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Ruling
Subject: Deduction for forfeited deposit
Question 1:
Can you claim a deduction for the forfeited deposit?
Answer:
No.
Question 2:
Did a capital gains tax (CGT) event happen when you withdrew from the contract to purchase the investment property?
Answer:
Yes.
This ruling applies for the following periods:
Year ended 30 June 2012
The scheme commenced on:
1 July 2011
Relevant facts and circumstances
You intended to purchase an investment property.
You refinanced your main residence to fund the deposit to purchase an investment property.
You entered into a contract and paid a deposit to a developer to purchase an investment property.
Your bank approved finance to purchase the investment property.
There were delays with the development and you did not obtain legal title in the time frame intended.
Your financial situation changed due to a change in family circumstances.
Your bank required you to re-apply for finance.
Because of the change in your financial situation, your bank declined to provide finance to you to purchase the investment property.
You withdrew from the contract to purchase the investment property and forfeited your deposit.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 8-1.
Income Tax Assessment Act 1997 Section 104-25.
Reasons for decision
Deduction for forfeited deposit
Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
In your case, you forfeited your deposit relating to the purchase of an investment property.
This deposit is capital in nature as it relates to the purchase of a capital asset.
Therefore, you cannot claim a deduction for your forfeited deposit.
Capital gains tax
A taxpayer makes a capital gain or capital loss only when a capital gains tax (CGT) event happens.
When a contract for the sale of real estate is not proceeded with and a deposit is forfeited by a defaulting purchaser, CGT event C2 applies to a defaulting purchaser where the circumstances are voluntary, then it is considered there is a surrender, abandonment or forfeiture of the contractual rights and CGT event C2 is the more specific CGT event.
In your case, you entered into a contract to purchase an investment property. Due to a change in your financial circumstances, you withdrew from the contract and as a result forfeited your deposit.
The decision to withdraw from the contract was a voluntary one.
Therefore, CGT event C2 happened when your contract to purchase the property was terminated and your ownership of the contractual right to the transfer of the property ended.
You will need to determine if you made a capital gain or a capital loss, and declare that gain or loss in your income tax return.
Calculating the capital gain or capital loss
A taxpayer makes a capital gain where the capital proceeds exceed the cost base and a capital loss where the cost base exceeds the capital proceeds.
Capital proceeds
Taxation Ruling TR 1999/19 specifies that the market value substitution rule applies in determining the amount of capital proceeds received by a defaulting purchaser on the ending of their contractual right to a transfer of property.
According to TR 1999/19, the market value of a contractual right to a transfer of real estate acquired under a contract for the sale of real estate is the value of the real estate less the amount still to be paid.
Therefore, if, at the time of termination of the contract to purchase a property, the market value of the property is more than the sale price of the property when the contract was entered into, the market value of the forfeiting purchaser's contractual right to the transfer of that property is the value of the property at the time of the termination of the contract, less the amount still to be paid.
Cost base
TR 1999/19 specifies the cost base of a contractual right to a transfer of property acquired by a purchaser under a contract for the sale of real estate is:
· the amount of the deposit paid by the purchaser, plus
· incidental costs of acquisition, plus
· incidental costs relating to any CGT event that happens to the right.
In your case, the cost base of the contractual right to the transfer of the property that you acquired when you entered into the contract to purchase that property, plus any incidental costs (if any) relating to the acquisition and subsequent ending of that contractual right.