Private ruling: GST and the supply of a call option
Published: January 2015

Ruling: Q1: Are you making a taxable supply when you supply your right to exercise an option to a nominee? | A1: No | Q2: Are you entitled to an input tax credit (ITC) in regard to costs incurred in conducting activities associated with the development of the property? | A2: No

Relevant facts and circumstances: You are registered for GST. You have entered into an agreement with an unrelated entity (Vendor) which contains the following provisions: • the Vendor agrees to grant you (or your nominee) an option to purchase property (call option); • you are required to pay a specified amount to the Vendor in consideration for granting the call option; • the call option may be exercised any time prior to a specified date by written notice accompanied by a duly executed contract for sale; • settlement is to be completed within 90 days after the exercise of the option; • on delivery of the notice to exercise the option the parties become bound as vendor and purchaser under the contract; • if completion of the sale is effected the option fee is credited to the price and if the option is not exercised the option fee is forfeited to the Vendor; • the Vendor will upon request by you consent to all such applications to be made concerning the property to the local council or any other competent authority provided however that the Vendor will not incur any costs, expenses or liabilities concerning such applications and the vendor shall allow you access to the property for the purposes of such applications with reasonable notice. The Vendor appoints you as their attorney for the sole purpose of obtaining and/or amending such applications; • the Vendor agrees that by virtue of the sale contract being completed, all right title and interest will vest in the purchaser in all plans, consultants reports, and other documents and fees paid to the Council or any third party in relation to the Development or Building Application or Approval and the Vendor authorises full disclosure by the Council and Consultants to the purchaser and the Vendor will not seek to change any Applications or Approvals and not obtain any refunds of fees paid; • in the event that the option is not exercised, or where the option is exercised and the contract comes to an end for any reason prior to settlement, then all right title and interest in any planning permits and approvals, building permits, licences, plans of subdivision and consultant reports shall revert to being the property of the Vendor. You carry on an enterprise of conducting the preliminary activities associated with property development such as obtaining subdivision and planning approvals and engaging the services of surveyors and architects. You make acquisitions in relation to these activities. Prior to the specified expiry date to exercise the call option you will seek to locate another entity (such as a builder) to nominate as purchaser of the property (nominee). If you are unable to secure a purchaser for the property you will assess the situation at that time taking into consideration such factors as the expenses you have incurred. On locating a nominee you will sell your right to exercise the call option to the nominee. You will receive consideration (nomination fee) from the nominee for the supply of your right to exercise the call option. The nominee will pay a single amount as the 'nomination fee' which will include the recoupment of expenses you have incurred in relation to the subdivision. There will not be a separate charge for these expenses. The property that is the subject to the call option is a three bedroom house with a garage and is neither new residential premises nor commercial residential premises for the purposes of the GST Act. The residential premises will not be demolished prior to the acquisition of the property by you or the nominee.

Relevant legislative provisions: A New Tax System (Goods and Services Tax) Act 1999 Section 9-5 | Section 9-10 | Section 9-25 | Section 9-30 | Section 11-5 | Section 11-15 | Section 195-1

Reasons for decision: Summary: Section 9-10 provides that a 'supply' is any form of supply whatsoever' and includes: • a creation, grant, transfer, assignment or surrender of any right; and • an entry into, or release from, an obligation to do anything or to refrain from an act or to tolerate an act or situation. Goods and Services Tax Ruling GSTR 2006/9, Goods and services tax: supplies (GSTR 2006/9), provides guidance on the meaning of 'supply' in the GST Act. Paragraph 137 of GSTR 2006/9 states the following: 137. The grant of a right or entry into an obligation may be a term or condition of a larger transaction. Where the grant of the right or entry into the binding obligation is the substance of the transaction it will be the subject matter of a supply. In this case the granting of the call option is considered to be the substance of the transaction between you and the nominee. As such this grant is considered to fall within the definition of a 'supply' for GST purposes. Section 9-5 contains the definition of a 'taxable supply'. In this case, you satisfy section 9-5 as: • you will make the supply for consideration (nomination fee); • the supply is in the course of the enterprise that you carry on; • the supply is connected to Australia (subsection 9-25(5)); and • you are registered for GST. However the supply is not a taxable supply to the extent the supply is GST-free or input taxed. The supply of the call option does not fall under the scope of any of the GST-free provisions of the GST Act. The issue in this case is whether your supply is an input taxed supply. Subsection 9-30(2) provides that a supply is input taxed if it is a supply of a right to receive a supply that would be input taxed. Section 40-65 provides that the sale of real property is input taxed to the extent that the property is residential premises to be used predominately for residential accommodation. However the supply is not input taxed to the extent that the residential premises are commercial residential premises or new residential premises. 'Residential premises' is defined in section 195-1 as land or a building that: • is occupied as a residence or for residential accommodation, or • is intended to be occupied, and is capable of being occupied, as a residence or for residential accommodation; (regardless of the term of the occupation or intended occupation). Paragraph 9 of Goods and Services Tax Ruling GSTR 2012/5, Goods and services tax: residential premises (GSTR 2012/5) provides that the phrase 'residential premises to be used predominantly for residential accommodation' in section 40-65 is to be interpreted as a single test that looks to the physical characteristics of the property to determine the premises' suitability and capability for residential accommodation. Paragraph 10 of GSTR continues stating: The requirement for residential premises to be used predominantly for residential accommodation does not require an examination of the subjective intention of, or use by, any particular person. Premises that display physical characteristics evidencing their suitability and capability to provide residential accommodation are residential premises even if they are used for a purpose other than to provide residential accommodation (for example, where the premises are used as a business office). In this case the property is residential premises for the purposes of the GST Act. The premises will not be demolished prior to the acquisition of the property by you or the nominee. Consequently the supply of the property by the property owners would be classified as an input taxed supply of residential premises under section 40-65. As discussed above, the supply of a right in respect of an input taxed supply is also an input taxed supply. As your supply of the call option to the nominee is the supply of a right to acquire (purchase) an input taxed supply of residential premises, your supply of the right to the nominee will be input taxed pursuant to subsection 9-30(2). ATO Interpretive Decision 2005/183 Goods and Services Tax GST and supply of a call option over residential premises provides the ATO view in respect of a call option arrangement which differs in some respects to your circumstances. The ATO ID does however relevantly state: 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. You are entitled to an input tax credit (ITC) on any creditable acquisition that you make pursuant to section 11-20. Section 11-5 provides that you make a creditable acquisition if: • you acquire anything solely or partly for a creditable purpose • the supply of the thing to you is a taxable supply; • you provide or are liable to provide consideration for the supply; and • you are registered or required to be registered for GST. Section 11-15 provides the meaning of creditable purpose as: • anything acquired in the course of carrying on your enterprise; and • the thing was not acquired to make input taxed supplies or is of a private or domestic nature. As discussed previously, your supply of the right to purchase residential premises (through the call option) is an input taxed supply. Your acquisitions of goods and/or services are made in respect of your supply of the call option. Thus such acquisitions relate to your making the input taxed supply of the call option. Consequently, you have not made these acquisitions for a creditable purpose and therefore you are not entitled to an ITC under section 11-20.

Reasons for decision: Note: In this reasoning, unless otherwise stated, | • all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) | • reference material(s) referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au