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Edited version of your private ruling
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Ruling
Subject: CGT- losses
Questions and answers:
Are you entitled to a capital loss on the deposit you forfeited?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You paid a deposit on a property.
You were not able to secure finance to pay the remaining amount as required under the contract of sale.
You forfeited your deposit and did not receive any money when you defaulted on the contract.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 102-25(2)
Income Tax Assessment Act 1997 Section 116-30(1)
Reasons for decision
While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.
You make a capital gain or capital loss if a capital gains tax (CGT) event happens to a CGT asset in which you have ownership interest under section 102-20 of the Income tax Assessment Act 1997 (ITAA 1997).
There are a wide range of events which cover many different situations. Subsection 102-25(2) of the ITAA 1997 states that the CGT event that is the most specific to your circumstances is the one which is used.
CGT event C1 happens when your ownership interest in a CGT asset ends in an involuntary nature, where there is a loss or destruction of contractual rights. Taxation Ruling TR 1999/19 Income tax capital gains: treatment of forfeited deposits provides an example where if a purchaser defaults because of their finance failing then CGT event C1 is the more specific CGT event.
In your case you defaulted on your contract and forfeited your deposit as you were unable to secure finances to complete the contract. Therefore CGT event C1 is the most relevant to your circumstances.
Market value substitution rule.
Section 116-30(1) of the ITAA 1997 states that if a taxpayer receives no capital proceeds from a CGT event, they are taken to have received the market value of the CGT asset. This is called the Market value substitution rule.
If CGT event C1 is the most specific CGT event, the market value substitution rule does not apply and a bona fide purchaser is entitled to a capital loss of the amount of the deposit forfeited plus incidental costs regardless of the market value of the contractual rights of the underlying real estate.
You did not receive any proceeds from the CGT event which occurred when you forfeited your deposit. As it was a CGT event C1 which occurred when you failed to fulfil your contract of sale the market value substitution rule does not apply. You are therefore considered to have a made a capital loss equal to the amount of the deposit paid.