supply if: Item 11 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 11), lists a derivative. A derivative is defined in the GST Regulations to mean 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. The entity grants the purchaser a call option to purchase property for a specific amount up until a specified date. The purchaser paid 5% of the purchase price of the property to enter into the call option. Therefore, the call option is an agreement the value of which is derived from the value of an asset, the property. Accordingly, the call option satisfies the definition of a derivative. The supply of the call option was made for consideration, in the course or furtherance of the entity's enterprise and was connected with Australia. The entity is registered for GST and as it granted the option, it is a financial supply provider in relation to the supply of the call option (regulation 40-5.06 of the GST Regulations). Therefore, the requirements in subregulation 40-5.09(1) of the GST Regulations are satisfied and the entity's supply is an input taxed financial supply under subsection 40-5(1) of the GST Act. However, under subsection 9-30(1) of the GST Act a supply is GST-free if: 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. Accordingly, the entity's supply of the call option is both an input taxed financial supply, under subsection 40-5(1) of the GST Act, and a GST-free supply under subsection 9-30(1) of the GST Act. Subsection 9-30(3) of the GST Act provides that where a supply is both GST-free and input taxed, the supply will be GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed. Subsection 40-5(1) of the GST Act does not require the entity to choose for the supply to be input taxed. As such, the entity's supply will be GST-free and not input taxed.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(1) paragraph 9-30(1)(b) subsection 9-30(3) Division 38 Section 38-480 subsection 40-5(1) subsection 40-5(2)
Related ATO interpretative decisions: ATO ID 2005/182 | ATO ID 2005/183
Subject references: Goods and services tax GST-free supply GST property & construction GST residential premises GST rights and real property Input taxed supplies GST financial supply GST derivatives