Yesterday the Commissioner published GSTD 2014/2 ‘Goods and services tax: where real property is acquired following the exercise of a call option, does the call option fee form part of the consideration for the acquisition for the purposes of subsection 75-10(2) of the A New Tax System (Goods and Services Tax) Act 1999.

In the Determination the Commissioner takes the view that the call option fee does not form part of the consideration for the acquisition of real property for the purposes of s 75-10(2) of the GST Act. This is because the supply of the call option and the supply of the land are two separate taxable supplies and as a consequence of s 9-17(1), the consideration for the supply of the land is limited to any consideration provided in addition to the call option fee.

This means that the purchaser is not entitled to input tax credits relating to the consideration paid for the land (with that consideration going to the margin), but is entitled to credits for the call option fee.

I note that the Determination does not address the case where the parties agree that the option fee is to form part of the consideration for the purchase if it is exercised. The reasoning in the Determination would suggest that in such a case the option fee does not form part of the margin. This is because s 9-17(1) expressly states that the consideration for the supply of the thing on the exercise of the option is limited to any “additional consideration” provided for the supply.

However, s 75-10(2) states that the margin is “the amount by which the consideration for the supply exceeds the consideration for your acquisition…”. Where the parties contractually agree that the option fee is to form part of the price, one could argue that the option fee forms part of the consideration for the acquisition. Whether s 9-17(1) overrides that outcome is an interesting question, particularly given that s 45-5 provides that the special rules (which includes Division 75) override the provisions of chapter 2 (which includes s 9-17(1)) “but only to the extent of any inconsistency”.

On Friday 12 April 2013 the ATO published ATO ID 2013/18 ‘GST and the application of the margin scheme to taxable supplies to associates for no consideration’ where the ATO confirmed that an entity could use the margin scheme to work out the GST payable on a taxable supply of real property that was held prior to 8 December 2008 and made after 24 March 2010 to an associate for no consideration where the associate will not use the real property for a fully creditable purpose.

Because the entity made a supply of “new residential premises” to an associate for no consideration, and the associate will not use the real property for a fully creditable purpose (being to rent out the premises), the supply is a taxable supply pursuant to the “associate” provisions in s 72-5 of the GST. Further, the supply of the freehold interest in real property is taken to be sale in accordance with s 72-20 (which apply to supplied made after 24 March 2010). As the parties have agreed in writing that the margin scheme is to apply, the relevant requirements of s 75-5(1) are satisfied.

The ATO ID notes that if the entity had acquired the entity on or after 8 December 2008, a subsequent supply for no consideration made to an associate would be treated as a sale according to s 75-5(1B) of the GST Act.

On 17 January 2012 the ATO published a “Valuation issues paper” in collaboration with the Australian Property Institute and the AVO.  The Issues Paper was prepared in conjunction with the Australian Property Institute and the AVO and it seeks to outline the ATO’s position on a number of recurring issues with regard to non-complying valuations.

The paper can be accessed here through the ATO website, but the paper does not appear to be available as a stand alone document.  For ease of reference I have collated the various parts of the paper and it can be accessed here.