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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1012965174023

Date of advice: 16 February 2016

Ruling

Subject: Capital loss - CGT event C2

Question 1

Did you make a capital loss when you forgave the debt owed to you by the company?

Answer

No.

Question 2

Will you make a capital loss when the company is deregistered or you execute a deed of release in favour of the company so that you are legally barred from collecting the debt?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on

1 July 20XX

Relevant facts and circumstances

The company carried on a property development and construction business.

Over the years you borrowed funds from various sources and on-lent these to the company for working capital with the intention that interest would be paid on the borrowed money and/or dividends would be paid, and did receive interest and dividends from the company.

For various reasons the company was unable to profitably complete developments and buildings which it held, and as a result sustained substantial losses and it ceased trading.

The company does not have any assets or funds to pay its outstanding liabilities.

You forgave the debt owed to you by the company.

The company has been notified by ASIC, that because of failure to pay outstanding fees, they are in the process of deregistering it.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subsection 104-25(1)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 116-30

Income Tax Assessment Act 1997 subsection 116-30(3A)

Reasons for decision

You make a capital gain (or loss) if and only if a CGT event happens (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)).

A capital gains tax (CGT) asset is any form of property or a legal and equitable right that is not property (section 108-5 of the (ITAA 1997)). A debt owed to you is an intangible CGT asset.

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset expiring or by it being released, discharged, redeemed, cancelled, abandoned, surrendered, or forfeited (subsection 104-25(1) of the ITAA 1997). The time of the event is when you enter into the contract that results in the asset ending; or if there is no contract, when the asset ends.

When a company is deregistered it ceases to exist. At that time, its debts, if any, are abandoned, surrendered or forfeited for the purposes of section 104-25 of the ITAA 1997, and CGT event C2 will happen.

CGT event C2 will also happen if the owner of a debt executes a deed of release in favour of the borrower such that they are legally barred from collecting the debt. However, the mere writing off of a debt is insufficient to constitute a cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment at law, or in equity, for the purposes of subsection 104-25 of the ITAA 1997. Nor is it sufficient that a debt is forgiven or abandoned without any legal impediment imposed on its collection.

In your case, you have forgiven the debt owed to you by the company; however, there is nothing legally stopping you from pursuing repayment. As such, CGT event C2 has not yet happened and you are not entitled to claim a capital loss.

CGT event C2 may happen in the future if:

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