ATO ID 2005/182: GST and supply of a call option over commercial property
Date of decision: 26 August 2004
Business line: Indirect Tax

Issue
Is the entity, a supplier of real property, making a taxable supply under section 9-5 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 taxable supply?

Decision
Yes, the entity is making a taxable supply under section 9-5 of the GST Act, when it grants a call option that entitles the grantee to purchase real property, the supply of which would be a taxable supply.

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 commercial 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 taxable supply of a commercial property under section 9-5 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 section 9-5 of the GST Act, an entity makes a taxable supply if: However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. The entity grants the purchaser a call option to purchase a commercial property and the purchaser paid 5% of the purchase price of the property to enter into the call option. Accordingly, the entity has made a supply for consideration. The supply is made in the course or furtherance of the entity's enterprise, is connected with Australia and the entity is registered for GST. As such, the supply satisfies the positive limbs of section 9-5 of the GST Act. The entity's supply is not GST-free under any provision of the GST Act. However, the supply of a call option could be an input taxed financial supply. 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, when certain requirements are met, 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. 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 commercial 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 and satisfies the definition of a derivative. However, regulation 40-5.12 of the GST Regulations provides that the supply of something, or an interest in something that is mentioned in the table in regulation 40-5.12 is not a financial supply. Item 7 in the table in regulation 40-5.12 of the GST Regulations (Item 7) lists an option, right or obligation to make or receive a taxable supply, except a mortgage or charge mentioned in item 3 in the table in subregulation 40-5.09(3) of the GST Regulations. The call option to purchase real property is an option to receive a taxable supply. As such, the entity is not making a financial supply under subsection 40-5(1) of the GST Act. Therefore, the entity is making a taxable supply under section 9-5 of the GST Act when it grants a call option that entitles the grantee to purchase real property, the supply of which is a taxable supply.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 section 9-5 section 40-5 subsection 40-5(1) subsection 40-5(2)
Related ATO interpretative decisions: ATO ID 2005/183 | ATO ID 2005/184
Subject references: Goods and services tax GST property & construction GST rights and real property Input taxed supplies Taxable supply