Edited version of your written advice

Authorisation Number: 1012824830860

Date of advice: 24 June 2015

Ruling

Subject: Capital gains tax - losses

Question 1

Are you able to claim a capital loss for a debt owed to you in the Company which was deregistered by the Australian Securities and Investments Commission (ASIC)?

Answer

Yes.

Question 2

Is the timing of the CGT event C2, the date of the Company deregistration initiated by ASIC?

Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2015.

The scheme commences on

1 July 2014.

Relevant facts and circumstances

You and your spouse loaned various amounts of funds, on various dates, to Company A.

The director of Company A was Mr B, who operated an accounting practice that you and your spouse had used for many years, and whose advice you had relied upon.

You and your spouse acted on the advice of Mr B and had lent amounts to Company A to assist with investments in property by Company A.

You and your spouse are not associated with the Company in any other way.

No specific rate of interest to be paid on the loaned amounts had been agreed upon between you and your spouse and Company A.

You and your spouse received varying interest amounts on numerous occasions, with your relevant share included in your assessable income in the income year in which the interest had been received.

Mr B passed away a number of years after your initial loan to Company A had occurred.

You and your spouse sought legal advice on the recovering of the principal loan amount and were advised that the prospect of successfully recovering the outstanding loan amount was minimal. As a result of this advice, you and your spouse decided to discontinue your efforts to recover the outstanding loan amount.

Company A entered into liquidation and was deregistered over five years after Mr B had passed away.

At the time of deregistration, Company A had no assets.

As at this date, the entire principal loan amount remains outstanding.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 108-20

Income Tax Assessment Act 1997 Subdivision 110-B

Income Tax Assessment Act 1997 Section 116-20

Income Tax Assessment Act 1997 Section 116-30

Reasons for decision

Generally, the CGT provisions apply in the following manner:

• A debt owed to you, or a right to repayment, is a CGT asset under section 108-5 of the ITAA 1997

• CGT event C2 happens when your ownership of a CGT asset ends by being redeemed, cancelled, or in certain other specified ways; and

• you make a capital gain or a capital loss as a result of a CGT event occurring to a CGT asset. However, a capital loss that you make from a personal use asset is disregarded in accordance with subsection 108-20(1) of the ITAA 1997.

In this case, the debt owed to you as a result of loaning the funds to Company A is a CGT asset. As the loaned funds had been made as an investment with the expectation of interest on the loan, which were and would have been included in your assessable income, the connection with the gaining or producing of your assessable income was established at the time the debt came to be owed. Accordingly, the debt owed to you is not a personal use asset and any capital loss made in relation to it will not be disregarded.

Taxation Determination TD 2000/7 outlines the Commissioner's view of when a CGT event occurs for the purposes of Parts 3-1 and 3-3 of the ITAA 1997 when a company is deregistered. It is stated at paragraph 1 that when a company is deregistered in accordance with the Corporations Law, CGT event C2 happens in respect of its shares. The determination provides that when a company is deregistered it ceases to exist and that the company's debts, if any, will be abandoned, surrendered or forfeited for the purposes of section 104-25 of the ITAA 1997.

In this case, Company A was deregistered, and it is viewed that your ownership of the debt has ended and CGT event C2 occurred. The time of the CGT event was when Company A was deregistered.

The general rules about capital proceeds are in section 116-20 of the ITAA 1997. However, these are modified by subsection 116-30(1) of the ITAA 1997. Subsection 116-30(1) of the ITAA 1997 provides that 'if you received no capital proceeds from a CGT event then you are taken to have received the market value of the CGT asset that is subject to the event'. The market value of the right at the time of the disposal is worked out as though the debt were not waived.

In the present case, it is necessary to determine the market value of the asset at the time Company A was deregistered. If the character of the loan is a contractual promise by the private company to pay the amount of the loan to you as creditor, can a market value exist for such a promise? Taxation Ruling TR 96/23 Income tax: capital gains: implications of a guarantee to pay a debt (TR 96/23) discusses this in a slightly different context, being the promise a creditor makes to a guarantor that it will advance funds to a principal debtor. However, the reasoning at paragraph 73 of TR 96/23 has application in the present case:

We cannot envisage that a market value exists for such a promise, in the sense of a value determined by an open and unrestricted market of willing (but not anxious) informed, independent buyers and sellers. In O'Brien (Inspector of Taxes) v. Benson's Hosiery (Holdings) Ltd [1978] 3 All ER 1057 … the UK Court of Appeal determined that 'there can be no market for what is unsaleable.' As the creditor's promise to a guarantor to make a loan to a third party lacks the commercial character of transferability, although technically assignable … , we accept that the market value of the promise made to the guarantor is nil.

Similarly in this case, although technically you and your spouse could have assigned your right to receive income under the loan, realistically there would be no market for the sale of such a right. The loan was an arrangement between you and your spouse and Company A. The Commissioner accepts that the market value of the debt would be nil if the debtor, being Company A in this case, cannot repay the debt.

In this situation, any examination of the circumstances by an informed buyer would no doubt have indicated scant likelihood of repayment of the debt, and the debt owed to you would therefore have a nil market value.

In conclusion, it is viewed that you and your spouse disposed of the debt owed to you under circumstances which fall under the description of CGT event C2 in section 104-25 of the ITAA 1997. The difference between the capital proceeds received, being nil in this case, and the reduced cost base of the debt owed to you will give rise to a capital loss in the 2014-15 income year.

Note: Subdivision 110-B of the ITAA 1997 provides the rules about the reduced cost base of a CGT asset. Items of expenditure can only be included in your reduced cost base if they fit within the five elements described in the subdivision. The reduced cost base of a CGT asset is made up of:

• Element 1 - money or property given for the asset

• Element 2 - incidental costs of acquiring the CGT asset or that relate to the CGT event

• Element 3 - any balancing adjustment amount that is assessable because of a balancing adjustment for the asset or that would be assessable if certain balancing adjustment relief were not available

• Element 4 - capital costs to increase or preserve the value of your asset or to install or move it; and

• Element 5 -capital costs of preserving or defending your title or rights to your asset.

In this case, the reduced cost base of the debt owed to you and your spouse includes the amount of the funds loaned to Company A (Element 1), plus amounts such as any borrowing expenses incurred in setting up the loan (Element 2) and the legal expenses incurred to defend your right to the repayment of the debt owed to you (Element 5).