OTP Capital Losses

Hello,

I have a friend who has recently disposed of a poorly chosen off the plan apartment prior to settlement. Unfortunately this resulted in them losing part of their deposit. This was done via making the new purchaser the nominee (still legal in Victoria apparently). Some of the deposit went to the new buyer and some went to the selling agent.

Is loss claimable as a capital loss?

Cheers

 

A capital gain or capital loss may arise if a CGT event happens to a CGT asset. Where a CGT event happens, the CGT provisions are relevant. Section 108-5 of the ITAA 1997 states that a CGT asset is any kind of property, or a legal or equitable right that is not property.

Your contract and associated rights are regarded as a CGT asset.

Where a purchaser forfeits a deposit, either CGT event C1 or C2 occurs. CGT event C1 happens if a CGT asset you own is lost or destroyed. CGT event C2 happens if your ownership in an intangible CGT asset ends by the cancellation, surrender or similar ending.

As both CGT event C1 and CGT event C2 can apply if a purchaser forfeits a deposit, subsection 102-25(1) of the ITAA 1997 provides that the CGT event that is the most specific to the situation is the one to use. The circumstances surrounding the purchaser's default in each case determines which is the more specific CGT event.

As highlighted in paragraph 123 of Taxation Ruling TR 1999/19, if the circumstances 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, CGT event C1 is the more specific CGT event.

You make a capital gain if the capital proceeds are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

If you received no consideration on the termination of your contractual rights, you are entitled to a capital loss for your share of the amount of the deposit forfeited. That is, the deposit paid in relation to entering into the contract forms part of the reduced cost base when calculating the capital loss. Please note, the reduced cost base excludes holding costs such as interest. However, any legal fees incurred are included in the reduced cost base.

Any capital loss is shared according to your legal interest in the contract. That is, as you and your spouse entered into the contract jointly, you are only entitled to 50% of any capital loss.

 

Nomination is legal in every state still

 

If the property was bought in spec with the intention of flogging it off before settlement: then the loss might be tax deductible and not a capital loss.

The intention on buying is relevant. However it sounds capital in nature and will probably generate a capital loss.