Grant Options – Property and Tax Implications

Bob entered into an option agreement to sell a block of land in December 2020.  

Under the option agreement the purchaser has to pay a fee of $20k per quarter up the exercise/termination date of the agreement.

If the agreement proceeds then the proceeds under the option agreement form part of the purchase price.  

So what happens from a tax perspective.

Options are treated as separate assets with separate CGT implications unless the option is exercised, in which case the option transaction is effectively “merged” with the underlying transaction that results in the acquisition or disposal of the asset. 

The granting of the option to buy a property at a later date would trigger CGT event D2. On this basis, regardless of whether the proceeds of the option fee are made over the year or paid upfront, the CGT event occurs at the time of granting the option. The cost base of the option will be the amount of expenditure incurred in granting the option. The proceeds are the option fee.

Where the option is exercised then the fees that relate to granting the option are rolled into the proceeds on the sale of the asset. Hence, the sale of the underlying CGT asset (ie, the subject of the option) would be considered a CGT event A1 under s104-10.

On this basis, an amendment of the prior return would be required to reverse the capital gains relating to the grant of the option.


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