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Edited version of private ruling
Authorisation Number: 1011833150525
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Ruling
Subject: Capital gains tax - forfeited deposit
Question
Does a deposit that you received on a contract to sell your property result in a capital gain in the year it was forfeited?
Answer
Yes.
This ruling applies for the following period:
Year ending 2010-11
The scheme commences on:
Year ending 30 June 2010
Relevant facts and circumstances
You own a home, which you purchased in 20XX.
You were approached by a property developer to purchase your home as part of a development.
You signed a contract with the property developer in the year ending 30 June 20XX and received a deposit.
Settlement was scheduled for July 20XX but an extension was granted.
You were not advised prior to the settlement date that settlement would not proceed.
You have expenses relating to your home and another property that you were in the initial stages of purchasing. When settlement did not occur and the contract was dishonoured you were entitled to keep the deposit.
Reasons for decision
A capital gains tax (CGT) event occurs if a deposit paid is forfeited due to a prospective disposal of an underlying asset such as a residence, not proceeding. The time the event occurs is when the deposit is forfeited.
There are two possible outcomes in relation to forfeited deposits. Either the forfeited deposit becomes part of the proceeds from the eventual sale of the property or it represents proceeds from the termination of the vendor's bundle of contractual rights under the contract.
In your case, the second outcome applies and the relevant asset is the contractual right under the contract. The contractual rights ended when the property developer did not proceed with the contract at settlement. As a result the contractual rights and the non-refundable deposit was forfeited resulting in a CGT event occurring.
The capital gain you made on this forfeited deposit will therefore need to be included in your assessable income for the 2010-11 income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20,
Income Tax Assessment Act 1997 Section 104-25 and
Income Tax Assessment Act 1997 Subsection 108-5(1).