Edited version of private advice

Authorisation Number: 1052312120333

Date of advice: 3 October 2024

Ruling

Subject: CGT - forfeited deposit

Question

Are you entitled to a capital loss for the forfeited deposit and the damages paid to the vendor of the property?

Answer

Yes.

Having applied your circumstances to the principles held in Taxation Ruling TR 1999/19 Income tax capital gains: treatment of forfeited deposits (TR 1999/19), the Commissioner accepts that a capital gains tax (CGT) event C1 occurred. In your case, you advised the vendor you were unable to complete the contract, the deposit was subsequently forfeited and you paid damages to the vendor. Given your inability to obtain finance, we accept that the forfeited deposit was genuinely involuntary in nature.

Paragraph 116 of TR 1999/19 states the cost base of the purchaser's contractual rights (the right to a transfer of the property) 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.

Paragraph 123 of TR 1999/19 states that if the circumstance of the default are of a genuinely involuntary nature, there is a loss or destruction of the contractual rights and CGT event C1 is the more specific CGT event. For example, if a purchaser defaults because their finance fails, or because of extenuating personal circumstances, e.g., death of spouse, severe illness, natural disaster, CGT event C1 is the more specific CGT event.

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.

However, 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 damages). This capital loss is not an immediate deduction but may be offset against future capital gains.

This ruling applies for the following period

Year ended 30 June 20XX

The scheme commenced on

1 July 20XX

Relevant facts and circumstances

On DD MM 20XX, you entered into a contract to purchase the property for $X with a settlement date of DD MM 20XX.

You paid a deposit of $X to the vendor.

Between signing the contract and the settlement date, you were unable to obtain finance to complete the purchase because of rapidly rising interest rates over the X month period coupled with extenuating personal circumstances.

On DD MM 20XX, you advised the vendor you were unable to complete the contract and the deposit was forfeited.

On DD MM 20XX, you executed a 'Deed of Recission of contract and Deed of Settlement 'and paid the agreed amount of $X to the vendor as damages.

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 subsection 116-30(1)