Property purchasers should consider options

An Adelaide lawyer believes property investors should look at using call options when buying investment properties.

Mellor Olsson Lawyers senior associate Will Webster said options are common practise in commercial property transactions, but are less known among modern property investors such as baby boomers.

“A call option is a binding contractual arrangement, locking up property for a fixed period of time at a fixed purchase price,” Webster said.

“The purchaser and vendor agree on all fundamental terms of the transaction, but they are not required to formally enter a purchase contract unless and until the beneficiary of the option — usually the purchaser — chooses to exercise it.”

He said the deal lapses if they do not exercise the option within the fixed time period.

“In return for locking up their asset, the vendor is compensated by a call option fee, which can be nominal, but is more likely to be a figure that reflects the vendor’s lost opportunity to sell during that period,” he said.

Call options are particularly attractive for purchasers of land for development, Webster said.

“For a purchaser, land is secured at a fixed price, but without the obligation to commit,” he said.

“If circumstances don’t play out as planned, the purchaser can pull out of the deal and only the option fee is at risk.

“This enables the purchaser to take any steps which may be necessary to ensure the land is going to work for them.”

Webster said there are also attractions with call options for vendors of potential development land.

“It is possible to sell portions of an undivided allotment of land, subject to a land division being approved down the track,” he said.

“However, the execution of a sale contract can create an immediate obligation to pay tax on the transaction, even though the land division process may take months or years.

“That can give rise to a hefty burden on the vendor, particularly in respect of CGT [Capital Gains Tax], when the actual settlement and payment may be months or years away.”

Webster warns, however, that the call option fee is seen as an asset and will be taxed at the vendor’s marginal tax rate.

“This is because granting a call option is a CGT event and no CGT discounts will apply,” he said.

“This means that when fixing an option fee, the vendor should be mindful that the fee will be subject to taxation at their marginal rate.”