Edited version of your private ruling

Authorisation Number: 1011946067428

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Subject: Capital gains tax - worthless shares - loss - dividends - assessable income

Question 1: Will you be eligible to include a capital loss made in relation to your investment in Company A in the income year the company was placed into administration?

Answer: No.

Question 2: Will dividends received in relation to your investment in Company A be included in your assessable income in the income year that they were received?

Answer: Yes.

This ruling applies for the following period:

Income year ended 30 June 2011.

The scheme commenced on:

1 July 2010.

Relevant facts and circumstances

You used the software platform developed by Company A to buy and sell securities on a number of stock exchanges.

In order to use the software provided by Company A, you were required to have a segregated account.

You transferred a number of amounts on numerous occasions during the income year in which you commenced your investment with Company A.

During the following income year, you transferred further amounts into the segregated account.

You received dividends in relation to your Company A investment which could be received as either a cash amount directly credited into your segregated account, or you could reinvest the dividend. When available, you reinvested your dividends.

Company A was put into administration and the segregated account was blocked or disabled.

You had an unsecured debt amount at the time Company A was put into administration.

The administrators announced that it was unlikely that a dividend would be paid to unsecured creditors and that the creditors and investors had voted to have Company A wound up at a meeting.

You have provided copies of a number of documents, which from part of, and should be read in conjunction with this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1936 Section 44

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-145

Reasons for decision

Worthless shares

Taxpayers who own shares in a company that has been placed in liquidation and/or administration may realise a capital loss under the capital gains tax (CGT) provisions in respect of worthless shares in one of two ways:

· CGT event C2 happens; or

· CGT event G3 happens.

CGT event C2 - Cancellation, surrender and similar endings

CGT event C2 occurs if the CGT asset ends by cancellation, surrender, redemption, release, discharge, satisfaction, abandonment, surrender, or forfeiture of an intangible CGT asset.

Where the relevant CGT asset is shares, it is considered that it is not possible to abandon or surrender a share. However, CGT event C2 happens when a company is liquidated or wound up.

CGT event G3 - Liquidator or administrator declares shares worthless

CGT event G3 can occur in two situations:

1. A taxpayer owns a share in a company and the company's liquidator or administrator declares in writing that he or she has reasonable grounds to believe, as at the time of the declaration, that there is no likelihood that the shareholders in the company, or shareholders of the relevant class of shares, will receive any further distribution in respect of the taxpayer's shares; or

2. A taxpayer owns financial instruments issued by, or created by or in relation to, a company and the company's liquidator or administrator declares in writing that he or she has reasonable grounds to believe, as at the time of the declaration, that the instruments, or a class of instruments that includes instruments of the kind, have no value or only negligible value.

If this CGT event occurs, you can choose to make a capital loss equal to the reduced cost base of your share, at the time of the declaration.

Application of the law to your facts

You invested in Company A, which was placed into administration and on that date you had an unsecured debt.

In letters from the administrator, you were advised that it was estimated that if no further recoveries were made, a dividend would be payable to investors, however, it was unlikely that any dividend would be payable to unsecured creditors.

It was also stated by the administrators the creditors and investors had voted at a meeting to have the company wound up.

In this case, your interests in Company A have not been cancelled because Company A has not been deregistered at this point in time. Therefore, CGT event C2 has not occurred.

While the administrators have stated it is unlikely that unsecured creditors will receive any further payments, they have not made a declaration that there is no likelihood that unsecured creditors will receive any future payments. CGT event G3 will not occur until a declaration has been made, and you are not able to choose to make a capital loss in relation to this CGT event occurring.

Therefore, you will not be able to claim a capital loss until either the administrator makes a declaration that there is no likelihood of any further payments to unsecured creditors, or your interests end due to their cancellation at the deregistration of Company A.

Dividends and reinvested dividends

If you own shares in a company, you will generally be paid your share of the company's profits as a dividend. If you are paid or credited dividends or non-share dividends, you must include the following amounts as assessable income in your income tax return in the income year in which you received the dividend:

· the unfranked amount

· the franked amount; and

· the franking credit, provided you are entitled to a franking tax offset in respect of the franking credit.

Where you participate in a dividend reinvestment plan you are deemed to have received a cash dividend and then used the cash to buy new shares. Therefore, the dividend is assessable in the income year that the dividend is paid. Under ordinary concepts it is included in your income tax return under dividends.

The dividend is not taxed under the capital gains tax (CGT) provisions. However, the share acquired under the dividend investment plan will be taxed under the CGT provisions when a CGT event occurs in relation to the share.

Application to your facts

In your case, you received dividends in relation to your Company A investment. When you chose to reinvest the dividends, it is viewed that you received the dividends and then reinvested the dividends to acquire additional shares.

Therefore, you must include all dividends that you received or were credited as assessable income in your income tax return in the income year in which you received the dividends.