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This edited version has been archived due to the length of time since original publication.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: 1013133099029

Date of advice: 30 November 2016

Ruling

Subject: Capital loss

Question 1

Has there been a capital gains tax event in relation to your investment?

Answer

Yes.

Question 2

Can the capital loss made on your investment be carried forward to be offset against a future capital gain?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ended 30 June 20ZZ

The scheme commenced on:

1 July 20XX

Relevant facts

You invested money with entity A.

In 20YY you were notified that part of the investment was not recoverable due to entity B unable to honour debt and the business was now in receivership.

Entity A acted on behalf the investors in recovering the funds. After years of court battles with the receivers you were issued a capital impairment letter.

You have not made any capital gain in the 20XX-YY financial year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

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 108-5.

Reasons for decision

Capital gains tax provisions

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens. The gain or loss is made at the time of the CGT event.

As a result of you having an investment with entity A, it is considered that you acquired contractual rights. These contractual rights are CGT assets (section 108-5 of the ITAA 1997).

The relevant CGT events are event A1, C2 and G3.

CGT event A1 as outlined in section 104-10 of ITAA 1997 occurs when you dispose of a CGT asset.

CGT event C2 as outlined in section 104-25 of ITAA 1997 occurs when a CGT asset is cancelled, surrendered or has a similar ending.

CGT event G3 as outlined in section 104-145 of ITAA 1997 occurs when a liquidator or administrator declares shares or financial instruments are worthless.

In your case, you have not disposed of your investment, therefore CGT even A1 is not relevant.

CGT event G3 happens if you own financial instruments issued by or created by or in relation to a company and a liquidator or administrator of the company declares in writing that the liquidator or administrator has reasonable grounds to believe that the financial instruments have no value or have only negligible value.

In your case your investment was with entity A and not directly with entity B. Entity A is not in liquidation and you have not received written advice from a liquidator or administrator in relation to your investment. Therefore CGT event G3 has not occurred and is not relevant in your situation.

It is considered that CGT event C2 is the most relevant in your circumstances.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being abandoned, surrendered or forfeited or being released, discharged or satisfied. 

The time of a CGT event C2 is when you enter into the contract that results in the asset ending or, if there is no contract, when the asset ends.

In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423 it was recognised that a contract can come to an end merely by being treated as being at an end by the parties. It was held in Fitzgerald v. Masters (1956) 95 CLR 420 at 432 that:

In your case you had funds invested. You received some return of capital of your investment; however an amount will not be paid to you.

The Commissioner takes the view that in certain circumstances contractual rights can be discharged or come to an end merely by being treated as being at an end by the parties. That is, a CGT event C2 will happen when the contractual rights are abandoned.

From the information provided, it is considered that it is unlikely that you will have any of the remaining investment amount paid to you.

In your case, your contractual rights are considered properly abandoned as it is reasonably certain that there is no real hope of recovering any further funds. Therefore, CGT event C2 has occurred.

A net capital loss is not deductible from your assessable income. However, it can generally be offset against capital gains made in later income years. To the extent that a net capital loss cannot be used to offset capital gains in an income year, it can be carried forward to a later income year.

In your case, your C2 capital loss occurred in the 20XX-YY financial year. As you did not have any capital gains in the 20XX-YY, your capital loss is carried forward.

Capital losses may be carried forward as net capital losses without a time limit and are offset against any capital gains realised in subsequent years.

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