ATO ID 2005/183: GST and supply of a call option over residential premises
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 an input taxed supply of residential premises?

Decision
Yes, the entity is making an input taxed financial supply under section 40-5 of the GST Act. The grant of the call option is also an input taxed supply under paragraph 9-30(2)(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 residential premises 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 an input taxed supply of residential premises under subsection 40-65(1) 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 residential premises 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. In addition, under subsection 9-30(2) of the GST Act a supply is input taxed if: The supply of the call option is a supply of a right to receive a supply of residential premises which would be input taxed under subsection 40-65(1) of the GST Act. Therefore, the supply of the call option is also an input taxed supply under paragraph 9-30(2)(b) of the GST Act. Accordingly, the entity is making an input taxed financial supply, under subsection 40-5(1) of the GST Act, and an input taxed supply under paragraph 9-30(2)(b) of the GST Act, when it grants a call option which entitles the grantee to purchase real property, the supply of which is an input taxed supply.

Legislative references: A New Tax System (Goods and Services Tax) Act 1999 subsection 9-30(2) subsection 11-15(4) Division 40 subsection 40-5(1) subsection 40-5(2) subsection 40-65(1) Division 70
Related ATO interpretative decisions: ATO ID 2005/182 | ATO ID 2005/184
Subject references: Goods and services tax GST property & construction GST residential premises GST rights and real property Input taxed supplies GST financial supplies GST derivatives