Edited version of private advice

Authorisation Number: 1052139646554

Date of advice: 11 July 2023

Ruling

Subject:CGT-forfeited deposit

Question 1

Did capital gains tax (CGT) event C1 occur in June 20XX upon the forfeiture of your deposit?

Answer

Yes.

Question 2

Are the liquidated damages included in the cost base of this CGT event?

Answer

Yes.

Question 3

Are you entitled to a capital loss for the amount of the deposit forfeited plus incidental costs?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

In February 20XX, you signed a sale contract for the purchase of a property which you intended to be your main residence. Purchase price was $XXXX.

At the time of signing the contact, you paid a deposit of $XXXX.

You incurred conveyancing fees associated with the purchase.

In May 20XX, the property was due to settle, and the balance of the purchase price was due for payment.

You were to fund the settlement from the disposal of listed investments in Country X which you owned.

The investments were valued more than the settlement amount at the time that you entered the contract and made up nearly all your personal assets.

During the time between you signing the contract and settlement occurring, the value of the assets fell substantially, and their value was short of the settlement amount required and you defaulted on the purchase of the property.

In May 20XX, you received a recession notice.

In June 20XX, you received a letter confirming that as the default had not been rectified within a certain number of days, the contract had ended and the vendor would rely on a condition of the contract, 'Default not remedied'.

This condition states that if the default is not remedied, the contract will end, and the deposit will be forfeited. It also states that vendor can sell the property within one year and recover any deficiency in price on resale as well as any resulting expenses from resale.

In March 20XX, you received a letter which advised that the property had sold in October 20XX, and settlement had occurred in March 20XX.

In accordance with the condition in the contract, the vendor demanded payment for liquidated damages for deficiency in sale price, re-advertising costs, commission on sale, legal fees, and valuations fees. You have paid for these amounts.

Relevant legislative provisions

Income tax Assessment Act 1997 section 102-20

Income tax Assessment Act 1997 section 104-20

Income tax Assessment Act 1997 section 108-5

Income tax Assessment Act 1997 section 110-25

Income tax Assessment Act 1997 subsection 116-30(1)

Reasons for decision

Section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997)provides that capital gains tax (CGT) event C1 occurs when a CGT asset you own is lost or destroyed.

Taxation Ruling TR 1999/19 Income tax capital gains: treatment of forfeited deposits outlines the CGT consequences of the receipt by a vendor of a forfeited deposit, forfeited instalments of the purchase price and damages; and the payment by a purchaser of a deposit that is forfeited.

Having applied your circumstances to the principles held in TR 1999/19, the Commissioner accepts that a CGT event C1 occurred when the sale contract was terminated by the vendor and your deposit forfeited.

Paragraph 116 of TR 1999/19 states that the cost base of these rights is the amount of the deposit, being money paid in respect of acquiring the rights, plus any incidental costs of acquisition and any incidental costs that relate to a CGT event happening to the rights.

Usually, no capital proceeds are received by a defaulting purchaser on the ending of their contractual rights. Subsection 116-30(1) of the ITAA 1997 states that if an entity receives no capital proceeds from a CGT event, generally the entity is taken to have received the market value of the CGT asset that is the subject of the event.

Therefore, the liquidated damages are included in the cost base of CGT event C1 occurring.

Paragraph 133 of TR 1999/19 states that if a 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.

Therefore, you are entitled to a capital loss of the amount of the deposit forfeited plus incidental costs (including the amount paid as liquidated damages). This capital loss is not an immediate deduction but may be offset against future capital gains.