A property developer has been unsuccessful in arguing that a fee paid for an option to purchase real property formed part of the acquisition cost of the property.
The taxpayer entered into an agreement with the vendor to purchase the property for $28m, which included a non-refundable option fee of $2m. The option was exercised and the taxpayer became the registered proprietor. The property was subsequently developed and sold in residential lots. In calculating the GST on the lots, the taxpayer utilised the margin scheme and sought to include the $2m as part of the acquisition cost of the property (the margin scheme imposes GST on the difference between the consideration for the sale of real property and the cost of its acquisition).
Section 75-10(1), of the GST Act, allows a vendor, to pay GST on the ‘margin’ for the supply, which is defined in ss(2) as follows:
(2) Subject to subsection (3) and section 75-11, the margin for the supply is the amount by which the *consideration for the supply exceeds the consideration for your acquisition of the interest, unit or lease in question.
Consideration, in turn, is defined in broad terms, under s9-15(1), as follows.
Consideration includes:
(a) any payment, or any act or forbearance, in connection with a supply of anything; and
(b) any payment, or any act or forbearance, in response to or for the inducement of a supply of anything.
Based on this definition, it might seem that an option fee was relevantly ‘in connection with’ the ultimate supply of the real property or was a ‘a payment … for the inducement of a supply’ of the real property’.
However, there is a specific exclusion from the definition of “consideration”. Relevantly, s 9-17(1) of the GST Act, provides:
(1) If a right or option to acquire a thing is granted, then:
(a) 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; or
(b) if there is no such additional consideration – there is no consideration for the supply.
On the strength of these provisions, therefore, the AAT agreed with the Commissioner that there were 2 separate supplies involved here – the supply of an option (for $2m) and the supply of real property (for $26m). The cost of acquisition for the purposes of s75-10(2) of the GST Act was therefore $26m, ie the option fee was solely referable to the supply of the call option.
This is in keeping with the Commissioner’s views as set out in GST Determination GSTD 2014/2.
(The Trustee for the Whitby Trust and FCT [2017] AATA 343, AAT File No: 2015/3625, Walsh SM, 20 March 2017.)
[FJM, Sievers, LTN 55, 23/3/17]