1011553896506 | Legal database

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Edited version of private ruling

Authorisation Number: 1011553896506

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Ruling

Subject: Capital Gains Tax

Question 1

Will the money deposited with the entity be regarded as an investment in shares?

Answer

No.

Question 2

Can the rulees crystallise a capital loss from CGT event G3 happening in section 104-145 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 3

Did the capital loss happen when the administrators for the entity were appointed?

Answer

No.

Question 4

Will the eligible capital losses equal the reduced cost base of the financial instruments?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2006

The scheme commences on:

1 July 2005

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

The rulees (A) invested with an entity (B). A lent B a loan plus any further funds mutually agreed upon. B was required to deposit all funds advanced with other entities in a dedicated account for the purpose of trading exclusively with the other entities.

B was to pay A a regular interest dividend.

Administrators and liquidators were appointed.

B was deregistered and no dividends were paid to any class of creditor.

The liquidator subsequently declared in writing that any loans made to B were deemed to have no value as at their date of joint appointment.

Of the value of the loans declared to have no value was an amount of interest.

Relevant legislative provisions

Income Tax Assessment Act 1997 104-145

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

The investment of funds by the rulees with the entity represents a loan to the entity. The scope of CGT event G3 in section 104-145 of the ITAA 1997 was extended with effect from 22 March 2005. The event now happens if a liquidator or an administrator makes an appropriate written declaration in respect of valueless shares or financial instruments.

Examples of "financial instruments" in subsection 104-135(3) of the ITAA 1997 include:

(a) debentures, bonds or promissory notes issued by the company;

(b) loans to the company;

(d) rights or options to acquire an asset referred to in paragraphs (a) to (c) above, and

(e) rights or options to acquire shares in the company.

CGT event G3 happens to the financial instruments issued by or created by or in relation to a company when the liquidator or administrator of the company declares in writing that the financial instruments have no value. The time of the event is when the declaration was made (subsection 104-145(2) of the ITAA 1997).

In this case, loans were advanced to an entity. The liquidator has made a declaration in writing that the loans from A to B were deemed to have no value. Therefore, CGT event G3 in section 104-135 of the ITAA 1997 happened as at the date of written notification.

It should be noted that there is no requirement in CGT event G3 that shareholders or holders of financial instruments be notified by the liquidator individually or collectively. It is the responsibility of each shareholder or holder of a financial instrument to obtain this information from the liquidator.

Capital loss from CGT event G3

A taxpayer makes a capital loss from CGT event G3 equal to the "reduced cost base" of the share or financial instrument to the taxpayer, but only if the taxpayer chooses to do so (subsection 104-145(4) of the ITAA 1997). The reduced cost base of the share or financial instrument to the taxpayer is worked out as at the time the declaration is made by the liquidator.

Specifically, paragraph 104-145(6)(b) of the ITAA 1997 precludes financial instruments that were revenue assets at the time that the declaration was made.

A taxpayer indicates that he or she has made a choice to make a capital loss under CGT event G3 by the amounts shown in the capital gains tax questions on the taxpayer's income tax return for that income year.

If the taxpayer does not choose to make a capital loss under CGT event G3, no capital loss will be made until the share or financial instrument is disposed of, usually when the company is deregistered.

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