ATO Interpretative Decision

ATO ID 2005/113

Income Tax

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

Issue

Did CGT event C1 under section 104-20 of the Income Tax Assessment Act 1997 (ITAA 1997) happen to a taxpayer who owned ostriches when the company holding the ostriches was deregistered?

Decision

Yes. CGT event C1 under section 104-20 of the ITAA 1997 happened to the taxpayer who owned ostriches when the company holding the ostriches was deregistered.

Facts

In 1995-96 income year the taxpayer invested in a managed investment to purchase ostriches. The taxpayer entered into a purchase agreement with the company.

The taxpayer contracted to pay an initial upfront deposit on the purchase price of three juvenile ostriches and commenced paying off the balance by way of loan repayments (that is, 60 equal monthly payments of $1,000). The taxpayer paid a total of $15,000 for the ostriches under the purchase agreement.

The taxpayer also entered into an Ostrich Agistment & Management Agreement with the company. The taxpayer paid $5,000 for management fees and agistment costs.

In 1997-98 income year the taxpayer was allocated a further three ostriches under the terms of the purchase agreement. The taxpayer was issued with Certificates of Title for the six ostriches.

In 1999-2000 income year the company went into administration.

The Administrator of the company gave the taxpayer three options:

•

pay the balance outstanding, or

•

exercise the company's rights under the provisions of contract relating to lien, or

•

transfer the company's obligations for the keep and maintenance of the birds to a new company if the taxpayer reached an agreement with that new company for such transfer. The Administrator however reserved the right to pursue recovery of the outstanding debt due to the company.

The taxpayer elected the last option and entered into another Agistment and Breeding Services Agreement with the new company in relation to the ostriches previously agisted.

The taxpayer paid a further $10,000 to the new company for the management fees and agistment costs.

In 2000-01 income year, after reviewing the information available, the taxpayer concluded that there would never be a return on the investment nor any saleable asset to dispose of. At that time, the taxpayer discontinued the payment of monies to the new company.

In 2001-02 income year, the new company was also deregistered. All assets of the new company were liquidated but no payment was paid to unsecured creditors. The taxpayer had taken no action during liquidation to recover their property or any distribution.

The taxpayer does not know what happened to the ostriches when payment of the management and agistment fees ceased.

Reasons for Decision

Under section 104-20 of the ITAA 1997 CGT event C1 happens if a CGT asset you own is lost or destroyed.

A CGT asset is defined as any kind of property or a legal or equitable right that is not property (section 108-5 of the ITAA 1997).

The CGT asset in this case is the six ostriches. The taxpayer owned the ostriches but the company had possession and control of the ostriches.

The word 'lost' in subsection 104-20(1) of the ITAA 1997 is not defined and takes its ordinary meaning. Taxation Determination TD 1999/79 states that the meaning of the word 'lose' in the context of subsection 104-20(1) ('lost' being the past tense of lose) is 'to come to be without, by some chance, and not know the whereabouts of: to lose a ring'.

Paragraph 3 of TD 1999/79 says that the word 'lost' is wide enough to cover some situations where an asset is confiscated. However, other situations involving confiscation may amount to a change of ownership under CGT event A1, so that the circumstances of each case determine the relevant CGT event.

Because the company did not give back the ostriches to the taxpayer and was subsequently liquidated and deregistered, the taxpayer had no means of knowing what had happened to their property. Even if they had located the property held by the company they would have had no means of knowing which ostriches were theirs. They had no means of knowing whether the ostriches had been destroyed, or whether there had been a change of ownership of them by confiscation.

CGT event C1 therefore happened as the taxpayer had lost their ostriches when the company was deregistered.

Under subsection 104-20(2) of the ITAA 1997 the time of CGT event C1 is when you first receive compensation for the loss or if you receive no compensation when the loss is discovered. As the taxpayer did not receive any payment or compensation the time of CGT event C1 is when the loss was discovered. This was when the company was deregistered in accordance with the Corporations Act 2001 because the company ceased to exist as a legal entity and therefore ceased to hold any property. On deregistration, the taxpayer no longer had any rights to recover their property.

Year of income:  Year ended 30 June 2004

Legislative References:
Income Tax Assessment Act 1997
   section 108-5
   subsection 104-20(1)
   subsection 104-20(2)
   subsection 104-20(3)
   subsection 110-25(1)

Related Public Rulings (including Determinations)
Taxation Determination TD 1999/79

Keywords
Capital gains tax
CGT reduced cost base

Siebel/TDMS Reference Number:  4370892

Business Line:  Private Groups and High Wealth Individuals

Date of publication:  6 May 2005

ISSN: 1445-2782