ATO Interpretative Decision

ATO ID 2002/973

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can a shareholder of Pasminco Limited choose to make a capital loss under CGT event G3 in section 104-145 of the Income Tax Assessment Act 1997 (ITAA 1997) following a declaration by the administrators of the company that the shares are worthless?

Decision

No. CGT event G3 in section 104-145 of the ITAA 1997 requires that a declaration is only effective for the purposes of the section, when made by a liquidator. As Pasminco Limited is currently in administration and not liquidation, CGT event G3 does not happen when the administrator declares that the shares are worthless. Accordingly, shareholders cannot choose to make a capital loss in relation to their shares.

Facts

A shareholder acquired shares in Pasminco Limited after 19 September 1985.

On 19 September 2001, Pasminco Limited was placed into voluntary administration.

On 30 August 2002, the creditors of Pasminco Limited agreed to accept a deed of company arrangement under which it was proposed that creditors would exchange their debt for equity in a new holding company.

In a letter to shareholders dated 4 September 2002, the administrators of Pasminco Limited advised that given the extent of the company's liabilities, there is no practical value left in the shares. Shareholders were also advised by the administrators that they would not receive any return on their existing shares in the company.

Reasons for Decision

CGT event G3 happens if a liquidator of a company declares in writing that he or she has reasonable grounds to believe that there is no likelihood that shareholders will receive any further distribution from the company in the course of its winding up (subsection 104-145(1) of the ITAA 1997). If this declaration is made, shareholders can choose to make a capital loss on their shares at the time of the declaration (subsections 104-145(2) and 104-145(3) of the ITAA 1997).

Voluntary administration is a procedure designed to enable companies in financial difficulties to be placed under the control of an administrator who will work with creditors to maximise the chance of the business continuing or if this is not possible, to maximise the return to the company's creditors. While the company is in administration, there is a moratorium placed on the claims of creditors. It is the administrator's role to investigate the company's affairs and recommend to creditors to either enter into a deed of arrangement, liquidate the company or terminate the administration and return the control of the company to the directors. In this case, the creditors of Pasminco Limited agreed to enter into a deed of company arrangement. At this point in time, the creditors have not determined that the company should be placed into liquidation.

Accordingly, as Pasminco Limited is in administration and not liquidation, the declaration by the administrators is ineffective for the purposes of section 104-145 of the ITAA 1997 and therefore CGT event G3 does not happen. As a result, shareholders are unable to choose to make a capital loss on their Pasminco Limited shares.

Year of income:  Year ending 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 104-145
   subsection 104-145(1)
   subsection 104-145(2)
   subsection 104-145(3)

Related Public Rulings (including Determinations)
Taxation Determination TD 2002/3
Addendum TD2002/3A
Taxation Determination TD 2002/17

Keywords
CGT events G1-G3 - shares
Capital gains tax
Capital losses
Voluntary administration

Business Line:  Office of the Chief Tax Counsel

Date of publication:  18 October 2002

ISSN: 1445-2782