Issue
Does the entity, a supplier of real property, include the call option fee as part of the consideration for a supply of real property in calculating the margin for the purposes of the margin scheme under Division 75 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when the purchaser has exercised the call option to purchase the property?
Decision
No, the entity does not include the call option fee as consideration for a supply of real property in calculating the margin for the purposes of the margin scheme under Division 75 of the GST Act when the purchaser has exercised the call option to purchase the property.
Facts
The entity is a supplier of real property and is registered for goods and services tax (GST). The entity is selling real property it owns to a purchaser.
Before the sale, the entity granted the purchaser a call option over the property and charged the purchaser a call option fee. If the purchaser subsequently takes up the option to purchase the property, the call option fee that has been paid will be applied to the purchase price of the property (that is at the time of supply, the purchaser will only pay the difference between the agreed purchase price and the amount of the option fee). The supply of the call option by the entity was a taxable supply under section 9-5 of the GST Act.
The purchaser exercised the option to purchase the real property from the entity. The entity's sale of the real property to the purchaser was made under a contract entered into on or after 29 June 2005 and was not made pursuant to a right or option granted before that day. The supply was a taxable supply under section 9-5 of the GST Act.
The entity and the purchaser agreed in writing before the supply that the margin scheme was to apply. The supply of the real property satisfies the other requirements of section 75-5 of the GST Act for the margin scheme to apply.
The circumstances specified in the items in the table in subsection 75-10(3) of the GST Act are not applicable to the supply of the real property by the entity. The circumstances specified in section 75-11 of the GST Act are also not applicable as the entity did not acquire the real property it sold from: • a member of a GST group the entity was a member of; • the joint venture operator of a GST joint venture the entity was a participant in; or • an associate of the entity,
nor did the entity: • inherit the real property from a deceased estate; or • acquire the real property under a GST-free supply of farmland or going concern.
Reasons for Decision
The sale of the real property by the entity satisfies the requirements of section 75-5 of the GST Act and the entity and purchaser have agreed in writing to apply the margin scheme in working out the amount of GST on the taxable supply. To determine its GST liability, the entity must calculate the margin for the supply.
Subsection 75-10(1) of the GST Act provides that the amount of GST on a taxable supply of real property made under the margin scheme is 1/11th of the margin for the supply. Accordingly, to determine the amount of GST, the entity must calculate the margin for the supply.
The margin for a supply of real property is calculated in accordance with either section 75-10 of the GST Act or section 75-11 of the GST Act. However, as the circumstances specified in both the items in the table in subsection 75-10(3) of the GST Act and section 75-11 are not applicable to the entity, the margin for the supply in this instance is calculated in accordance with subsection 75-10(2) of the GST Act.
Subsection 75-10(2) of the GST Act provides that the margin for the supply is the amount by which the consideration for the supply exceeds the consideration for the acquisition of the interest, unit or lease in question.
The entity granted the purchaser a call option over the property and charged the purchaser a call option fee. The purchaser has decided to take up the option to purchase the property and as such, the call option fee that has been paid, is applied to the purchase price of the property.
Subparagraph 9-15(3)(a)(i) of the GST Act provides that, if a right or option to acquire a thing is granted then the consideration for the supply of the thing on the exercise of the right or option is limited to any additional consideration provided either for the supply or in connection with the exercise of the right or option.
Although the call option fee is applied to the purchase price of the property, the supply of the real property, on the exercise of the option, is a distinct and separate supply from the supply of the option.
As such, due to the operation of subparagraph 9-15(3)(a)(i) of the GST Act, the consideration for the supply of the real property, on the exercise of the option, is limited to the additional amount that the purchaser pays, after the call option fee is applied to the purchase price of the property (that is the difference between the agreed purchase price and the amount of the option fee). The call option fee is consideration for the call option over the property rather than for the supply of the property itself.
Therefore, the entity does not include the call option fee as part of the consideration for the supply of the real property in calculating the margin under either section 75-10 of the GST Act or section 75-11 of the GST Act when the purchaser has exercised the call option to purchase the property. Note 1: In addition, if the purchaser later sells the real property and the margin scheme is applied to that sale, then the consideration that the purchaser provided for the acquisition of the real property does not include the amount paid for the option. Note 2: Where a taxable supply of real property was made pursuant to contracts entered into prior to 29 June 2005 or made pursuant to rights and options granted before that day, the margin scheme could be applied if the supplier chose to apply the margin scheme and the supplier did not acquire the real property through a taxable supply on which the GST was worked out without applying the margin scheme.