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Ruling

Subject: Capital gains tax Capital Loss offset on taxation liability

Question 1

During the financial year ending 30 June 2011, did Capital Gains Tax (CGT) event G3 happen under section 104-145 of the Income Tax Assessment Act 1997 (ITAA1997), on your debentures held in a company?

Answer

Yes.

Question 2

Can any capital gain upon the sale of your real estate investment be offset against any capital loss from the investment in a company during year ending 30 June 2011?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You sold a real estate investment during the 2011 financial year. A capital gain resulted in an income tax liability.

You also have a debenture issued in a company that is in liquidation and there appears no distribution for creditors will be available.

The liquidator informed Creditors of the company in an earlier creditors meeting under dividend prospects:

As matters presently stand, we will not be able to pay a dividend to the unsecured creditors of the Company from the funds that we have either recovered to date or are likely to recover

Later in the same report:

As we are now without funds to continue further significant litigation and, realistically, do not expect that state of affairs to change, we do not consider that the prospects of unsecured creditors being paid a dividend will increase in the future

Later the liquidator issued form 524 to the Australian Securities & Investments Commission during the year ending 30 June 2011, which states nil dividends have been paid to date and no expected dividend will be paid.

The liquidator subsequently lodged a final form 578 to the Australian Securities & Investments Commission.

Under the basis for this request for deregistration is:

· there are no funds left in the creditors' voluntary liquidation to hold a final meeting and also the affairs of the company are fully wound up

The liquidator is based in Sydney NSW.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 102-25.

Income Tax Assessment Act 1997 Section 104-145.

Reasons for decision

Unless otherwise stated, all references in the following Reasons for Decision are to the ITAA 1997.

Capital gains tax (CGT) is the tax you pay on certain gains you make.  Section 102-20 provides that a capital gain or loss can only arise if a CGT event happens.

The capital gain on the real estate investment can only be offset against a capital loss if a CGT event happened in respect of the investment issued by the company.

Section 102-25 provides that if more than one CGT event happens, the one that is most specific to the taxpayer's situation applies. The most appropriate CGT event in your case would be G3 because a liquidator has been appointed.

CGT event G3 under section 104-145 occurs if you own a share or financial instrument in a company and its liquidator or administrator declares in writing that there is no likelihood that the creditors of the company, or shareholders of a relevant class of shares, will receive any further distribution in the course of winding up the company. If this CGT event occurs, you can choose to make a capital loss equal to the reduced cost base of your debenture at the time of the declaration.

A debenture is included in the definition of financial instrument under subsection 104-145(3) (a).

As stated in the liquidators earlier report to Creditors:

As matters presently stand, we will not be able to pay a dividend to the unsecured creditors of the Company from the funds that we have either recovered to date or are likely to recover (emphasis added).

The statement in the report was made on the basis of "As matters presently stand". As such, it was not considered final and there was a possibility (however small) of receiving some return from the company, therefore a CGT event G3 did not happen at this time.

The liquidator has later issued a final statement form 578 during the year ending 30 June 2011, which meets the requirements under section 104-145 and a CGT event G3 has occurred. Therefore, you can offset the capital losses against the capital gain taxation liability of the real estate investment in the year ended 30 June 2011.

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.