Minimising Risk with Options
By David Kenney, Partner, Hall Chadwick
Options are a useful way of minimising up-front costs and commercial risk for developers. As a tax adviser, I get asked all the time about the GST and duty implications of financial options. In fact, a new client of mine asked about GST on an option over a particular property. After giving him an overview he lamented the fact that he had been told different things from different people at different time.
Although like everything with tax, the particular facts may alter the outcome, I am here to clarify the general position in relation to the GST and (NSW) duty treatment of the grant and nomination options.
Overview of tax and duty
The starting point as to the GST and duty implications of options is as follows:
- From a GST perspective – whether the option relates to an underlying property whose supply would be subject to GST or not?
- From a duty perspective – which State/Territory the underlying property is in and, in NSW for example, whether it is a call option or a put and call option?
Goods and Services Tax Issues
Grant of a call option
Broadly, the GST treatment of a call option follows the GST treatment of the underlying supply to which it relates. That is, for example, if a call option relates to the acquisition of:
- Existing residential premises (that is, not new residential premises) which would be an input taxed supply – the grant of the option itself will not be subject to GST (see ATOID 2005/183); and
- A GST-free going concern – the grant of the option itself will not be subject to GST provided that the parties to the option agree in writing that, on the exercise of the option, the supply will be a GST-free supply of a going concern (GSTR 2002/5).
Duty issues (NSW)
Traditionally, nominees could avoid duty on nominations under call options by ensuring that the nomination occurred by way of novation rather transfer (a technical legal distinction). However, NSW introduced amendments to ensure that nominations will attract duty regardless of how the nomination is carried out. Following the recent amendments, the duty position is as follows:
In relation to call options:
- The grant of a call option is not dutiable in NSW;
- A nomination (whether by way of transfer or novation) under a call option is dutiable and:
(i) the nominee is subject to duty on the option value (such as the premium paid);
(ii) the nominee is able to credit the duty paid under the nomination against the duty payable on the transfer of the underlying land on exercise of the option;
(iii) if the option is not exercised, the nominee is not entitled to refund for the duty paid under the nomination; and
In relation to put and call options:
- An option holder is subject to full duty on the underlying land value under a nomination (effectively treated as a sub-sale); and
- The nominee under the option is subject to full duty on the transfer of the underlying land.
This represents the starting point when dealing with the GST and duty implications of the grant and exercise of options. As you can see, it depends on the underlying GST treatment of the land to which an option relates and the form of the option itself and unfortunately practitioners often get it wrong, creating cash flow issues and compliance problems. These issues can often be avoided by a quick review of the facts and draft option agreement.
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