Private ruling: GST and sale of property
Date of advice: 5 February 2016
Published: April 2016

Ruling: Q1: Will your grant of the option to the buyer pursuant to the Call Option Agreement be a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: Pursuant to the Call Option Agreement, during the period you were registered for GST you have made: • a taxable supply under section 9-5 of the GST Act when you grant a call option that entitles the grantee to purchase the vacant land; and • an input taxed supply under subsection 9-30(2) of the GST Act when you grant a call option that entitles the grantee to purchase the residential premise. You will need to apportion the consideration between these two supplies. From the date you are not registered for the goods and services tax (GST), the two supplies of call option are not within the scope of GST as you are not required to be registered for GST and therefore the supplies are not taxable supplies under section 9-5 of the GST Act. | Q2: Will the sale of the land situated in Australia be a taxable supply under the GST Act if the option under the Call Option Agreement is exercised? | A2: The sale of the vacant land and residential premise on the land situated in Australia will not be taxable supplies under section 9-5 of the GST Act as at the time of settlement you will not be required to be registered for GST.

Relevant facts and circumstances: You own land in Australia. The land has a residential premise; an old unused animal shed and associated buildings on it. Since your acquisition, you carry on a livestock business and a leasing enterprise on the land. You have entered into a Call Option Agreement with a buyer in regard to the land on XXMMYY and the land will be sold if the Call Option Agreement is exercised. Pursuant to the Call Option Agreement the buyer has to pay as consideration for the call option a monthly premium to you, starting from the date the agreement was entered into, and the amount of outgoings that you are to pay in regard to the land. After the sale the buyer will use the land for development purposes and your livestock and leasing business will cease at that time. Upon the call option being exercised you and the buyer will enter into a sale contract for the land. You will deduct the premium you have received when calculating the purchase price of the land. You were previously registered for GST and during the period you were registered for GST you carried on the livestock business and leasing enterprise on the land. Currently you are not carrying on a livestock business on the land and you have advised that you will not carry on any livestock business on the land until its sale. Now the only use of the land is the residential premise that is being leased. You have cancelled your GST registration after you have entered into the Call Option Agreement with the buyer as your annual turnover is below $75,000. You have received payments from the buyer during the periods you were registered for GST and not registered for GST after the Call Option Agreement was entered into.

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 9-20 | A New Tax System (Goods and Services Tax) Act 1999 section 23-5 | A New Tax System (Goods and Services Tax) Act 1999 section 188-25 Reason for decisions | Question 1 | You use the land partly to carry on your livestock business and partly to derive rental income from the residential premise located on the land. | The substance of a call option transaction is a supply of a right which is a separate transaction from the exercise of the option. | In this circumstance, your supply of the call option under the Call Option Agreement consists of two supplies which are: | 1. a supply of right which entitled the buyer to acquire the vacant land on which you carried on your livestock business; and | 2. a supply of right which entitled the buyer to acquire the residential premise from which you are deriving rental income | We will now consider the GST status of each supply of right. | Taxable supply | A supply is a taxable supply under section 9-5 of the GST Act if: (a) you make the supply for consideration; | (b) the supply is made in the course of an enterprise that you carry on; | (c) the supply is connected with the indirect tax zone (Australia), and | (d) you are registered or required to be registered for GST. | However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. | Right to acquire residential premise when you are registered for GST | You satisfy paragraph (a) to (d) of section 9-5 of the GST Act when you supply the right to acquire the residential premise to the buyer as: a) you make the supply for consideration; | b) the supply is made in the course of the leasing business you carry on; | c) the supply is connected with Australia as the residential premise is located in Australia; and | d) you were registered for GST. | However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. There is no provision under the GST Act that makes a supply of residential premise by itself GST-free. Input taxed supply | A supply of residential premise is an input taxed supply under section 40-65 of the GST Act. | Under subsection 9-30(2) of the GST Act, a supply is input taxed if: | a) it is input taxed under Division 40 or under a provision of another Act, or b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a). | In this instance the supply of the right to acquire the residential premise is an input taxed supply under paragraph 9-30(2)(b) of the GST Act. No GST will therefore be payable on the consideration received for this supply. Right to acquire vacant land when you are registered for GST | You satisfy paragraph (a) to (d) of section 9-5 of the GST Act when you supply the right to acquire the vacant land to the buyer as: a) you make the supply for consideration; | b) the supply is made in the course of the livestock business you carry on as the vacant land is an asset for the livestock business; | c) the supply is connected with Australia as the land is located in Australia; and | d) you were registered for GST. | However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. | GST-free supply | Under subsection 9-30(1) of the GST Act, a supply is GST-free if it is GST-free under Division 38 or under a provision of another Act, or it is a supply of a right to receive a supply that would be GST-free. The substance of a call option transaction is the supply of a right, which is a separate transaction from the exercise of the call option to acquire the vacant land. | As there is no provision under the GST Act that makes a supply of vacant land in Australia GST-free, subsection 9-30(1) of the GST Act is not applicable. The supply of the call option is not GST-free. Input taxed 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. You grant the purchaser a call option to purchase the vacant land for a specific amount up until a specified date. The purchaser paid a monthly premium and outgoings of the land 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 vacant land 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 the vacant land is an option to receive a taxable supply when you are registered for GST. As such, you are not making a financial supply under subsection 40-5(1) of the GST Act for the period you were registered for GST. Accordingly, your supply is a taxable supply for the period you were registered for GST. You will need to apportion the consideration received during that period as you have made a mixed supply of taxable and input taxed supply. | You may use any reasonable method to apportion the consideration. However, the consideration must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical common sense. Goods and Services Tax Ruling GSTR 2001/8 may be of assistance to you as it provides guidance in apportioning mixed supply. | Supply of right to acquire residential premise and vacant land when you are not registered for GST | Currently you are not registered for GST. We therefore need to determine whether you are required to be registered for GST when you receive payments for your supply of a call option from the date you are not registered for GST. | Under section 23-5 of the GST Act, an entity is required to be registered for GST if: a) the entity carries on an enterprise; and | b) the entity's GST turnover (current or projected) meets the registration turnover threshold (currently $75,000). | Under section 188-15 and 188-20 of the GST Act, supplies that are input taxed are excluded from the calculation of current turnover and projected GST turnover. As the supply of the right to acquire the residential premise is an input taxed supply, the consideration for this supply will not be included when calculating your GST annual turnover. | Further under section 188-25 of the GST Act any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours is disregarded when calculating your projected annual turnover where it relates to you ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise. For GST purposes, we consider that where the supply of the vacant land and the residential premise is the sale of a capital asset, the proceeds from granting an option to purchase the asset are capital proceeds. | The sale of the vacant land and residential premise are capital assets and therefore the proceeds from granting the option to purchase the two capital assets are considered to be capital proceeds. The proceeds received from the date you are not registered for GST and onwards are therefore disregarded in working out your projected annual turnover. | At this point of time you are not required to be registered for GST. The supplies of the two rights under the Call Option Agreement from the date you are not registered for GST are therefore not subject to GST as all the requirements in section 9-5 of the GST Act are not satisfied. Summary | For the period you were registered for GST, you have made: | • a taxable supply under section 9-5 of the GST Act when you grant a call option that entitles the grantee to purchase the vacant land; and | • an input taxed supply under subsection 9-30(2) of the GST Act when you grant a call option that entitles the grantee to purchase the residential premise. You will have to apportion the consideration received between the two supplies for the period you were not registered for GST. | From the date you are not registered for GST and onwards, your two supplies of call option are not taxable supplies under section 9-5 of the GST Act as you are not required to be registered for GST. Question 2 | As discussed above, the vacant land and the residential premise are capital assets for your livestock and leasing business. Accordingly, the sale of these assets will not be included when calculating your projected annual turnover where it relates to you ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise. | In this instance you will not be required to be registered for GST when you will sell these two assets as currently you are not required to be registered for GST. | Accordingly at the time of settlement your supply of the vacant land and residential premise will not be a taxable supply under section 9-5 of the GST Act.

Reasons for decision: Summary: You use the land partly to carry on your livestock business and partly to derive rental income from the residential premise located on the land. The substance of a call option transaction is a supply of a right which is a separate transaction from the exercise of the option. In this circumstance, your supply of the call option under the Call Option Agreement consists of two supplies which are: 1. a supply of right which entitled the buyer to acquire the vacant land on which you carried on your livestock business; and 2. a supply of right which entitled the buyer to acquire the residential premise from which you are deriving rental income We will now consider the GST status of each supply of right. | Detailed Reasoning - Taxable supply: A supply is a taxable supply under section 9-5 of the GST Act if: (a) you make the supply for consideration; (b) the supply is made in the course of an enterprise that you carry on; (c) the supply is connected with the indirect tax zone (Australia), and (d) you are registered or required to be registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. | Detailed Reasoning - Right to acquire residential premise when you are registered for GST: You satisfy paragraph (a) to (d) of section 9-5 of the GST Act when you supply the right to acquire the residential premise to the buyer as: a) you make the supply for consideration; b) the supply is made in the course of the leasing business you carry on; c) the supply is connected with Australia as the residential premise is located in Australia; and d) you were registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. There is no provision under the GST Act that makes a supply of residential premise by itself GST-free. Input taxed supply A supply of residential premise is an input taxed supply under section 40-65 of the GST Act. Under subsection 9-30(2) of the GST Act, a supply is input taxed if: a) it is input taxed under Division 40 or under a provision of another Act, or b) it is a supply of a right to receive a supply that would be input taxed under paragraph (a). In this instance the supply of the right to acquire the residential premise is an input taxed supply under paragraph 9-30(2)(b) of the GST Act. No GST will therefore be payable on the consideration received for this supply. | Detailed Reasoning - Right to acquire vacant land when you are registered for GST: You satisfy paragraph (a) to (d) of section 9-5 of the GST Act when you supply the right to acquire the vacant land to the buyer as: a) you make the supply for consideration; b) the supply is made in the course of the livestock business you carry on as the vacant land is an asset for the livestock business; c) the supply is connected with Australia as the land is located in Australia; and d) you were registered for GST. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. GST-free supply Under subsection 9-30(1) of the GST Act, a supply is GST-free if it is GST-free under Division 38 or under a provision of another Act, or it is a supply of a right to receive a supply that would be GST-free. The substance of a call option transaction is the supply of a right, which is a separate transaction from the exercise of the call option to acquire the vacant land. As there is no provision under the GST Act that makes a supply of vacant land in Australia GST-free, subsection 9-30(1) of the GST Act is not applicable. The supply of the call option is not GST-free. Input taxed 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. You grant the purchaser a call option to purchase the vacant land for a specific amount up until a specified date. The purchaser paid a monthly premium and outgoings of the land 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 vacant land 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 the vacant land is an option to receive a taxable supply when you are registered for GST. As such, you are not making a financial supply under subsection 40-5(1) of the GST Act for the period you were registered for GST. Accordingly, your supply is a taxable supply for the period you were registered for GST. You will need to apportion the consideration received during that period as you have made a mixed supply of taxable and input taxed supply. You may use any reasonable method to apportion the consideration. However, the consideration must be supportable by the facts in the particular circumstances and be undertaken as a matter of practical common sense. Goods and Services Tax Ruling GSTR 2001/8 may be of assistance to you as it provides guidance in apportioning mixed supply. | Detailed Reasoning - Supply of right to acquire residential premise and vacant land when you are not registered for GST: Currently you are not registered for GST. We therefore need to determine whether you are required to be registered for GST when you receive payments for your supply of a call option from the date you are not registered for GST. Under section 23-5 of the GST Act, an entity is required to be registered for GST if: a) the entity carries on an enterprise; and b) the entity's GST turnover (current or projected) meets the registration turnover threshold (currently $75,000). Under section 188-15 and 188-20 of the GST Act, supplies that are input taxed are excluded from the calculation of current turnover and projected GST turnover. As the supply of the right to acquire the residential premise is an input taxed supply, the consideration for this supply will not be included when calculating your GST annual turnover. Further under section 188-25 of the GST Act any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours is disregarded when calculating your projected annual turnover where it relates to you ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise. For GST purposes, we consider that where the supply of the vacant land and the residential premise is the sale of a capital asset, the proceeds from granting an option to purchase the asset are capital proceeds. The sale of the vacant land and residential premise are capital assets and therefore the proceeds from granting the option to purchase the two capital assets are considered to be capital proceeds. The proceeds received from the date you are not registered for GST and onwards are therefore disregarded in working out your projected annual turnover. At this point of time you are not required to be registered for GST. The supplies of the two rights under the Call Option Agreement from the date you are not registered for GST are therefore not subject to GST as all the requirements in section 9-5 of the GST Act are not satisfied. | Summary: For the period you were registered for GST, you have made: • a taxable supply under section 9-5 of the GST Act when you grant a call option that entitles the grantee to purchase the vacant land; and • an input taxed supply under subsection 9-30(2) of the GST Act when you grant a call option that entitles the grantee to purchase the residential premise. You will have to apportion the consideration received between the two supplies for the period you were not registered for GST. From the date you are not registered for GST and onwards, your two supplies of call option are not taxable supplies under section 9-5 of the GST Act as you are not required to be registered for GST. | Detailed Reasoning - Question 2: As discussed above, the vacant land and the residential premise are capital assets for your livestock and leasing business. Accordingly, the sale of these assets will not be included when calculating your projected annual turnover where it relates to you ceasing to carry on an enterprise or substantially and permanently reducing the size or scale of an enterprise. In this instance you will not be required to be registered for GST when you will sell these two assets as currently you are not required to be registered for GST. Accordingly at the time of settlement your supply of the vacant land and residential premise will not be a taxable supply under section 9-5 of the GST Act.