Income Tax Assessment Act 1997

CHAPTER 3 - SPECIALIST LIABILITY RULES

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

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Division 134 - Options

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SECTION 134-1 Exercise of options

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
Item	In this situation:	Effect of cost base and reduced cost base:
1	Option 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
2	Option 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.

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History

S 134-1(1) amended by No 133 of 2009, s 3 and Sch 1 item 41, by substituting notes 3 and 4 for note 3, applicable in relation to the ESS interests mentioned in subsections 83A-5(1) and (2) of the Income Tax (Transitional Provisions) Act 1997 . Note 3 formerly read:

Note 3:

Item 1 in the table is modified for shares or rights acquired at a discount (within the meaning of Subdivision C of Division 13A of Part III of the Income Tax Assessment Act 1936 ) under an employee share scheme - in certain circumstances you can be taken to have paid the market value for an option: see Subdivision 130-D and section 112-15 .

Note: No 133 of 2009 made the above amendment to " 134-1 " - presumably the amendment was intended to apply to s 134-1(1).

S 134-1(1) substituted by No 58 of 2006 , s 3 and Sch 3 item 3, applicable in relation to options exercised on or after 27 May 2005. S 134-1(1) formerly read:

134-1(1)
This table sets out the effects of the exercise of an option on the *cost bases and *reduced cost bases of the grantor and the entity that exercises the option (the grantee ).

Exercise of options

Item In this situation: Effect on cost base and reduced cost base:

1 Option binds grantor to *dispose of a *CGT asset or to issue *shares in a company (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 plus any amount the grantee paid to exercise it

For the grantor

See section 116-65

.

2 Option 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

For the grantee

The second element of the grantee ' s *cost base and *reduced cost base for the asset disposed of to the grantor includes any payment the grantee made to *acquire the option

Note 1:

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

Note 2:

Item 1 in the table is modified for 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 shares or rights acquired at a discount (within the meaning of Subdivision C of Division 13A of Part III of the Income Tax Assessment Act 1936 ) under an employee share scheme - in certain circumstances you can be taken to have paid the market value for an option: see Subdivision 130-D and section 112-15.

S 134-1(1) amended by No 173 of 2000 and No 94 of 1999.

134-1(2)
All the payments can include giving property: see section 103-5 . EXAMPLES

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) .

View history note

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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