Edited version of private advice

Authorisation Number: 1051951741033

Date of advice: 22 February 2022

Ruling

Subject: CGT - shares - event G3 - liquidator's declaration

Question

Did CGT event G3 happen to your Company A shares in the 20XX-XX income year?

Answer

No.

This private ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Company A is an unlisted company that ran a business.

About X years ago, you purchased ordinary shares in Company A when your syndicate purchased the company from the retiring owner. You incurred other costs associated with the purchase. This was financed by a standalone interest only loan.

A couple of years later, you purchased further shares in Company A. At this time, the investment loan was re-financed by a different financial institution. All funds were borrowed on an interest only basis.

A couple of years later, X% of the original shares were transferred to a relative.

For the next couple of years, interest was capitalised, therefore, this was added to the loan balance.

Some years later, the loan was re-financed by a third financial institution, along with other investment loans as a principal and interest loan.

From the date of your purchase, the turnover had grown significantly. In the early years, Company A paid significant dividends. However, with the onset of the Global Financial Crisis, the company became squeezed for capital due to its funding arrangements and subsequently experienced difficult financial times.

A few years ago, Company A went into liquidation with liquidators appointed as at that date.

A letter from the liquidators dated shortly after their appointment is silent about any consequences for shareholders. It makes the following statement under the heading 'Return to Creditors:

Given the debts outstanding to priority and secured creditors, there will be no funds available to unsecured creditors from the sale of the company's asset.

Any return to unsecured creditors will be dependent upon recoveries from voidable transactions and an insolvent trading claim.

After contacting the liquidator, you received a letter from them dated (after the ruling year) stating in part:

... I can confirm that given the extent of the company's creditors, no surplus funds will be available in the liquidation for a distribution to be made to the company's shareholders.

You have also received a more recent e-mail from the liquidator stating:

I confirm the following:-

- The liquidator has not issued an 'Official Loss Declaration' to shareholders at any time during the liquidation.

- At no point during the liquidation has there been an expectation that sufficient funds would be available for a return to shareholders of the company. Accordingly, the Liquidator can confirm that as at the 20XX/20XX financial year, there was no expectation of a return to shareholders.

You have made a large capital gain from an unrelated CGT event during the 20XX-XX income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 section 104-145

Reasons for decision

Summary

Capital gains tax (CGT) event G3 did not happen to your Company A shares in the 20XX-XX income year.

Detailed reasoning

You can only make a capital gain or capital loss if a CGT event happens. You make the gain or loss at the time of the event.

Shareholders generally only make capital gains or losses when their ownership of their shares ends.

Shareholders continue to own their shares when a company goes into liquidation with their ownership generally only ending when the company is deregistered at the end of the liquidation process. CGT event C2 happens when the shares are cancelled due to the company being deregistered.

There can be a significant period of time between a company entering liquidation and the liquidation process being completed. A shareholder of a company in liquidation may hold valueless shares and be unable to crystallise the capital loss by transferring them to a new owner.

CGT event G3 can allow a shareholder of a company in liquidation to bring forward the time that they can claim the capital loss for the shares.

CGT event G3 happens if you own shares in a company ... and a liquidator ... of the company declares in writing that the liquidator ... has reasonable grounds to believe (as at the time of the declaration) that:

(a) for shares - there is no likelihood that shareholders in the company ... will receive any further distribution for their shares

The time of CGT event G3 is when the declaration was made.

TD 92/102 Income tax: capital gains: when does a CGT event happen to shares in a company, for the purposes of Part 3-1 and Part 3-3 of the Income Tax Assessment Act 1997, if the company is deregistered under the Corporations Law? states that 'a written declaration that addresses these matters is acceptable to the ATO'.

Is the letter dated shortly after the liquidator's appointment acceptable as a written declaration for the purposes of CGT event G3?

No. This letter is only preliminary in nature and was written shortly after the liquidators began. It is silent about the effect of the liquidation on shareholders.

Is the letter dated (after the ruling year) acceptable as a written declaration for the purposes of CGT event G3?

Yes. This letter specifically states that shareholders will not receive any distributions for their shares.

CGT event G3 will happen in the later income year as a result of this declaration. Any capital loss you choose to make from it will not be available to reduce the capital gain you made in the 20XX-XX income year.

Is the more recent e-mail acceptable as a written declaration for the purposes of CGT event G3?

No, because an effective declaration has already been made, being the letter dated (after the ruling year). In any event, it would not be capable of backdating the effective date of the earlier declaration because CGT event G3 is based on the date the written declaration was made and not the date the liquidator became aware of the situation.

The conclusions reached in this private ruling are based on the documents that you have obtained from the liquidator. You are free to seek other evidence for the existence of an earlier statement from the liquidators that might constitute a written declaration for the purposes of CGT event G3.

TD 92/101 notes that there is no requirement for the liquidator to notify shareholders that they have made a written declaration for the purposes of CGT event G3.

Note: Taxation Determinations TD 92/101 and TD 92/102 quote section 160WA of the Income Tax Assessment Act 1936 which is the original law. The same ideas are expressed in section 104-145 of the Income Tax Assessment Act 1997 being the re-written law (see Taxation Determination TD 2000/7).