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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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