Edited version of private advice

Authorisation Number: 1052159032701

Date of advice: 21 August 2023

Ruling

Subject: CGT - disposal - contract falls through

Question

Will a CGT event happen when the contracts are terminated?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2023

Year ending 30 June 2024

The scheme commenced on:

1 July 2022

Relevant facts and circumstances

You entered into contracts for the purchase of residential investment properties.

The contracts provided for annual repayments through the term of the contracts.

You made the annual payments in most years but due to hardship in certain years you did not make those payments.

You were responsible for paying all expenses associated with the property.

You also did not attend to settle the contractual arrangements and no demand from the vendors was ever made.

You were created solely for the purposes of property investment, shares and other financial products.

The vendors are disillusioned with the arrangements that were entered into and wish to avail themselves of the contractual provisions contained in those contracts.

The vendors intend to give notice then the contracts will be rescinded and the matter will be concluded.

It is the intention of the vendors to remit back any purchase money that was received during the course of the transactions so that the parties are in the position they were prior to the contracts being entered into.

You have received rental income during the intervening years on both property and declared as income and tax liability assessed/paid.

Ownership of the title has not been transferred.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 104-25

Reasons for decision

When you entered into the contracts to purchase the properties, you acquired a number of rights. In particular, you acquired the right to enforce the completion of the contracts and have the properties transferred to you. Also the vendors acquired rights to enforce the completion of the sales. Those rights are intangible CGT assets (section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)). The rights acquired under the contracts of sale will be cancelled by the termination of the contracts.

Where a purchaser defaults it is possible that a C1 or a C2 event occurs. C1 event occurs on the loss or destruction of a CGT asset. While event C2 occurs when your ownership of an intangible CGT asset ends by the asset:

•         being redeemed or cancelled; or

•         being released, discharged or satisfied; or

•         expiring; or

•         being abandoned, surrendered or forfeited;

In determining which event is applicable consideration is given to paragraphs 117 to 123 of TR 1999/19. In particular, looking at paragraphs 122 and 123, where the circumstances are of a voluntary nature which results in a surrender, abandonment or forfeiture by the purchaser of their contractual rights then C2 is the more specific CGT event that applies. This is so even if there might also be a destruction of the purchaser's contractual rights. Examples include where a purchaser defaults simply by changing their mind or deciding to invest elsewhere. However, where circumstances are of a genuinely involuntary nature there is a loss or destruction of the contractual rights and CGT event C1 applies.

In this case, you have not paid the remaining balance to complete the transaction, did not attend to settle the contractual arrangements and no demand was made from the vendors to settle. As a result, CGT event C2 will happen when the contract is terminated under section 104-25 of the ITAA 1997.