GST on options over real property
Developers often use options as a means of mitigating risk by optioning a property so as to lock in a property at a set price whilst giving them give them time within which to obtain the necessary approvals without having to actually acquire the property – saving carrying costs such as interest as well as delaying stamp duty.
The GST implications of options broadly follow the GST treatment of the underlying property/ies subject to the option, that is, if the supply of the underlying property on exercise of the option would be an input taxed supply of (non-new) residential premises, then the option itself will not be subject to GST.
It is common for some option holders to acquire the option with a view to obtaining the necessary approvals before effectively ‘on-selling’ the option rather than exercising it and carrying out the development itself. This is done by way of nomination under the option agreement. However, developers acquiring an option by way of nomination, whereby they pay a premium representing the difference between the amount payable for the property under the option and the market value of the underlying property following the development approval process must understand the GST implications this will have downstream when it subsequently re-develops the property and seeks to sell-off individual titles. Specifically, how acquiring property in this way, as opposed to purchasing land directly, impacts on the calculation of the margin scheme on eventual disposal.
These issues should be carefully determined as part of any meaningful feasibility study from the outset.
For a detailed explanation and helpful diagrams, see GST on Options over Real Property
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