Private ruling: Capital gains tax - Disposal of main residence - granting of an option
Published: March 2014
Ruling period: Year ended 2014 | Year ended 2015
Date scheme commenced: 1 July 2013

Ruling: Q1: Does the granting of an option to another entity to purchase your property constitute a capital gains tax (CGT) event D2? | A1: Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You and your spouse purchased a property after 20 September 1985. You and your spouse moved in and established the property as your main residence as soon as practicable after settlement. The property was used for income producing purposes for a period of approximately 20 months. The property has been vacant for approximately X months. Mid last year you and your spouse entered into a Contract for Option to purchase the property with a number of companies (the buyers). The contract is binding for a specified period unless the buyers exercise the option prior to the expiration of the contract or the buyers abandon the option. You and your spouse agreed to a purchase price at the commencement of the option contract. You and your spouse agreed to receive an option fee of a specified amount per calendar month from the buyers. There are no affiliations between you, your spouse and the buyers. You have provided documentation to support your application and this documentation is to be read with and forms part of your application for the purpose of this ruling.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 104-40 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 115-25 | Income Tax Assessment Act 1997 Section 116-65 | Income Tax Assessment Act 1wer997 Section 118-110

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. An option is considered to be a CGT asset. Options are considered as rights to accept an irrevocable offer within a specified time and the acceptance of the offer creates a contract. An option provides the grantee of the option the right to acquire an asset from the grantor of the option at a specified price before a specified date. CGT event D2 happens if you grant an option to a person or an entity, or renew or extend an option you have 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, renewal or extension of the option are more than the expenditure you incurred to grant, renew or extend it. You make a capital loss if those capital proceeds are less. There is an exception which states that a capital gain or capital loss you make from the grant, renewal or extension of the option is disregarded if the option is exercised. It should be noted that a capital gain arising under CGT event D2 cannot be a discount capital gain. In your case, you and your spouse signed a contract on a specified date granting an option to the buyers to purchase the property. Therefore, the granting of an option by you and your spouse constitutes a CGT event D2 and the date of the event is when the option was granted. You and your spouse should have record the amount you received for granting the option in your income tax return. It may be the following year before the option is exercised. If the option is exercised, the granting of the option on a particular date and the exercise of the option is treated as a single transaction in relation to the grantor. Taxation Determination TD 16 Capital Gains: What is the date of acquisition (or date of disposal) of an asset acquired (or disposed of) on the exercise of an option? confirms that the date of disposal of an asset under an option is the date of the transaction entered into as a result of the exercise of the option. The subsequent disposal from the exercising the option will be a CGT event A1. Where you dispose of a CGT asset because another entity exercises an option you granted in relation to the asset, the capital proceeds from the disposal include any payment you received for granting the option. This means that the capital proceeds from the CGT A1 event includes any payment you received for granting the option. Therefore, the original CGT event D2 is disregarded. Where an option is given in one financial year and exercised in another financial year, an amendment to an individual's income tax assessment for the year in which the option was granted will be necessary. Note: The main residence exemption does not apply to CGT event D2.