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

Ruling: Q1: Are you making a taxable supply when you supply your right to exercise an option (call option) to a nominee? | A1: Your supply of the call option will be a mixed supply containing a taxable and an input taxed component. | Q2: Are you entitled to an input tax credit (ITC) in regard to costs incurred in conducting activities associated with the call option? | A2: As your acquisitions relate to your mixed supply of the call option, you will be entitled to an input tax credit to the extent the acquisitions are for a creditable purpose.

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 located at a specified location (call option) • you are required to pay $X 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 consists of two separate titles: 1. Title 1. This property consists of a commercial shed structure currently used by the Vendor in conducting a business. 2. Title 2. This property contains 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 on Title 2 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 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-10 | A New Tax System (Goods and Services Tax) Act 1999 Section 9-30 | A New Tax System (Goods and Services Tax) Act 1999 Section 11-5 | A New Tax System (Goods and Services Tax) Act 1999 Section 11-15 | A New Tax System (Goods and Services Tax) Act 1999 Section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 Section 40-65, and | A New Tax System (Goods and Services Tax) Act 1999 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. 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. In this case, your supply of the call option is the supply of a right to purchase a parcel of land comprising two separate titles. One title comprises a commercial lot whilst the second title comprises a three bedroom residential premises. 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 situated on Title 2 (the three bedroom house) 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. The property situated on Title 1 (the commercial lot) is not considered to be residential premises for GST purposes and therefore since the supply of the call option satisfies the positive limbs of section 9-5, the supply of the call option to purchase the property will be a taxable supply. Given the above, your supply of the call option to a nominee includes the supply of the right to purchase an input taxed supply of residential premises (Title 2) and the taxable supply of a right to purchase the adjoining (non-residential) property (Title 1). The issue of when a supply contains both a taxable and non-taxable part (mixed supply) is discussed in Goods and Services Tax Ruling GSTR 2001/8, Goods and services tax: apportioning the consideration for a supply that includes taxable and non-taxable parts (GSTR 2001/8). GST is payable on a mixed supply that you make, but only to the extent that the supply is taxable. You need to apportion the consideration for a mixed supply (the nomination fee) between the taxable and non-taxable parts of the supply to find the consideration for the taxable part. Paragraph 92 of GSTR 2001/8 provides that you may use 'any reasonable method to apportion consideration to the separately identifiable taxable part of a mixed supply. However, the apportionment must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical commonsense.' Paragraphs 93 to 113 of GSTR 2001/8 discuss choosing a reasonable method including both direct and indirect methods of apportionment and situations where a method may be inappropriate to use. 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 that you acquire something for a creditable purpose to the extent you acquire it carrying on your enterprise. However, you do not acquire the thing for a creditable purpose to the extent that the acquisition relates to making input taxed supplies or is of a private and domestic nature. As discussed previously, your supply of the right to purchase residential premises (call option) is a mixed supply which includes an input taxed part. As such any acquisitions that you make that relate to the input taxed part of the supply of the call option will not be made for a creditable purpose. As such you will not be entitled to an ITC in regard to such acquisitions. In regard to acquisitions made in relation to the taxable component of your supply of the call option, these acquisitions will be made for a creditable purpose and provided the other criteria of section 11-5 are satisfied, you will be entitled to an ITC pursuant to section 11-20. In the case you acquire something that relates to both the taxable and input taxed components of your supply of the call option, any ITC will need to be apportioned using a reasonable basis. Goods and Services Tax Ruling GSTR 2006/4, Goods and services tax: determining the extent of creditable purpose for claiming input tax credits and for making adjustments for changes in extent of creditable purpose (GSTR 2006/4) provides guidance on how to determine the extent of your creditable purpose in making acquisitions and importations to enable you to claim the correct amount of ITCs. Paragraphs 51 to 53 of GSTR 2006/4 discuss the requirement to apportion ITCs where the acquisition was not made for a fully creditable purpose with paragraphs 67 and 68 discussing acquisitions used partly to make input taxed supplies. Paragraphs 101 to 123 of GSTR 2006/4 discuss choosing a reasonable method including both direct and indirect methods of apportionment and situations where a method may be inappropriate to use similar to that discussed in paragraphs 93 to 113 of GSTR 2001/8 referred to previously.

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