Edited version of your private ruling

Authorisation Number: 1012470964255

Ruling

Subject: Assessability of liquidator's payment

Question and answer:

Is the amount you received as payment of a debt included in your assessable income?

No.

This ruling applies for the following period:

1 July 2011 to 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances:

You were owed a debt by a Company.

The debt was assigned to you by a Court Order

The Company that owed the debt to you was placed in liquidation.

The liquidator of the Company wrote to you on, advising that you would receive an amount as payment of the debt.

The amount you received was less than the value of the debt.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 6-10.

Income Tax Assessment Act 1997 Part 3-1.

Reasons for decision

Ordinary and statutory income - general

The assessable income of an Australian resident taxpayer includes all the ordinary and statutory income they receive from all sources, in or out of Australia, in an income year.

Ordinary income includes such things as salary and wages or interest payments and is included in your assessable income under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

If an amount is not ordinary income, it may still be included in your assessable income by a specific provision of the income tax laws. Capital gains for example are included in your assessable income under the capital gains tax (CGT) provisions contained in Part 3-1 of the ITAA 1997.

The amount you received as payment for the debt owed to you does not constitute ordinary income and is not included in your assessable income under the provisions of section 6-5 of the ITAA 1997.

However, the debt owed to you was a CGT asset. As such, it is necessary to examine the application of the CGT provisions to your circumstances to determine the taxation treatment of the amount received.

Capital gains tax and the ending of a CGT asset

You can only make a capital gain or loss if a CGT event happens to a CGT asset you own.

A debt owed to you is a CGT asset.

There are numerous CGT events that may happen to a CGT asset. They include CGT event C2, which happens when a CGT asset ends in various ways including by being discharged.

We consider that when you received the payment from the liquidator that debt ceased to exist. Effectively, the debt was discharged by the payment and CGT event C2 took place at that time.

You will have made either a capital gain or loss from the CGT event, depending on whether or not the capital proceeds you received were greater than or less than the cost base/reduced cost base of the asset.

The payment you received from the liquidator are the capital proceeds you received for the discharge of the debt.

The cost base of a CGT asset includes the cost of acquiring the asset and certain other costs associated with acquiring, holding and disposing of the asset. The cost base is made up of the following five elements:

· money or property given for the asset,

· incidental costs of acquiring the CGT asset or that relate to the CGT event,

· costs of owning the asset,

· capital costs to increase or preserve the value of the asset or to install or move it, and

· capital costs of preserving or defending your ownership of or rights to the asset.

The reduced cost base of a CGT asset has the same five elements as the cost base, with the exception of the third element which is a balancing adjustment applicable to depreciating assets, but not to assets such as debts.

When no amount is actually paid for an asset you are taken in most cases to have received the asset for its market value at the time you became its owner. That market value effectively becomes the first element of the cost base of the asset in your hands.

In your case, the first element of the cost base/reduced cost base of the debt was its value at the time it was assigned to you.

As the cost base/reduced cost base of the debt exceeds the capital proceeds you received from the discharge of the debt, you have made a capital loss. The loss you have made will be the equivalent of the capital proceeds less the reduced cost base.

A capital loss can be applied to reduce any capital gains you may have in the income year you incur the loss.

If your total capital losses for an income year are more than your total capital gains for that year, the difference is your net capital loss for the year.

A capital loss or a net capital loss cannot be deducted from income but a net capital loss can be carried forward to later income years to be deducted from future capital gains.

There is no time limit on how long a taxpayer can carry forward a net capital loss but taxpayers must apply their net capital losses in the order they make them.

Conclusion

The payment received from the liquidator is not included in your assessable income for the year. However, you did make a capital loss when the debt was discharged and CGT event C2 took place. The loss will be the equivalent of the capital proceeds less the reduced cost base of the asset.

You can apply the loss to reduce any capital gains made in the income year.

If you end up with a net capital loss in the year, you can carry that loss forward to later income years to reduce future capital gains.