Edited version of private ruling

Authorisation Number: 1011565674316

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Ruling

Subject: Capital gains tax (CGT) and capital losses

Are you entitled to claim a capital loss in respect of the shares acquired in a Company B?

No.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

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.

You and your spouse purchased allotments in a project with you investing double the amount your spouse did. You and your spouse were issued with a certificate and identification number.

You and your spouse converted your ownership from the allotments to shares under a proposal based on imputed value of your allotments and a notional issue price per share.

You were issued with shares in Company B.

You and your spouse assert that within a month of this transaction, Company B shares were suspended from the Stock Exchange.

You have made repeated attempts to clarify the company's position without success.

You assert you and your spouse have experienced a capital loss for the amount originally invested in the project.

You have not received a satisfactory reply from the administrators.

You hold documentation for the original investment and subsequent exchange for shares.

You can not afford to engage the services of an accountant.

You complete your tax returns utilising e-tax.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6-5

Income Tax Assessment Act 1936 Section 82KZMG

Income Tax Assessment Act 1936 Subsection 82KZMGB(2)

Income Tax Assessment Act 1997 Section 70-75

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-145

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 118-25.

Reasons for decision

Disposal of lease agreement and timber

You entered into a lease and management agreement to produce a product as part of an end to end process. You and your spouse were issued with a certificate detailing your allotment.

Product Ruling 2002/134 provides guidance on the type of business each participant is carrying on when participating in this type of arrangement. You are determined to be a commercial grower of a particular species for the production of a specific type of product for use in a specific industry. In the course of carrying on your business, you and your spouse were entitled to claim the original investment amounts made by you and your spouse for the acquisition costs of the lease agreement as primary production business income and deductions in the income tax year you acquired the allotment.

In order to make a capital gain or capital loss, a CGT event must happen in relation to a CGT asset. The most common CGT event is an A1. The disposal of the lease and product lots you and your spouse held in Company A resulted in a CCT event A1 occurring.

However, certain assets are considered trading stock of a business. Where a taxpayer disposes of an item of trading stock outside the ordinary course of business, the market value of the item on the day of the disposal is include in the taxpayer's assessable income. The provision only applies to certain assets which include the trees planted and tended for sale . There are three basic conditions that must be met:

1. The taxpayer must dispose of the item of trading stock outside the ordinary course of a business.

2. The trading stock must be held in a business that taxpayer is carrying on.

3. The trading stock must be an asset of that business.

If these conditions are met, the market value of the item is included as assessable income in the year in which it is received. The amount actually received is excluded from your assessable income.

In you and your spouse's situation, you include the market value of the lease and product in your income tax return for the year in which you acquired shares in Company B.

To prevent double taxing, a capital gain or loss you make from a CGT asset is disregarded at the time of the CGT A1 event if the asset is your trading stock as the amount has already been included in your assessable income.

Acquisition of shares

In order for a capital gain or loss to occur, a CGT event must happen to a CGT asset.

The most common CGT event occurs when you dispose of a CGT asset to another entity triggering a CGT event A1. Other CGT events may be more applicable to the CGT assets such as CGT event C2, when the shares are cancelled or surrendered or CGT event G3, where the liquidator declares the shares worthless.

Liquidators were appointed for Company B. The liquidations have yet to declare the shares worthless. You and your spouse will have a capital loss in the income tax year when there is either a CGT event C2, when the shares are cancelled or surrendered or CGT event G3, where the liquidator declares the shares worthless.

You and your spouse were granted shares in Company B in exchange for your lot holdings with Company A. You and your spouse received notification that you would each receive shares parcels in Company B. You have not disposed of your ownership of these share parcels.

You and your spouse will calculate the capital loss by utilising the cost base of the shares.

The cost base of a CGT asset is generally the cost of the asset when you bought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset. There are five elements:

First element - Money or property given for the asset

Second element - Incidental cost of acquiring the CGT asset or that relate to the CGT event

Third element - Costs of owning the asset

Fourth element - Capital costs to increase or preserve the value of your asset or to install or move it

Fifth element - Capital costs of preserving or defending your ownership of or rights to your asset.

In you and your spouse's situation, the first element of the cost base of the shares acquired in Company B will be the value of the lease and product (the CGT asset) from Company A at the time you disposed of the CGT asset to acquire the shares.

When you acquired the shares in Company B, you acquired a CGT asset. You and your spouse currently hold ownership of the shares and as you have not disposed of the shares, no CGT event has occurred in relation to the shares.

You are not able to claim a capital loss in relation to the shares held in Company B as you retain ownership in the shares and they have not been declared worthless.

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