Options and CGT

We're thinking about writing an option on one of our properties.

Question: At what date is CGT triggered if the buyer takes up the option: the date the option is bought, the date it expires, the date contracts are exchanged or some other date?

Bob
 
Hi Bob,

This is a tricky question but I'll have a stab at it.

Let's say the current market value of your property is $100,000. You agree to sell it in two years for $120,000. You grant an option to the buyer for a fee of $10,000. If the option is not exercised you keep the $10,000. If the option is exercised the property is sold and the balance of $110,000 is paid to you.

If the option is granted and subsequently exercised and the property sold to the grantee two CGT events occur.

The first CGT event ( D2 ) occurred by granting the option. The capital gain is $10,000 minus legal costs and other expenditure for making the grant. The second CGT event ( A1 ) occurred when the property is sold. Now comes the tricky part. When calculating the capital gain for the property when sold do you take the sale price as $110,000 or $120,000?

If you said $110,000 because you already paid CGT two years earlier on $10,000 you'd actually be wrong. What happens is you have to get the ATO to ammend your earlier return and remove any reference to the $10,000 capital gain, then they will recalculate your return for that year. In the year of the sale you calculate your capital gain based on the figure of $120,000.

If the option is not exercised and it expires then you keep the $10,000 and your earlier tax return stands. If I'm wrong please correct me.

As far as the buyer is concerned the cost base figure is $120,000 plus legals.

Regards, Mike
 
Thansk for that Mike.

As the option will run for six months (with contract exchange date on the house purchase to be on 1 July) I'll be able to declare the D2 event and then ask for it to be disregarded as I will have triggered the A1 event before lodging the first tax return.

Cheers,

Bob
 
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