Private ruling: GST and sale of residential property subject to a put and call option deed.
Date of advice: 22 June 2015
Published: June 2015

Ruling: Q1: Is the acquisition of a call option by you, pursuant to a put and call option deed between you and Entity A, for the purchase of a residential property, a creditable acquisition? | A1: No. The acquisition of the call option by you is not a creditable acquisition where its supply to you is not a taxable supply. | Q2: Where GST has been incorrectly applied to a transaction and remitted to the ATO, can it be claimed back and if so by which entity? | A2: Yes. The entity that remitted the GST to the ATO can correct its GST mistakes via its Business Activity Statements. Please refer to the Reasons for decision. | Q3: Is the sale of residential premises on the exercise of a call option, subject to GST? | A3: No. Where the residential premises are used predominantly for residential accommodation and are not commercial residential premises or new residential premises, its sale will be input taxed and therefore not subject to GST.

Relevant facts and circumstances: You are registered for goods and services tax. You and Entity A entered into a put and call option deed (the deed) for the sale of a residential property. Entity A is registered for GST. Entity A (Vendor) has agreed to grant and you (purchaser) have agreed to accept a call option to purchase the residential property on the terms and conditions contained in the deed. Also, you have agreed to grant and Entity A has agreed to accept a put option to require you to purchase the residential property on the terms and conditions contained in the deed. Upon signing of the deed, you paid Entity A the call option fee plus 10% GST. Entity A has issued you a tax invoice showing the call option fee plus GST amount. Entity A has remitted the GST component to the ATO. You have not made a corresponding input tax credit claim in relation to the GST amount. The residential property Entity A purchased the residential property from an individual owner who had occupied the single dwelling on the residential property as residential accommodation. The residential property comprises X hectares of land and contains a single dwelling that is used for residential accommodation. Entity A leases the residential property under a residential lease contract. The residential property is not a commercial residential property nor is it a new residential property. Entity A bought the residential property with the intention of developing it into a retirement village. Entity A has treated the residential property as trading stock for income tax purposes within its audited accounts. The DA for a Y unit retirement village has been approved; however, no construction has been undertaken as Entity A deems the development to not be profitable. Since the purchase, Entity A has not conducted any demolition, building or renovation work on the residential property. The residential property remains in the same condition it was when purchased by Entity A. Contract of Sale You have appointed a nominee (purchaser) to exercise the option and to enter into the contract of sale with Entity A. The purchaser is an individual and not registered for GST and intends to occupy the residential property as residential accommodation.

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 9-17 | A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-17(1) | A New Tax System (Goods and Services Tax) Act 1999 Subsection 9-30(2) | A New Tax System (Goods and Services Tax) Act 1999 paragraph 9-30(2)(b) | A New Tax System (Goods and Services Tax) Act 1999 Section 9-40 | A New Tax System (Goods and Services Tax) Act 1999 Division 11 | A New Tax System (Goods and Services Tax) Act 1999 S ection 11-5 | A New Tax System (Goods and Services Tax) Act 1999 paragraphs 11-5(a) to (d) | A New Tax System (Goods and Services Tax) Act 1999 Section 11-20 | A New Tax System (Goods and Services Tax) Act 1999 Division 40-C | A New Tax System (Goods and Services Tax) Act 1999 Section 40-65 | A New Tax System (Goods and Services Tax) Act 1999 Section 195-1 A New Tax System (Goods and Services Tax) Regulations1999 subregulation 40-5.09(1)

Reasons for decision: Summary: Division 11 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deals with the entitlement to input tax credits. Section 11-20 of the GST Act provides an entitlement to an input tax credit for any creditable acquisition made by an entity. Section 11-5 of the GST Act states: You make a creditable acquisition if: (a) you acquire anything solely or partly for a *creditable purpose; and (b) the supply of the thing to you is a *taxable supply; and (c) you provide, or liable to provide, *consideration for the supply; and (d) you are *registered or *required to be registered. (Terms denoted by asterisks are defined in section 195-1 of the GST Act.) In order for an acquisition to be a creditable acquisition all four of the criteria set out in paragraphs 11-5(a) to (d) of the GST Act are required to be met, that is, if any one of these criteria are not met, the acquisition is not a creditable acquisition. Relevantly in this case, paragraph 11-5(b) of the GST Act requires that for an acquisition to be a creditable acquisition for you, its supply to you has to be a taxable supply. That is, the supply of the call option has to be a taxable supply by Entity A to you. Section 9-40 of the GST Act provides that GST is payable on taxable supplies. Section 9-5 provides that you make a taxable supply where you make the taxable supply for consideration, the supply is made in the course or furtherance of an enterprise that you carry on, the supply is connected with Australia and you are registered or required to be registered. However the supply is not a taxable supply to the extent that it is GST-free or input taxed. You have made an acquisition of the call option for consideration, being the call option fee, from Entity A for the purchase of the residential property. The supply of the residential property and the supply of the call option are two separate supplies. We will consider these separately below. | Detailed Reasoning - Residential property: Division 40-C of A New Tax System (Goods and Services Tax) Act 1999 (GST Act) deal with residential premises. In particular, section 40-65 deal with the sales of residential premises and state: (1) A sale of *real property is input taxed , but only to the extent that the property is *residential premises to be used predominantly for residential accommodation (regardless of the term of occupation). (2) However, the sale is not input taxed to the extent that the *residential premises are: (a) *commercial residential premises; or (b) *new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998. Further section 195-1 of the GST Act sates: residential premises means land or a building that: (a) is occupied as a residence or for residential accommodation; or (b) 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) and includes a *floating home. From the information you have provided, the residential property comprises of a single dwelling on 2.625 hectares of land that has been occupied only for residential accommodation. It is not a commercial residential premises nor is it new residential premises. The sale of the residential property will therefore be an input taxed supply in accordance with section 40-65 of the GST Act and is not subject to GST. | Detailed Reasoning - Call option: ATO Interpretative Decision ATO ID 2005/183 Goods and services tax: GST and supply of a call option over residential premises (ATO ID 2005/183) states: 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. Accordingly, the supply of the call option by Entity A to you is an input taxed financial supply where the requirements of subregulation 40-5.09(1) of A New Tax System (Goods and Services Tax) Regulations 1999 (GST Regulations) as stated above are met. Further, Goods and Services Tax Ruling GSTR 2002/2 Goods and services tax: GST treatment of financial supplies and acquisitions (GSTR 2002/2) provides that an option is a contractual right but not an obligation to buy or sell a fixed quantity of a commodity, currency, financial security and so on, at a particular price (the exercise or strike price). An option to buy is known as a call option and an option to sell is a put option. In this regard, subsection 9-30(2) of the GST Act provides that a supply is input taxed if: (a) it is input taxed under Division 40 of the GST Act 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). The supply of the call option to you by Entity A is a supply of a right to receive the residential property and the residential property in this case is an input taxed supply under subsection 40-65(1) as discussed above. Therefore the supply of the call option is also an input taxed supply under paragraph 9-30(2)(b) of the GST Act (see ATO ID 2005/183). Accordingly, Entity A 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 you to purchase the residential property, the supply of which is also an input taxed supply. As the supply of the call option is an input taxed supply by Entity A to you, it meets the negative limbs of section 9-5 of the GST Act and therefore it is not a taxable supply and should not be subject to GST. Further, as your acquisition of the call option does not meet the requirement of paragraph 11-5(b) of the GST Act, it is not a creditable acquisition to you. | Detailed Reasoning - Additional information: It is noted that the deed provides at clause 5.3(a) that if the call option is exercised, the call option fee will be taken to be the deposit required under the matter. The Commissioner has issued Goods and Services Tax Determination GSTD 2014/2 Goods and services tax: where real property is acquired following the exercise of a call option, does the call option fee form part of the consideration for the acquisition for the purposes of subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999? (GSTD 2014/2) in relation to this matter. In particular paragraphs 16, 17 and 18 of GSTD 2014/2 provide that where an entity has exercised a call option to compel the transfer of real property, for GST purposes, the call option fee does not form part of the consideration for the property. This is the case even if the agreement between the parties specifies that the call option fee forms part of the price for the supply of the real property. The operation of section 9-17 of the GST Act varies what may be the outcome under contract law. Subsection 9-17(1) relevantly provide, that if an option to acquire a thing is granted, then the consideration for the supply of the thing on the exercise of the option is limited to any additional consideration provided either for the supply or in connection with the exercise of the option. | Detailed Reasoning - Question 2: Where an entity has incorrectly applied GST to a transaction and remitted the GST to the ATO, it is that entity which has to correct the mistake in its activity statement. Please refer to the ATO web site under " Correcting GST Mistakes" for further information on the process of how to do this. | Detailed Reasoning - Question 3: The sale of residential premises that is to be used predominantly for residential accommodation and which is not a commercial residence or new residential premises will be an input taxed supply in accordance with section 40-65 of the GST Act, and therefore will not be subject to GST.