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Ruling

Subject: Non receipt of full consideration on sale of a CGT asset

Question 1

Are you entitled to a capital loss for the loss of funds paid to a distributor, for the purchase of an asset under section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, in a later year.

Question 2

Is the above payment claimable over five years as blackhole expenditure incurred in running the business under section 40-880 of the ITAA 1997?

Answer

No

This ruling applies for the following period:

The year ended 30 June 2009

The scheme commences on:

1 July 2008

Relevant facts and circumstances

You are in the transport industry.

Regular replacement of vehicles is required because of the wear and tear on this type of transport.

In a previous year, you contracted via a distributor to purchase new vehicles. This is normal practice in the industry as manufacturers do not generally retail directly to individual firms.

A loan was arranged to cover the purchase price and the proceeds were paid by the finance company to the distributor.

The distributor did not pass the loan proceeds on to the manufacturer, although the order had been placed and the manufacturer had manufactured the required equipment.

When it emerged that the loan proceeds paid to the distributor were not paid to the manufacturer, you were obliged to pay the purchase price directly to the manufacturer from other funds to secure the required equipment.

Since that time you have attempted to recover the proceeds from the distributor. The distributor, amongst other facts, had other substantial creditors and was placed into liquidation.

No deduction was claimed when your tax return was lodged because recovery from the distributor was anticipated at that time.

You previously applied for a private ruling relating to a deduction for the loss of funds that were paid to a distributor for the purchase of new vehicles.

A private ruling issued stating that you were not entitled to a deduction for the loss of funds paid to a distributor for the purchase of vehicles.

Relevant legislative provisions

Section 40-880 of the Income Tax Assessment Act 1997

Paragraph 40-880(1)(a) of the Income Tax Assessment Act 1997

Subsection 100-20(1) of the Income Tax Assessment Act 1997

Section 100-25 of the of the Income Tax Assessment Act 1997

Subsection 100-25(1) of the Income Tax Assessment Act 1997

Subsection 100-25(3) of the Income Tax Assessment Act 1997

Section 102-20 of the Income Tax Assessment Act 1997

Section 104-25 of the Income Tax Assessment Act 1997

Paragraph 104-25(1)(b) of the Income Tax Assessment Act 1997

Section 110-55 of the Income Tax Assessment Act 1997

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'.

Reasons for decision

Question 1

Summary

You can make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the event (section 102-20 of the ITAA 1997).

Your CGT asset was your contractual right with the distributor. CGT event C2 is the CGT event that is applicable to your circumstances. The timing of this event is when the distributor's liquidator advised you that there is no foreseeable dividend payable to creditors.

Detailed reasoning

Subsection 100-20(1) of the ITAA 1997 states that you make a capital gain or loss only if a CGT event happens. Section 100-25 of the ITAA 1997 is about CGT assets and subsection 100-25(1) of the ITAA 1997 explains that most CGT events involve a CGT asset. Subsection 100-25(3) of the ITAA 1997 includes contractual rights as a CGT asset.

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied (paragraph 104-25(1)(b) of the ITAA 1997). CGT event C2 is discussed in ATO Interpretative Decision ATO ID 2003/828 discusses CGT event C2 - ending of contractual rights.

In your situation, a period of time has elapsed since you made the payment under the arrangement. In addition, you have attempted to recover the monies. Your enquiries have determined that:

§ the distributor had not passed the monies onto the manufacturer, although the order had been placed and the manufacturer had manufactured the required equipment

§ the monies paid to the distributor had disappeared

§ the distributor had other substantial creditors

§ the distributor's company has been placed into liquidation

§ it appears that there is no likelihood of recovering the funds.

The distributor has made no attempt to perform their part of the contract.

Based on these facts, it is considered that the contract has been abandoned with the effect that CGT event C2 in section 104-25 of the ITAA 1997 has happened. The contract was cancelled with the effect that the contract is discharged.

For most CGT events, your total costs associated with the event are worked out in two different ways:

§ for the purpose of working out a capital gain, those costs are called the cost base of the CGT asset

§ for the purpose of working out a capital loss, those costs are called the reduced cost base of the asset.

You will make a capital gain if the capital proceeds from the ending are more that the asset's cost base. You will make a capital loss if those capital proceeds are less than the asset's reduced cost base. The cost base of a CGT asset consists of five elements that are discussed in section 110-55 of the ITAA 1997:

§ the money you pay, or are required to pay, in respect of acquiring the asset and the market value of any property you gave or are required to give in respect of acquiring the asset

§ any incidental costs incurred

§ any costs of owning the asset

§ capital expenditure incurred

§ capital expenditure incurred in preserving or defending your title to the asset, or right over the asset.

The time of the CGT C2 event is when the contract ending the asset is entered into, or, if none, when the asset ends. You have advice from the liquidator stating that there is no foreseeable dividend payable to creditors. The liquidator's advice means that at that point your contract is cancelled. At that time it was determined that the contract for supply of your equipment will not be enforced, nor will you receive the monies you paid to the distributor. Therefore this is the date that your contractual right ceased and the date of CGT event C2.

Question 2

Summary

As this expenditure is taken into account as a capital loss, it is excluded from being claimed as blackhole expenditure under section 40-880 of the ITAA 1997.

Detailed reasoning

Paragraph 40-880(1)(a) of the ITAA 1997 explains that business capital expenditure may be deductible over five years if the expenditure is not otherwise taken into account. As your expenditure is claimable as a capital loss, you are therefore not entitled to claim these costs as blackhole expenditure over five years.