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Ruling

Subject: Capital losses

Question

Are you entitled to claim a capital loss in the 2012-13 financial year?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2013

The scheme commences on:

1 July 2012

Relevant facts and circumstances

In the 2006-07 financial year you loaned $X to company A for a project.

As per the loan agreement you were entitled to X% of the taxable profits derived by company A or a lump sum payment.

The profits were to be paid to you at the completion of the project.

You were also entitled to interest payments each calendar month.

You understood the investment to be for a X year period.

Several years later, you became aware that company A had not proceeded with the project.

You began legal proceedings to try and recover your funds.

You became aware that the funds had been transferred to company B and used for another project.

You have attempted to recover your monies through the courts. However, as the director is no longer living in Australia your attempts have been unsuccessful.

Administrators were appointed to company B by the director of the company.

You submitted a 'formal proof of debt or claim' form to the administrator for the amount of $X.

Your claim was disallowed on the grounds that the money was lent to company A and therefore you were deemed to be a creditor of that company and not company B.

You explored the option of placing company A into receivership. However, on the advice of your lawyer you deemed this course of action to be too costly.

Soon you will be unable to pursue the debt through the courts given the period of time that has passed since you executed the loan agreement.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20,

Income Tax Assessment Act 1997 section 104-25, and

Income Tax Assessment Act 1997 section 108-5.

Reasons for decision

Under section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) an asset for capital gains tax (CGT) purposes is any form of property or a legal or equitable right that is not property. An example of a CGT asset is a debt owed to you.

Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a CGT event.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset ends by the asset:

(a) being redeemed or cancelled

(b) being released, discharged or satisfied

(c) expiring; or

(d) being abandoned, surrendered or forfeited

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

The mere writing off of a debt (by a taxpayer) is insufficient to constitute a cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment at law or in equity.

Accordingly, CGT event C2 will not happen to the debt owed to you and you cannot claim a capital loss until the rights under the agreement are legally and irrevocably surrendered, released or abandoned and, as a result, all provable debts are released.

In your case, a CGT event does not occur in relation to the debt owed to you at the point in time when you are no longer able to take legal action to recover the funds. Even though the debt cannot be pursued through the courts, your contractual right to receive the funds still exists. Therefore, you cannot claim a capital loss for the amount that you invested in company A as the debt has not come to an end.