Property transactions using “put and call options” have been common in the Eastern States and are used sparingly in WA. This arrangement can be useful to both a vendor and a purchaser in certain circumstances.
Put and call options give the purchaser the right to enter a contract of sale for land within a specified time period. They also give the seller the right to require the purchaser to enter the contract of sale.
The contract arises when the “call” option is exercised by the purchaser or the “put” option is exercised by the vendor. Generally the purchase may “assign” the call option, ie, nominate a third party to exercise the call option.
Under these arrangements a land buyer who does not wish to take possession of the property until some future time can have the certainty of a secure price locked in and guaranteed possession on a certain date. In a rising market this may be advantageous, especially if the buyer needs to sell his/her existing home to finance the new house/land package. The buyer can remain in his existing home while plans and specifications are drawn up, so that the builder is ready to commence on the date of land settlement.
The net effect is that several months rent savings can be reaped while these processes occur.
Historically some builders purchased land from a developer using put and call options with a view to “on selling” to individual home buyers before settlement date occurred. By selling the land with a “put and call” option, the vendor could transfer the land (originally purchased by the builder) to another party (home buyer) before settlement with the builder without double stamp duty being incurred on separate transfers of property between each of the parties.
The end result was that the final land price was cheaper to the home buyer because stamp duty has only be paid once during the transfer process. However, amendments to the Stamp Act have closed this loophole in Western Australia, although the practice still exists in Queensland.
Some vendors may wish to enter into a put and call option to minimise capital gains tax obligations in a financial year. Effective tax planning can allow the vendor to sell a property in May 2006 with a put and call option, and not incur capital gains tax obligations until the 2006/07 financial year when the contract is settled. But the Tax Office may frown on this arrangement if it is deemed to be tax avoidance.
However from the buyers point of view the “put and call” contract is not a deferred settlement arrangement. The call option is a condition of sale and as a result will incur an immediate stamp duty obligation for the home buyer, rather than at the time of contract settlement.
Put and call options on the sale of property can be useful under certain special circumstances where immediate possession is not required. You should consult your accountant and/or lawyer to see if this arrangement suits your circumstances. For the majority of land buyers it will probably not be necessary to enter into this form of contract, especially if a deferred settlement arrangement is available.