Mr. Chan entered into a “Deed of Call Option” to sell his investment property with a property developer
in March 2018.
Upon signing the deed, he received an option fee of $10,000 which was non-refundable regardless the
developer pulled out at the end of the expiration period which was from March 2018 to March 2019.
Should Mr. Chan include the capital gain made from the option in his FY2018 individual tax return?
Is CGT Discount available for the capital gain made from granting the option?
Upon granting a call option to sell the property, CGT event D2 happens on the date of signing the option
contract. The grantor is considered to have disposed of an asset (the call option) for the capital
proceeds received for it.
Capital gain for the grantor = capital proceeds from the grant ($10,000) – the expenditure to grant it
This capital gain will include in Mr. Chan individual tax return in the income year in which the option
agreement is entered into (ie FY2018). However, according to s115-25(3), The 50% CGT discount is not
available in relation to a capital gain from CGT event D2.
If the option is later exercised before the expiry date then the fees that relate to granting the option
are rolled into the proceeds on the sale of the property. Hence, the sale of the underlying CGT asset
(Mr. Chan’s investment property) would trigger CGT event A1 at the date of the sale of the property.
If the option is exercised in the next Financial Year, an amendment of the prior year’s return would be
required to reverse the capital gain relating to the grant of the option. There is unlimited time to
amend the relevant tax return: Item 50 in s170(10AA) of the ITAA 1936.
If the option is not exercised and expires, no amendment will be made to the prior year’s return
relating to the capital gain from CGT event D2.