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Edited version of your written advice
Authorisation Number: 1012919250683
Date of advice: 27 November 2015
Ruling
Subject: Capital gains tax - capital loss
Question:
Did CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen in relation to your contractual rights arising from your investment?
Answer
Yes.
This ruling applies for the following periods:
Year ending 30 June 20ZZ
The scheme commenced on:
1 July 20YY
Relevant facts
You signed an agreement of sale with X ('X') as trustee for 'Y' trust for 1 share in Lot 'A' of a property development. Your share in Lot 'A' cost an amount which you paid in full.
The project was started in approximately 20XX. The aim of the project was to reclaim land and construct residential lots, condominiums, hotels and a marina. As of yet no land has been reclaimed and construction has not yet begun.
'X' is a non-resident registered company.
Since you signed the agreement, you have discovered that 'X' has been deregistered.
'X' has been in liquidation prior to this.
The liquidators have provided their final report advising that they have exhausted all reasonable avenues for recovery.
You are unable to pursue legal avenues to recover your investment due to a lack of monetary resources.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Division 104
Income Tax Assessment Act 1997 Section 108
Reasons for decision
As a result of entering into this agreement, it is considered that you acquired contractual rights. These contractual rights are CGT assets.
CGT event C2 happens if your ownership of an intangible CGT asset ends in various ways including due to the asset being released, abandoned or cancelled.
In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423 it was recognised that a contract can come to an end merely by being treated as being at an end by the parties. It was held in Fitzgerald v. Masters (1956) 95 CLR 420 at 432 that:
Where an 'inordinate' length of time has been allowed to elapse, during which neither party has attempted to perform, or called on the other to perform, it may be inferred that the contract has been abandoned. ... What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long-continued ignoring of the contract on both sides that (in the words of Rowlatt J.) "the matter is off altogether".
In this situation, it is considered that the contract has been abandoned with the effect that your rights under the contract have been discharged. Accordingly, it is considered that CGT event C2 has happened.
In this case, it is considered that CGT event C2 happened when the contract was abandoned with the effect that the contract was discharged (subsection 104-25(2) of the ITAA 1997). You will make a capital loss if those capital proceeds are less than the asset's reduced cost base.