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Capital Gains Tax (“CGT”) and Options

Commentary

There are two distinct stages in an option.

The first stage is the grant of the Option where the option fee is paid up front, and where an ongoing option fee might be specified. The questions are -

  • What capital gains tax is payable by the owner (the grantor) on the option fees?
  • What is the status of the option fees paid for capital gains tax purposes by the purchaser (the grantee)?

Because the purchaser has an option to purchase, rather than being contractually bound to purchase, under a standard option (a call option), the capital gains tax that will be payable if the option becomes a contract (i.e. the option is exercised) does not arise at this stage.

The ATO calls the first stage a CGT event D2.

The second stage is the exercise of the Option, which is where a legally binding Contract for the Sale of the Property is entered into. The question is –

  • Starting with the Contract price, what deductions are able to be made to arrive at the capital gain, which is subject to the capital gains tax?

The ATO calls the second stage a CGT event B1 (see above).

Here is the ATO commentary on Capital Gains Tax for Options –
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The ATO Interpretation of CGT event D2


Granting an option

CGT event D2 happens if you grant an option to a person or an entity, or renew or extend an option that you had granted.

The amount of your capital gain or capital loss from CGT event D2 is the difference between what you receive for granting the right and any expenditure you incurred on it. The CGT discount does not apply to CGT event D2.

Example

Granting of an option (stage 1)
You were approached by Colleen who was interested in buying your land. On 30 June 2009, you granted her an option to purchase your land within 12 months for $200,000. Colleen pays you $10,000 for the grant of the option. You incur legal fees of $500. You made a capital gain in the 2008-09 income year of $9,500.

Exercise of an option

If the option you granted is later exercised, you ignore any capital gain or capital loss you made from the grant, renewal or extension. You may have to amend your income tax assessment for an earlier income year.

Similarly, any capital gain or capital loss that the grantee would otherwise make from the exercise of the option is disregarded.

The effect of the exercise of an option depends on whether the option was a call option or a put option. A call option is one that binds the grantor to dispose of an asset. A put option binds the grantor to acquire an asset.

Example

Granting of an option (stage 2):
On 1 February 2010, Colleen exercises the option. You disregard the capital gain that you made in the 2008-09 income year and you request an amendment of your income tax assessment to exclude that amount. The $10,000 you received for the grant of the option is considered to be part of the capital proceeds for the sale of your property in the 2009-10 income year. Your capital gain or capital loss from the property is the difference between its cost base/reduced cost base and $210,000.

Source:
http://www.ato.gov.au/individuals/content.aspx?doc=/content/36904.htm&pc=001/001/038/002/002&mnu=0&mfp=&st=&cy=
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Commentary

In the Example (stage 1) you will notice that the option is granted for less than 12 months. If the Option goes beyond 12 months, so that more than a year passes, then when you reach stage 2, the property will have been owned for more than 12 months and so only 50% of the capital gain will be subject to tax.

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