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Edited version of private ruling
Authorisation Number: 1011732435561
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Ruling
Subject: Rental property expenses
Question 1
Are you entitled to a deduction for the value of white goods ordered and paid for your rental property that were never delivered?
Answer: No.
Question 2
Has there been a capital gains tax (CGT) event that would give rise to a capital loss when you decided not to pursue your right to the white goods?
Answer: Yes.
This ruling applies for the following period
Year ended 30 June 2009
The scheme commenced on
1 July 2008
Relevant facts
You own a rental property.
You ordered goods from the manufacturer in October 2008 and paid for them.
The goods purchased were white goods.
The manufacturer went into liquidation in October 2009 and you never received the goods.
From the media reports and your initial dealings with the receiver, you believe there is no hope of recovering anything.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 104-25
Reasons for decision
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for expenditure to the extent that it is incurred in the gaining or producing of assessable income. No deduction is allowable to the extent that the expenditure is private, domestic or capital in nature.
The funds that were lost were to be used to purchase CGT assets. Funds which are used to purchase CGT assets are capital in nature, therefore the loss of these funds retains this capital nature. As such, no deduction is allowable under section 8-1 of the ITAA 1997.
A capital loss can only arise if a CGT event happens. Most CGT events involve a CGT asset. The gain or loss is made at the time of the CGT event.
As a result of entering into this arrangement, it is considered that you acquired contractual rights. These contractual rights are CGT assets (paragraph 108-5(1)(b) of the ITAA 1997).
The CGT event that may be relevant in this situation is CGT event C2- cancellation, surrender and similar endings.
CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being cancelled, surrendered, released, discharged, satisfied or abandoned. (paragraph 104-25(1)(b) of the ITAA 1997).
In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12 it was recognised that a contract can come to an end merely by being treated as being at an end by the parties. It was held in Fitzgerald v. Masters (1956) 95 CLR 420 at 432 that:
Where an 'inordinate' length of time has been allowed to elapse, during which neither party has attempted to perform, or called on the other to perform, it may be inferred that the contract has been abandoned… What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long-continued ignoring of the contract on both sides that (in the words of Rowlatt J.) 'the matter is off altogether'.
As you believe, based on your discussions with the receiver that there is no hope of success, you have decided not to pursue any further. It may be inferred that the contract has been abandoned with the effect that your rights under the contract cease. Therefore, CGT event C2 in section 104-25 of the ITAA 1997 has happened that would give rise to a capital loss when you decided not to pursue your right to the white goods.
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