Why You Shouldn’t Lodge Your Tax Return in July: Avoiding Common Tax Return Mistakes in 2024
Granting an Option to Sell Your Land: Understanding the Capital Gains Tax Implication
July 16, 2025 |
Introduction
In 2025, navigating property transactions remains a critical aspect of tax planning for landowners. Selling land through an option agreement is a common practice, particularly when developers express interest in securing future purchase rights. However, these agreements introduce complexities, especially regarding Capital Gains Tax (CGT) implications. If you’ve been approached with an option agreement, understanding how it impacts your tax obligations is essential to making informed financial decisions.
This article explores the tax treatment of granting an option to sell land, the differences between call and put options, and the key CGT considerations landowners should be aware of in 2025, followed by a practical example to illustrate these concepts.
What Does Granting an Option Mean?
Granting an option is a legal agreement where a property owner (grantor) provides a buyer (option holder) with the exclusive right—but not the obligation—to purchase the property within a specific timeframe at a predetermined price. In exchange, the buyer pays an upfront option fee.
This practice is prevalent in real estate transactions where buyers require time to secure financing, obtain necessary approvals, or conduct due diligence before committing to a purchase. From a tax perspective, granting an option is considered a separate transaction from the eventual sale of the property, triggering distinct CGT implications.
Call Option vs. Put Option: Key Differences
The type of option granted influences the tax treatment:
- Call Option: Gives the buyer the right to purchase the property at an agreed price within a set timeframe. If exercised, the seller is legally required to proceed with the sale.
- Put Option: The seller grants the buyer the right to require them to purchase the property under agreed terms. This type is often used in structured property deals.
Understanding these differences is crucial for assessing potential tax outcomes.
CGT Event D2: Taxation of Option Agreements
Under Australian tax law, granting, renewing, or extending an option triggers CGT Event D2, which treats the transaction separately from the property sale. The capital gain or loss from CGT Event D2 is calculated as the difference between the amount received for granting the option and any related expenses incurred.
However, a key consideration is that the CGT discount does not apply to gains made under CGT Event D2, meaning the entire gain is subject to tax at the landowner’s marginal tax rate.
Example: How CGT Event D2 Applies in Practice
To illustrate these concepts, let’s consider an example:
Sam purchased a property in 2010 for $500,000. By 2024, rezoning for high-density development had significantly increased demand in his area. On 10 June 2024, Sam granted an option to Liz, giving her the right to purchase his land within 12 months for $3,000,000. As part of the agreement, Liz paid Sam an upfront option fee of $150,000, while Sam incurred $5,000 in legal fees.
Sam’s capital gain calculation under CGT Event D2 was:
- Proceeds from granting the option: $150,000
- Less: Legal fees incurred: $5,000
- Net capital gain: $145,000
Since the CGT discount does not apply, Sam had to include the full $145,000 in his taxable income for the 2023-24 financial year, increasing his overall tax liability.
What Happens if the Option is Exercised?
If the option is exercised, the tax treatment of the initial CGT Event D2 gain changes significantly.
When the buyer (option holder) decides to proceed with the purchase, the upfront option fee that was previously taxed under CGT Event D2 is disregarded. Instead, the option fee is incorporated into the total capital proceeds of the property sale. This means that any capital gain reported from granting the option is no longer taxed separately but becomes part of the overall capital gain from the property sale.
For example, in Sam’s case, if Liz exercised the option on 10 May 2025 and proceeded with the purchase of the land. Since the option fee of $150,000 was already paid when the option was granted, it is now included in the final sale price of $3,000,000 for CGT purposes.
Under CGT rules, any capital gain previously reported from granting the option must be disregarded. Instead, the $150,000 option fee was included as part of the total capital proceeds from the sale of the property.
Since Sam had not yet lodged his 2024 tax return, he did not need to amend any previous filings—he simply excluded the CGT Event D2 gain when preparing his tax return. If he had already lodged it, an amendment would have been required to correct his income assessment.
Conclusion: What This Means for Landowners in 2025
As we progress through 2025, landowners must be well-informed about the tax consequences of granting an option to sell their property. The example of Sam demonstrates how CGT Event D2 creates an immediate taxable gain that may later be disregarded if the option is exercised. Without proper planning, landowners risk unexpected tax liabilities or missed opportunities to optimise their tax position.
Understanding the intricacies of CGT Event D2 is crucial to ensuring compliance and maximising financial outcomes. At Investax, our Property Tax Specialists are here to help landowners navigate these complexities, ensuring they make well-informed, tax-efficient decisions.
If you’re considering granting an option or need expert guidance on its tax implications, contact Investax today to secure professional advice tailored to your situation.