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Edited version of private ruling

Authorisation Number: 1011565116539

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Ruling

Subject: Expenses associated with a forfeited contact of sale

Questions and Answers

Can the costs associated with a contract to purchase an investment property be claimed as a deduction?

No

Do the costs associated with a contract to purchase an investment property form part of the cost base of the contract?

Yes

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You signed a contract to purchase an investment property.

The contract was subject to various inspections.

The contract had a settlement date that was not met.

You terminated the contract shortly after the settlement date as the vendor was unable to get the property released from mortgage.

You incurred expenses which were expenses of the contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-35

Income Tax Assessment Act 1997 Section 108-5

Reasons for decision

Deductions

In order for an expense to be deductible under Section 8-1 of the ITAA1997, it must be incurred in gaining or producing your assessable income; and not be capital, private or domestic in nature.

An expense which is capital in nature is an asset which is:

You signed a contract to purchase an investment property. By entering into this contract and paying the deposit, you created a right over the property to which the contract related. These rights fall within the definition of a CGT asset under Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997). Your expenses are therefore not income expenses but expenses of a capital nature.

CGT events

A capital gain or loss occurs only if a CGT event occurs.

When you entered into a contract, the creation of that contractual right is known as CGT event D1.

You surrendered your contractual right over the property because the other party was unable to reach settlement by the agreed date. The result is the CGT asset was surrendered, in doing so you incurred CGT event C2.

Calculating a capital loss

You received no money or property as a result of entering into and then surrendering your contract for the purchase of an investment property.

Section 116-20 of the ITAA 1997 defines capital proceeds from a CGT event as the total value of money and any property that you received as a result of the CGT event.

The expenses are applied against your capital proceeds, which will give you your total capital loss. Capital losses are then applied to offset any current or future capital gains (where there are no current capital gains).

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