Private ruling: Sale of residential property - GST and CGT application
Date of advice: 23 October 2015
Published: October 2015


Relevant facts and circumstances: You reside at your private residence. You are not registered for goods and services tax (GST), nor are you required to be registered. You have been approached by a development company with an offer to purchase your residence with a call option to buy, subject to development approval. You acquired the property prior to 20 September 1985 and built your residence after this date. You will remain living in the residence until it is sold. No business or income producing activities have ever been conducted from the property.

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 9-30 | 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 | Income Tax Assessment Act 1997 section 104-10 | Income Tax Assessment Act 1997 subsection 104-40(5) | Income Tax Assessment Act 1997 paragraph 104-10(5)(a) | Income Tax Assessment Act 1997 subsection 108-55(2) | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 section 120-20

Reasons for decision: Detailed Reasoning - Issue 1 GST: In this ruling: • all legislative references are to the A New Tax System (Goods and Services Tax) Act 1999 (GST Act) • all reference materials referred to are available on the Australian Taxation Office (ATO) website www.ato.gov.au • all legislative terms of the GST Act marked with an asterisk are defined in section 195-1 of the GST Act You must pay the GST payable on any taxable supply that you make. The term supply is defined in section 9-10 to include, amongst other things; • a grant, assignment or surrender of real property; and • a creation, grant, transfer, assignment or surrender of any right. In your case, you have advised that you have been approached by a property developer to enter into a call option agreement whereby the property developer will acquire the option to purchase your residential property. There are two supplies involved in this arrangement. The first supply is your supply of the call option to the property developer, that is, the grant of the right to the property developer to purchase your residential property. This supply is separate and distinct from the second supply that may occur if the call option is exercised and you sell your residential property. To be a taxable supply, a supply must meet all of the requirements of section 9-5 which states you make a taxable supply if: (a) you make the supply for *consideration; and (b) the supply is made in the course or furtherance of an *enterprise that you *carry on; and (c) the supply is *connected with the indirect tax zone, and (d) you are registered for GST, or required to be registered. However, the supply is not a taxable supply to the extent that it is GST-free or input taxed. Input taxed Subsection 9-30(2) provides that a supply is input taxed if: (a) it is input taxed under Division 40 or under another 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). Section 40-65 provides that a sale of real property is input taxed to the extent that the property is residential premises to be used predominantly for residential accommodation and is not commercial residential premises or new residential premises. Your property does not meet the definition of new residential premises, nor does it meet the definition of commercial residential premises. However, your property does meet the definition of residential premises as contained in section 195-1 which provides that '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 … Therefore, when you sell your existing residential premises, the sale will be an input-taxed supply pursuant to paragraph 9-30(2)(a) and not a taxable supply. As such, you are not liable for GST on the sale of the property. Furthermore, when you grant the option to purchase your property to the developer, this will also be an input taxed supply pursuant to paragraph 9-30(2)(b). As the supplies in question are not taxable supplies, you are not liable for GST on either the grant of the call option or on the sale of your residential property. | Detailed Reasoning - Detailed Reasoning - Issue 2 CGT: Under section 120-20 of the Income Tax Assessment Act 1997 (ITAA 1997), an entity will make a capital gain or a capital loss if a CGT event happens to a CGT asset. A capital gain on the disposal of an asset can be disregarded under paragraph 104-10(5)(a) of the ITAA 1997 if it was acquired prior to 20 September 1985. Separate assets Subsection 108-55(2) of the ITAA 1997 states that a building or structure that is constructed on land that you acquired before 20 September 1985 is taken to be a separate CGT asset from the land if: • you entered into a contract for the construction on or after that day; or • if there is no contract - the construction started on or after that day. In this case, you purchased the land prior to 20 September 1985 but the dwelling was built after this date. Therefore, the dwelling is considered a post CGT asset. Main residence exemption The main residence exemption is outlined in Subdivision 118-B of the ITAA 1997. Under section 118-110 of the ITAA 1997 you are eligible for a full main residence exemption if the dwelling has been the family home for you, your partner and other dependents for the whole period you have owned it (ownership period), has not been used to produce assessable income - that is, you have not run a business from it or rented it out, and is on land that is not more than 2 hectares in area. CGT event A1 happens if you dispose of a CGT asset as per subsection 104-10(1) of ITAA 1997. Subsection 104-10(2) of the ITAA 1997 provides that you dispose of a CGT asset if a change in ownership occurs from you to another entity, whether because of some act or event or by operation of law. Granting an option Under subsection 104-40(1) of the ITAA 1997, CGT event D2 happens if you grant an option to an entity, or renew or extend an option you had granted. The time of the event is when you grant, renew or extend the option. You make a capital gain if the capital proceeds from the grant of the option are more than the expenditure you incurred to grant it. You make a capital loss if those capital proceeds are less. A call option gives a person the right to acquire an asset from the person granting the right at some specified tie and usually at a predetermined price. Under subsection 104-40(5) of the ITAA 1997, a capital gain or loss you make from the grant of the option is disregarded if the option is exercised. | Detailed Reasoning - Application to your circumstances: In this case, you purchased land prior to 1985 and built a dwelling after this date. As discussed above, the land is a pre CGT asset but the dwelling is a post CGT asset. Under the proposed agreement, you will grant the developer an option to purchase the property. As discussed above, CGT event D2 happens if you grant an option to an entity. However, if this option is exercised by the developer, any capital gain or loss you make from the grant of the option is disregarded. In this case, if the developer exercises the option to purchase the land, CGT event A1 will happen upon the disposal of the property. As the land was acquired prior to 20 September 1985 any capital gain or loss made from the disposal can be disregarded. Further, as the dwelling is your main residence section 118-110 of the ITAA 1997 will apply to disregard any capital gain or loss made on the disposal. | Detailed Reasoning - Note:: It does not matter, in determining whether a capital gain or a capital loss is made from the grant of a call option, that the property the subject of the option was acquired by the grantor before 20 September 1985. If the option is exercised, the fact that the property was acquired before 20 September 1985 will ordinarily mean that no capital gain or capital loss is made as a result of the grant of the option and the subsequent exercise of it. The capital gain or capital loss made on the grant is disregarded and the exercise of the option would simply result in a disposal of the property the subject of the option.