GST and supply of a call option over GST-free eligible emissions units

Is an entity making an input taxed financial supply under section 40-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act), when it grants a call option that entitles the grantee to acquire eligible emissions units, the supply of which would be a GST-free supply?

No, the entity is not making an input taxed financial supply under section 40-5 of the GST Act. The supply of the call option is GST-free under paragraph 9-30(1)(b) of the GST Act.

An entity grants an over-the-counter call option over 'eligible emission units' within the definition in section 195-1 of the GST Act.

The option is granted for consideration, and the entity makes the supply of the option through an enterprise that it carries on in Australia. The entity is also registered for GST.

Under the option, the holder has the right but not the obligation to exercise the option and purchase the eligible emissions units up until the expiry date.

A financial supply is input taxed under subsection 40-5(1) of the GST Act. Subsection 40-5(2) of the GST Act states that 'financial supply' has the meaning given by the A New Tax System (Goods and Service Tax) Regulations 1999 (GST Regulations).

The provision, acquisition or disposal of an interest mentioned in subregulation 40-5.09(3) of the GST Regulations is a financial supply if the requirements of subregulation 40-5.09(1) of the GST Regulations are satisfied.

A 'derivative' is listed at Item 11 in the table in subregulation 40-5.09(3) of the GST Regulations (Item 11). '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. The value or price of an option is determined by a number of factors, including the current price of the underlying asset that is the subject of the option. Accordingly, the call option satisfies the definition of a derivative.

The supply of the call option is made for consideration, in the course or furtherance of the entity's enterprise and is connected with Australia. The entity is registered for GST and as it granted the option, it is a financial supply provider in relation to the supply of the call option (regulation 40-5.06 of the GST Regulations). Therefore, the requirements in subregulation 40-5.09(1) of the GST Regulations are satisfied and the entity is making an input taxed financial supply under subsection 40-5(1) of the GST Act.

The supply of eligible emissions units is GST-free under section 38-590 of the GST Act.

Subsection 9-30(1) of the GST Act states that a supply is GST-free if: (a) it is GST-free under Division 38 of the GST Act or under a provision of another Act, or (b) it is a supply of a right to receive a supply that would be GST-free under paragraph (a).

The granting of the call option is the supply of a right to receive a supply of eligible emissions units. Therefore, the supply of the call option is also a GST-free supply under paragraph 9-30(1)(b) of the GST Act.

The entity's supply of the call option is both an input taxed financial supply under subsection 40-5(1) of the GST Act, and a GST-free supply under subsection 9-30(1) of the GST Act.

Subsection 9-30(3) of the GST Act provides that where a supply is both GST-free and input taxed, the supply will be GST-free and not input taxed, unless the provision under which it is input taxed requires the supplier to have chosen for its supplies of that kind to be input taxed. Subsection 40-5(1) of the GST Act does not require the entity to choose for the supply to be input taxed.

Consequently, the entity's supply of the call option will be GST-free. Note: The supply of other types of derivatives that amount to the supply of a right to receive a GST-free supply under paragraph 9-30(1)(a) of the GST Act will also be GST-free under paragraph 9-30(1)(b).

Date of amendment Part Comment 25 July 2014 Facts and Legislative References Deleted references to the Clean Energy Act 2011, which was repealed with a date of effect of 1 July 2014.

Date of amendment | Part | Comment

25 July 2014 | Facts and Legislative References | Deleted references to the Clean Energy Act 2011, which was repealed with a date of effect of 1 July 2014.