Edited version of your private ruling

Authorisation Number: 1012594587776

Ruling

Subject: Capital Gains Tax Forfeited Deposit

Capital Gains Tax (CGT) - Forfeited deposits under contract

Question 1

Has CGT event H1 happened by you exercising your contractual right to retain a deposit forfeited when a prospective sale fell through?

Answer

Yes

Question 2

If a CGT event does happen are you entitled to discount the capital gain under Sub-Division 155A of the Income Tax Assessment Act 1997?

Answer

Yes

This ruling applies for the following period(s)

1 July 2012 to 30 June 2013

The scheme commences on

1 July 2010

Relevant facts and circumstances

You, a family trust entered into a contract to sell a commercial property which was being used to derive rent from unconnected entities.

You entered into the contract in 20XX.

The purchaser paid you a deposit of X% of the purchase price under the contract.

The purchaser failed to settle the property in 20XX. Attempts to have the contract completed were unsuccessful and in 20XX your solicitor sent a notice to the purchaser rescinding the contract. The property remains unsold.

You have exercised your contractual right to retain the deposit paid under the contract.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104 - 150

Income Tax Assessment Act 1997 Section 115 - 10

Income Tax Assessment Act 1997 Section 115 - 25

Income Tax Assessment Act 1997 Section 115 - 30

Income Tax Assessment Act 1997 Section 152 - 10

Reasons for Decision

The basic condition required for you to make a capital gain or capital loss is that a CGT event must occur. Division 104 of ITAA 1997 lists all the CGT events available. Taxation Ruling TR 1999/19 deals with the CGT treatment of forfeited deposits, in response to the decision of Brooks and FC of T [2000] 44 ATR 590 the Commissioner issued an addendum to TR 1999/19. Paragraph 4 of the addendum provides:

According, the main effect of the decision in the Brooks case on TR 1999/19 is that it clarifies that if the forfeiture of a deposit under a contract for the sale of real estate does not occur within a 'continuum of events' as that expression is used in TR 1999/19, forfeited deposit is assessable under CGT event H1 in section 104 -150 of ITAA 1997.This is the case whether the contract is for the sale of pre-CGT real estate, post-CGT real estate or a main residence. The deposit (to the extent that it is more than any expenditure the vendor incurs in connection with the sale) is assessable as a capital gain in accordance with subsection 104-150(3).

A 'continuum of events" is defined by paragraph 16 of TR 1999/19 in that:

For a relevant '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. It is also necessary, in our view, for continuous and reasonable attempts to be made to resell the underlying asset after the earlier contract has fallen through, which end in this later disposal of the real estate.

Therefore in applying the above to your circumstances, CGT event H1 under Section 104-150 of ITAA 1997 has occurred in that you have been paid a deposit under the contract and there is no continuum of events in that the property was not immediately put back on the market and disposed of within two years of the forfeiture of the deposit.

Therefore CGT event H1 occurs when your client's solicitor sent a notice of rescission. You make a capital gain of the full amount of the deposit minus the expenditure you incurred in connection with the prospective sale or any amount repaid to the prospective purchaser.

Question 2

To be eligible for discount capital gains you must meet all the requirements under Subdivision 115-A of ITAA 1997.

Subsection 115-10(c) of ITAA 1997 lists a trust as an eligible entity to receive a discount capital gain.

Subsection 115-25(1) of ITAA 1997 provides:

To be a discount capital gain, the capital gain must result from a CGT event happening to a CGT asset that was acquired by the entity making the capital gain at least 12 months before the CGT event.

Additionally Subsection 115-30(3) of ITAA 1997 provides a list of CGT events specifically excluded from being a discount capital gain. CGT event H1 is not specifically excluded from being a discount capital gain and can therefore be presumed to be eligible for a discount capital gain assuming it meets the remaining requirements of the subdivision.

It is considered that in relation to Subsection 115-25(1) of ITAA 1997 the relevant CGT asset is the underlying property. Even though the continuum of events has been broken and the forfeiture does not form part of the proceeds of a later sale but rather its own CGT event, this event cannot occur but for the prospective sale of the underlying property.

In your circumstances you are an eligible entity and the CGT event H1 has occurred to a CGT asset being the underlying property which you have held since 1XXX. Consequently you have met all the requirements under Subdivision 115-A of ITAA 1997 and will be eligible to discount capital gains.