If a company is placed in liquidation or administration, company law restricts the transfer of shares in the company. This means that, in the absence of special CGT rules, you may not be able to realise a capital loss on shares that have become worthless unless you declare a trust over them.
In certain circumstances, you can choose to realise a capital loss on worthless shares before dissolution (if you acquired the shares on or after 20 September 1985). This applies if you own shares in a company and a liquidator or administrator declares in writing that there is no likelihood you will receive any further distribution in the course of winding up the company. A liquidator’s declaration can be made after you receive a distribution during the winding up.
Financial instruments relating to a company (not just shares) can also be declared worthless by a liquidator or administrator.
Financial instruments include (but are not limited to) convertible notes, debentures, bonds, promissory notes, loans to the company, futures contracts, forward contracts and currency swap contracts relating to the company, and rights or options to acquire any of these (including rights or options to acquire shares in a company). Many financial instruments may be referred to as securities.
If you make this choice, you will make a capital loss equal to the reduced cost base of the shares (or financial instruments) at the time of the liquidator’s or administrator’s declaration. The cost base and reduced cost base of the shares (or financial instruments) are reduced to nil just after the liquidator or administrator makes the declaration.
These rules do not apply to:
- a financial instrument where any profit made on the disposal or redemption of it would be included in your assessable income or any loss would be deductible, such as a traditional security or qualifying security
- a right acquired prior to 1 July 2009 under an employee share scheme
- a share acquired under an employee share scheme if it is a qualifying share, you did not make a section 139E election for the share under the employee share rules, and the declaration by the liquidator or administrator was made no later than 30 days after the ‘cessation time’ for the share.
- an ESS interest or an ESS interest that is a beneficial interest in a right that is forfeited and is taken to have been acquired, or
- units in unit trusts or financial instruments relating to trusts.
Example 25: Liquidator's declaration that shares are worthless
The administrators of XYZ Company Ltd made a written declaration on 31 March 2019 that they had reasonable grounds to believe that there was no likelihood that the shareholders of XYZ Company Ltd would receive any distribution from their shares.
Hillary purchased shares in XYZ Company Ltd in March 2008 for $1.70, including brokerage. Following the administrators’ declaration, Hillary can choose to make capital losses equal to the reduced cost bases of her shares as at 31 March 2019. She claims the capital losses in her 2019 tax return.End of example
If no declaration is made by a liquidator or administrator, or you have not chosen to make a capital loss following a declaration by a liquidator or administrator, you may make a capital loss on your shares or financial instruments when a court order is given to dissolve the company.
For information about when and how you make a choice, see Choices.
Also, if a company is wound up voluntarily, shareholders may realise a capital loss either three months after a liquidator lodges a tax return showing that the final meeting of the company has been held, or on another date declared by a court. The cancellation of shares as a result of the dissolution of the company is an example of CGT event D2.