Edited version of private advice

Authorisation Number: 1051787989105

Date of advice: 9 December 2020

Ruling

Subject: CGT - losses

Question

Has a capital gains tax (CGT) event happened, such that you can claim a capital loss for the investment you made?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You invested in a debenture product and you have been issued with a promissory note.

The issuer has stopped paying the monthly interest payments and ASIC have taken legal action against them.

You have not received a declaration from a liquidator stating that they believe your investment has no value or only negligible value.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-145

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 110-55

Reasons for decision

You make a capital gain (or loss) if and only if a capital gains tax (CGT) event happens (section 102-20 of the ITAA 1997). The gain or loss is made at the time of the event. There are two CGT events that may apply to your situation, events C2 and G3.

CGT event C2

CGT event C2 in section 104-25 of the ITAA 1997 happens if your ownership of an intangible CGT asset ends in certain ways, including because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. The time of the event is when you enter into the contract that results in the asset ending. If there is no contract, the event happens when the asset ends (subsection 104-25(2) of the ITAA 1997).

Your ownership of the underlying debt which the debenture represents does not end when the debenture matures if the company defaults on repayment. Nor does it end if the company is placed in administration or liquidation whether this is before or after the debenture matures. The debt continues in existence. Per Emmett J in Federal Commissioner of Taxation v. Macquarie Health Corporation Limited & Ors (1998) 88 FCR 451; 98 ATC 5214; (1998) 40 ATR 349:

There is no doubt that the effect of winding up and of sequestration is that there is a restriction imposed on the capacity of a creditor to enforce payment of a debt without the leave of the Court. A creditor will not be entitled to payment from the debtor and if the creditor receives payment, he will be required to repay the amount to the liquidator or trustee in bankruptcy. In that sense, the creditor's remedies are converted into a right to prove in winding up or in the bankruptcy. However, it does not follow, in my view, that the debt ceases to exist. The right to enforce payment is restricted. Nevertheless, the right to prove in the winding up or bankruptcy is a right to prove in respect of the debt which continues to exist.

In following the above case, the Court, observing the relevant consequences of the making of a winding up order, in Federal Commissioner of Taxation v. Linter Textiles Australia Ltd (in Liq) (2003) 129 FCR 42; [2003] FCAFC 63:2003 ATC 4458; (2003) 52 ATR 502 noted that:

The rights of creditors cease to be rights in personam (although their debts are not released prior to dissolution or deregistration);...

Therefore, as the debt continues in existence after the debenture matures, the taxpayer's ownership of the debt does not end in one of the ways contemplated by subsection 104-25(1) of the ITAA 1997, regardless of whether the company is in administration or liquidation.

However, when a company is deregistered it ceases to exist. At that time, its debts, if any, are abandoned, surrendered or forfeited for the purposes of section 104-25 of the ITAA 1997, and CGT event C2 will happen.

CGT event C2 also happens if the owner of a debt executes a deed of release in favour of the borrower such that they are legally barred from collecting the debt. However, the mere writing off of a debt is insufficient to constitute a cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment at law, or in equity, for the purposes of subsection 104-25 of the ITAA 1997. Nor is it sufficient that a debt is forgiven or abandoned without any legal impediment imposed on its collection.

In your case, the company has not been deregistered, nor have you released the debt in favour of the company. Therefore, CGT event C2 has not happened.

CGT event G3

CGT event G3 in section 104-145 of the ITAA 1997 happens if you own financial instruments, issued by a company, and an administrator of the company declares in writing that they have reasonable grounds to believe (as at the time of the declaration) that the instruments have no value or have only negligible value. The time of the event is when the declaration was made.

A promissory note falls within the examples of a financial instrument under paragraph 104-145(3)(a).

In your case, there has been no declaration that the debentures have no value or have only negligible value, as a result CGT event G3 has not happened. As neither CGT event C2 nor G3 has occurred, you have not yet made a capital loss on your investment.