The draft QWBA considers when a seller has to include a forfeited deposit from a cancelled land sale agreement as taxable income. The draft confirms a forfeited deposit is not taxable under the land taxing rules, nor has there been a disposal of a legal or equitable interest in land. However, it concludes where the proceeds from the sale of land would have been taxable under the land sale rules, if the sale had gone ahead, it is likely that a forfeited deposit will be taxable as “business income”; ”income from a profit-making scheme” or “income under ordinary concepts.” The Commissioner considers a forfeited deposit is compensation for failure of the buyer to settle and in the context of determining “income under ordinary concepts,” that the payment takes the character of what it replaces.

CA ANZ is not convinced the conclusion reached is correct when the applicable land taxing provision would have been the bright-line test under section CB 6A of the Income Tax Act 2007 had there been a disposal of land in the bright-line period.

CA ANZ suggests that further research and analysis are required to provide a more compelling argument that a forfeited deposit is income under ordinary concepts and is not in the nature of a penalty or damages.