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INCOME TAX ASSESSMENT ACT 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES  

PART 3-3 - CAPITAL GAINS AND LOSSES: SPECIAL TOPICS  

Division 134 - Options  

SECTION 134-1  Exercise of options  

 ITAA 36

134-1(1)  

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This table sets out the effects of the exercise of an option (including an option that has been renewed or extended) on the *cost bases and *reduced cost bases of the grantor and the entity that exercises the option (the grantee).
Exercise of options
ItemIn this situation:Effect of cost base and reduced cost base:
1Option binds grantor to:
(a) *dispose of a *CGT asset; or
(b) create (including grant or issue) a CGT asset (call option)
For the grantee
The first element of the grantee's *cost base and *reduced cost base for the CGT asset is what the grantee paid for the option (or to renew or extend it) plus any amount the grantee paid to exercise it
For the grantor
See section 116-65
2Option binds grantor to *acquire a *CGT asset (put option)For the grantor
The first element of the grantor's *cost base and *reduced cost base for the asset acquired is any amount paid to exercise the option reduced by any payment received by the grantor for the option (or to renew or extend it)
For the grantee
The second element of the grantee's cost base and reduced cost base for the asset acquired by the grantor includes any payment the grantee made to acquire the option (or to renew or extend it)

Note 1:

If you granted, renewed or extended an option, CGT event C3 or D2 may happen.

Note 2:

Item 1 in the table is modified for certain options granted before 20 September 1985: see section 134-1 of the Income Tax (Transitional Provisions) Act 1997.

Note 3:

Item 1 in the table is modified for ESS interests acquired under employee share schemes: see Division 83A and section 112-97.

Note 4:

This Division has no operation in relation to an option acquired under an employee share scheme if the option is exercised before the ESS deferred taxing point for the option: see Subdivision 130-D. Division 83A applies instead.

134-1(2)  

All the payments can include giving property: see section 103-5.

Example 1:

Steven obtains an option to buy a yacht (for $75,000) from Tom. Steven pays $5,000 for the option.

Steven exercises the option. The first element of his cost base and reduced cost base for the yacht includes the expenditure he incurred for the option.

So, the first element of his cost base and reduced cost base for the yacht is:
 $75,000 + $5,000 = $80,000 

Example 2:

An entity owns 1,000 shares in a company. Bill grants the entity an option which, if exercised, would require him to buy the shares for $2 each. The entity pays Bill 10 cents per share for the option.

The entity exercises the option. Bill paid $2,000 for the shares. He received $100 from the entity for granting the option.

The first element of Bill's cost base and reduced cost base for the shares is:
 $2,000 - $100 = $1,900 

In working out whether the entity made a capital gain or loss on the sale of the shares, the second element of its cost base (and reduced cost base) includes the $100 the entity paid for the option.

[CCH Note: There is no s 134-1(3).]

134-1(4)  

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A *capital gain or *capital loss the grantee makes from exercising the option is disregarded. However, this rule does not apply if the grantee *acquired the option under a trust restructure (see Subdivision 124-N) and, on exercising the option, held the resulting asset as an item of *trading stock.

Note 1:

The exercise of the option would be an example of CGT event C2 (about a CGT asset ending).

Note 2:

There is an exemption for the grantor if the option is exercised: see subsection 104-40(5).

134-1(5)  

This Division does not apply to rights or options to which Subdivision 130-B applies.

Note:

Subdivision 130-B deals (amongst other things) with rights and options issued by a company or trust where you did not pay or give anything to acquire them.

134-1(6)  

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This Division does not apply to:


(a) an option to the extent that the option binds the grantor to *dispose of *foreign currency; or


(b) an option to the extent that the option binds the grantor to *acquire *foreign currency.


 



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