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If CGT event H1 (about forfeiture of deposits) in section 104-150 of the Income Tax Assessment Act 1997 (ITAA 1997) happens, does that CGT event happen 'in relation to a CGT asset of yours' for the purposes of paragraph 152-10(1)(a) of the ITAA 1997 (one of the basic conditions for small business relief)?

Yes. If CGT event H1 in section 104-150 of the ITAA 1997 happens, that CGT event happens 'in relation to a CGT asset of yours' for the purposes of paragraph 152-10(1)(a) of the ITAA 1997.

The taxpayer owns farming land acquired after 19 September 1985 that is an active asset.

The taxpayer entered into a contract to sell the land and the prospective purchaser paid the taxpayer a deposit.

The prospective purchaser did not proceed with the purchase of the land and forfeited their deposit.

The taxpayer decided not to sell the land and took it off the market.

One of the basic conditions for small business CGT relief is that a CGT event happens in relation to a CGT asset of yours in an income year (paragraph 152-10(1)(a) of the ITAA 1997).

CGT event H1 in section 104-150 of the ITAA 1997 happens if a deposit paid to you is forfeited because a prospective sale or other transaction does not proceed.

Taxation Ruling TR 1999/19 Income tax capital gains: treatment of forfeited deposits deals with the treatment of forfeited deposits. Paragraph 6 of the Addendum to that Ruling effectively provides that CGT event H1 does not happen if the forfeiture of a deposit occurs within a 'continuum of events' constituting a later disposal of post-CGT real estate. Instead, the deposit forms part of the capital proceeds from CGT event A1 in section 104-10 of the ITAA 1997 happening to the land.

In this case the land has remained unsold. The forfeiture of the deposit is therefore not part of a 'continuum of events' constituting the later disposal of the land, as that expression is used in Taxation Ruling TR 1999/19. Accordingly, CGT event H1 in section 104-150 of the ITAA 1997 happens.

The words 'in relation to' in paragraph 152-10(1)(a) of the ITAA 1997 are wide enough to allow reference to an underlying asset such as land that was the subject of a sale which has fallen through. CGT event H1 happens in relation to the underlying land. Paragraph 152-10(1)(a) of the ITAA 1997 can therefore be satisfied for a capital gain made from CGT event H1. Note: It is the underlying land that must satisfy the active asset test in terms of paragraph 152-10(1)(d) of the ITAA 1997.

Date of Amendment Part Comment 3 July 2015 Reasons for Decision Citation corrected

Date of Amendment | Part | Comment

3 July 2015 | Reasons for Decision | Citation corrected