Edited version of private ruling

Authorisation Number: 1011699094715

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Ruling

Subject: Capital losses

Question 1

Are you entitled to a capital loss in respect to your investment with Company A?

Answer: No.

Question 2

Are you entitled to a capital loss in respect to your investment with Company B?

Answer: Yes.

This ruling applies for the following period

1 July 2008 to 30 June 2009

The scheme commenced in

Year ended 30 June 2007

Relevant facts and circumstances

You invested in two companies, Company A and Company B.

Investment with Company A

You had two investments with Company A. The first investment was made in the year ended 30 June 2007 and was to mature in the year ended 30 June 2009. The second investment was made in the year ended 30 June 2007and was to mature in the year ended 30 June 2009. Interest was to be paid at maturity. You have not received any return from these investments.

Company A advanced the funds raised from the investors to Company C (Receivers and Managers Appointed). Company C advanced these funds (together with funds raised from Company C investment holders) to third parties. Company C holds real property mortgages and other security from borrowers to support its loans.

A partnership has been appointed as Receivers and Managers of Company A by the secured creditor during the year ended 30 June 2009. The investments of Company A have been frozen as from mid 2008.

The Receivers have informed you that at this stage you will no longer receive regular payments, nor will your investment including any interest reinvested or accrued up to mid August 2008, be returned to you on its maturity. The receivers have also informed you that timing and the amount of any dividend is uncertain and is dependent on the realisation strategy adopted by the Receivers.

In mid 2010 the Receivers have issued an update to the investors stating that they are still in the process of selling the company assets, however, the expectation is that the assets will be sold at a loss and as a consequence the investors may receive a lower price for their investments.

Investment with Company B

You made and investment with Company B to mature in the year ended 30 June 2009. You were expected to receive an amount each month.

You last received a distribution from Company B in mid 2008 which was the income from the fund for the 2008-09 year.

You have stated that due to the financial crisis and too many redemption requests, redemptions were deferred and dividends cancelled and around June 2009, the company was taken over by Company D.

Subsequent to negotiations with Company D during the year ended 30 June 2011 you accepted an offer from a third party to purchase the investment you now held with Company D. You have stated that you lost an amount of principal and that you did not consider how much interest was lost.

During a telephone conversation with the ATO you stated that you did not know the market value of these units.

You have requested the Commissioner to allow you to claim the losses incurred in investing with Company A and Company B, later taken over by Company D.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-20

Income Tax Assessment Act 1997 section 104-145

Income Tax Assessment Act 1997 section 104-10(4)

Reasons for decision

For a capital loss (or gain) to accrue, a 'CGT event' must happen, according to section 100-20 of the Income Tax Assessment Act 1997 (ITAA 1997). Section 104-5 of the ITAA 1997 lists the various CGT events that can happen.

In terms of section 104-145 of the ITAA 1997, CGT event G3 happens to shares when a company liquidator makes a declaration, in writing, that there is reasonable ground to believe there is no likelihood that the shareholders will receive any further distributions from the company.

With regards to company A, the information available does not suggest that a liquidator has been appointed. The receivers state in the update to investors that assets of Company A are expected to be sold and the investors are expected to receive returns from their investments.

Therefore, at this stage you have not made a capital loss with your investment with Company A. However, at a later time, a capital gain or loss could be made in respect of this CGT asset.

You also had investments with Company B, which were later transferred to Company D. During the year ended 30 June 2011, you accepted an offer from a third party to purchase the units for $X.

At this time, CGT event A1 under section 104-10 of the ITAA 1997 occurred. In accordance with subsection 104-10(4) of the ITAA 1997, a capital loss is made if the capital proceeds are less than the asset's reduced cost base.

The transaction with the third party was at arm's length and you incurred a capital loss of $Y. Therefore, you are entitled to claim the capital loss.

Additional comment

If you make a capital loss from your investments with Company A, you may bring it to account for tax purposes by offsetting a capital gain you make in the same year or any later year. The loss may be carried forward indefinitely until it is offset against a capital gain. Note that a capital loss cannot be offset against ordinary income.