Private ruling: GST and supply of property
Date of advice: 27 January 2016
Published: March 2016

Ruling: Q1: Is your grant of the call option to the buyer pursuant to the Call Option Agreement a taxable supply under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act)? | A1: During the period you were registered for GST and received consideration for your supply, you have made a taxable supply under section 9-5 of the GST Act pursuant to the Call Option Agreement because the supply of the call option satisfies all the requirements of section 9-5 of the GST Act in that period. From the period you are not registered for GST and onwards, your supply pursuant to the Call Option Agreement is not a taxable supply under section 9-5 of the GST Act as you are not required to be registered for GST. However, should you become registered or required to be registered for the goods and services tax (GST), your supply will be a taxable supply under section 9-5 of the GST Act from the date you reregistered for GST. | Q2: Will your sale of the vacant land situated in Australia be a taxable supply under the GST Act if the call option under the Call Option Agreement is exercised? | A2: If at the time of settlement of the vacant land you are not required to be registered for GST, the sale of the vacant land will not be a taxable supply as all the requirements in section 9-5 of the GST Act will not be satisfied. GST will therefore not be applicable when the land is sold. However, should you become required to be registered for GST or register for GST at the time of settlement of the vacant land, the sale of the land will be a taxable supply under section 9-5 of the GST Act since all the requirements in section 9-5 of the GST Act will be satisfied.

Relevant facts and circumstances: You carry on a livestock business on vacant land that you own. The vacant land has a machinery shed located on it. You have entered into a Call Option Agreement with a buyer for this vacant land on XXMMYY and it 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 vacant land. After the sale, the buyer will use the land for development purposes. Upon the call option being exercised you and the buyer will enter into a sale contract for the vacant land. You will deduct the premium you have received when calculating the purchase price for the vacant land. You were registered for GST and cancelled your GST registration after you have entered into the Call Option Agreement with the buyer as your GST annual turnover was below the GST registration threshold of $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. You advised you will continue carrying on your livestock business after the vacant land is sold, and all livestock located on the land which is being sold will be either sold or relocated to another 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 9-20 | 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 Detailed reasoning | Question 1 | Goods and Services Tax Determination GSTD 2014/2 provides the Commissioner's view on 'call option'. Paragraphs 15, 16, 17, 18 and 21 state: | 15. Where a call option is granted, the grantee provides consideration to the grantor, commonly referred to as a call option fee. | 16. 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. | 17. 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. | 18. Subsection 9-17(1) relevantly provides 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. | 21. In the context of a call option over real property, subsection 9-17(1) recognises that the supply of the option is a separate supply to the supply of the underlying property. As a consequence of subsection 9-17(1) of the GST Act, the consideration for the call option is the call option fee, and the consideration for the supply or acquisition of the underlying property is limited to any additional consideration provided. | Accordingly, the call option in the Call Option Agreement is to be treated as a separate supply from the supply of the vacant land in the sale contract. | GST status of the call option | 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. | The supply of the call option is a taxable supply where all the requirements in section 9-5 of the GST Act are satisfied. | We will now consider whether your supply of the call option satisfies all the requirements in section 9-5 of the GST Act. | Paragraph 9-5(a) of the GST Act | Under subsection 9-10(2) of the GST Act, amongst other things, a supply includes a creation, grant, transfer, assignment or surrender of any right (paragraph 9-10(2)(e) of the GST Act). | In the Call Option Agreement you grant the buyer a call option to purchase the vacant land and as consideration the buyer has to pay the premiums and outgoings. In this instance, the substance of the grant of the call option is a supply of right to the buyer under paragraph 9-10(2)(e) of the GST Act which is a separate transaction from the exercise of the call option to acquire the vacant land. | Paragraph 9-5(a) of the GST Act is therefore satisfied as you have made the supply of the call option for consideration. | Paragraph 9-5(b) of the GST Act | Under paragraph 9-10(2) of the GST Act the definition of supply also includes a grant, assignment or surrender of real property. The term 'real 'property' is defined in section 195-1 of the GST Act to include a personal right to call for or be granted any interest in or right over land. As such an option to purchase real property is also a supply of real property. However, the supply is a separate supply to the actual sale of the property. | You use the vacant land to carry on your livestock business and therefore the vacant land is an asset that you hold for your livestock business. Accordingly, the supply of the option to buy the vacant land is made in the course of the livestock enterprise that you carry on. Paragraph 9-5(b) of the GST Act is satisfied. | Paragraph 9-5(c) of the GST Act The supply is connected with Australia as the option to buy the vacant land was granted in Australia. | Paragraph 9-5(d) of the GST Act Period you were registered for GST | You were registered for GST and pursuant to the Call Option Agreement, you have been receiving consideration from the date the agreement was entered into for your supply of the call option. In this instance you satisfy paragraph 9-5(d) of the GST Act from the date you entered into the agreement until you cancelled your GST registration. Period 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 call option while 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). | Section 188-25 of the GST Act excludes certain supplies made when working out the projected annual turnover for GST registration. Section 188-25 of the GST Act states: | 188-25 Transfer of capital assets, and termination etc. of enterprise to be disregarded | In working out your *projected GST turnover, disregard: | a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and | b) any supply made, or likely to be made, by you solely as a consequence of: | i. ceasing to carry on an enterprise; or | ii. substantially and permanently reducing the size or scale of an enterprise. | (* denotes a defined term in section 195-1 of the GST Act) For GST purposes, we consider that where the supply 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 is a capital asset and therefore the proceeds from granting the option to purchase the capital asset is considered to be capital proceeds. The proceeds received from the time you deregister 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 supply of the call option from the date you deregister for GST is therefore not subject to GST as all the requirements in section 9-5 of the GST Act are not satisfied. However should you become registered or are required to be registered for GST later, then paragraph 9-5(d) of the GST will be satisfied and all payments received from the date of your GST reregistration will be subject to GST. | 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 received consideration for your supply while registered for GST. Summary | For the period you were registered and received consideration for your supply, 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 because all the requirements in section 9-5 of the GST Act are satisfied. | From the date you are not registered for GST and onwards, your supply is not a taxable supply under section 9-5 of the GST Act as you are not required to be registered for GST. However, should you become registered or required to be registered for GST, your supply will be a taxable supply from the date you reregistered for GST since all the requirements in section 9-5 will be satisfied. | Question 2 | The supply of the vacant land will be a taxable supply where all the requirements in section 9-5 of the GST Act are satisfied. | You will satisfy paragraphs 9-5(a) to 9-5 (c) of the GST Act when you sell the vacant land as: a) you will sell the vacant land for consideration, | b) the supply of the vacant land will be made in the course of the livestock business that you carry on as the vacant land is an asset which you use to carry on your livestock business; and | c) the supply of the vacant land will be connected with Australia as the land is located in Australia. | A sale of vacant land is not input taxed or GST-free under the GST Act. What remains to be considered is whether your supply of vacant land will satisfy paragraph 9-5 (d) of the GST Act as currently you are not registered for GST. | Paragraph 9-5(d) of the GST Act | 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). | Section 188-25 of the GST Act excludes certain supplies made when working out the projected annual turnover for GST registration. Section 188-25 of the GST Act states: | 188-25 Transfer of capital assets, and termination etc. of enterprise to be disregarded | In working out your *projected GST turnover, disregard: | a) any supply made, or likely to be made, by you by way of transfer of ownership of a capital asset of yours; and | b) any supply made, or likely to be made, by you solely as a consequence of: | i. ceasing to carry on an enterprise; or | ii. substantially and permanently reducing the size or scale of an enterprise. | (* denotes a defined term in section 195-1 of the GST Act) | You use the vacant land for grazing livestock. Accordingly, the vacant land is a capital asset of your business as it enables you to derive income for your livestock business. When considering your projected annual turnover for GST registration at the time of settlement, the consideration to be received from the sale of the land will not be included under section 188-25 of the GST Act since the ownership of the vacant land will be transferred when sold. | Accordingly, if at the time of settlement of the land you are not required to be registered for GST, the sale of the vacant land will not be a taxable supply as all the requirements in section 9-5 of the GST Act will not be satisfied. GST will therefore not be applicable when the land is sold. | However, should you become required to be registered for GST (for example livestock is sold before settlement date and the payments resulted in your GST annual turnover exceeding the threshold) or you are registered for GST at the time of settlement for the sale of the vacant land, the sale of the land will be a taxable supply under section 9-5 of the GST Act since all the requirements of the GST Act will be satisfied.