ATO ID 2003/346: CGT small business concessions: basic conditions - CGT event happening in relation to a CGT asset - forfeited deposit
Date of decision: 28 March 2003
Year of income: Year ended 30 June 2003
Business line: Private Groups and High Wealth Individuals

Issue
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)?

Decision
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.

Facts
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.

Reasons for decision
Summary: 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.

Legislative references: Income Tax Assessment Act 1997 section 104-10 section 104-150 paragraph 152-10(1)(a) paragraph 152-10(1)(d)
Related public rulings and determinations: Taxation Ruling TR 1999/19 | Taxation Ruling TR 1999/19A - Addendum
Subject references: Basic conditions for relief Capital gains tax Capital Gains Tax CoE CGT events CGT events H1-H2 - special capital receipts CGT small business relief