Edited version of your private ruling

Authorisation Number: 1012064897525

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Subject: capital gains tax - forfeited deposit - capital proceeds

Question 1: Will the forfeited deposit be subject to capital gains tax?

Answer: Yes.

Question 2: Will the capital proceeds you received in relation to the disposal of the property be reduced by the amount of forfeited deposit repaid to the purchaser?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2012

The scheme commenced on

1 July 2011

Relevant facts and circumstances

You and your partner acquired a property after 20 September 1985.

A number of years later, you and your partner signed an unconditional Contract of Sale for the disposal of the property.

In compliance with the Contract of Sale, the vendor paid you and your partner a specified deposit amount with settlement to occur a number of months later.

Settlement did not occur on the determined settlement date, or within the extended period.

Notices to cancel the contract were served by your broker a number of months after settlement was to occur.

The property is still on the market.

You have retained the deposit received from the purchaser and the purchaser's broker is requesting that you pay the purchaser's costs out of the deposit amount.

For the purposes of this private ruling, you will repay the purchaser's costs out of the forfeited deposit.

You have provided a copy of the agreement for the sale and purchase of the property, which forms part of, and should be read in conjunction with this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-150

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 116-50

Reasons for decision

Forfeited deposit

You make a capital gain or capital loss when a capital gains tax (CGT) event happens to a CGT asset.

Where you enter into a contract for the disposal of a property and receive a non-refundable deposit, and the contract is terminated prior to the completion of the disposal, you are viewed as having received what is known as a forfeited deposit.

Taxation Ruling TR 1999/19 (TR 1999/19) and its Addendum TR 1999/19A (TR 1999/19A) explain the CGT treatment of forfeited deposits. The ruling provides that when you enter into a standard contract and receive a forfeited deposit there are two possible outcomes as to how the deposit is treated. The deposit will either be included in the capital proceeds from the eventual disposal of the property, or it will be treated as a capital gain or capital loss in the year that the termination of the contact occurred. The outcome depends on what is considered to be the most relevant asset that has been disposed of.

When you and your partner entered into the contract you acquired a bundle of contractual rights. We need to establish whether the most relevant asset is the underlying asset (the property) or the contractual rights that you acquired. This depends on whether the forfeiture of the contract occurred as part of a continuum of events.

A continuum of events means that there is a continuous and uninterrupted attempt to dispose of the real estate. For a continuum of events to exist there must be an earlier contract to sell the underlying asset, forfeiture of a deposit, and a later bona fide disposal of the underlying asset. The longer the period between the forfeiture and later disposal, the more difficult it is to show a continuum of events which constitutes a disposal of the underlying asset. For example, it is difficult to show a continuum of events of more than two years after the forfeiture under the earlier contract.

If the forfeiture occurred as part of a continuum of events, the forfeited deposit will be included in the capital proceeds when the property is eventually disposed of.

Where there is no continuum of events, such as the property is taken off the market, CGT event C2 occurs at the time of the forfeiture. You make a capital gain if the deposit is more than the expenditure you incur in respect of the prospective disposal and a capital loss if the deposit is less. The capital gain or capital loss is made regardless of whether the underlying asset was acquired prior to 20 September 1985 because it is the contractual rights and not the property or underlying asset that you have disposed of.

In your circumstances, the purchaser of your property did not complete the contract for the acquisition of your property. As part of the Contract of Sale, you and your partner received a predetermined deposit, which you have kept after the termination of the contract. You are continuing in your endeavour to dispose of the property and the property is still on the market.

If there is a continuum of events in your situation, being the continuous and uninterrupted attempt to dispose of the property, when the property is ultimately disposed of, you should include your share of the forfeited deposit in the capital proceeds you received for the disposal of your share of the property.

The cost base or reduced cost base of your share of the property will include appropriate costs associated with the making of the failed contract and the retention of the deposit.

If there is no continuum of events in relation to the property, such as taking the property off the market, you will have to include any capital gain or capital loss arising in relation to your share of the forfeited deposit in your 2011-12 income tax return.

Repayment of portion of the forfeited deposit

Capital proceeds are the amount you receive as a result of a CGT event. For most CGT events your capital proceeds are the amount of money, or the value of any property that you receive, or are entitled to receive.

Under the repaid rule, capital proceeds are reduced by any part of them repaid by the recipient, or by any compensation paid by the recipient that can reasonably be regarded as a repayment of them. However, the capital proceeds are not reduced by any part of the repayment that is deductible.