Edited version of private advice

Authorisation Number: 1051963628554

Date of advice: 22 March 2022

Ruling

Subject: Capital loss

Question

Can the capital loss made on your investment be carried forward to be offset against the capital gains made in the income year ending 30 June 2021?

Answer

Yes. CGT event C2 occurs when your right to the intangible asset is extinguished. This extinguishment occurred when Person A was discharged from all provable debts. As you have not had any capital gains against which to offset this capital loss, you can carry them forward each year until you have a capital gain. When you make a capital gain you must offset it against any capital losses you have carried forward.

This ruling applies for the following period:

Year ending 30 June 2021

The scheme commences on:

1 June 2005

Relevant facts and circumstances

You transferred several payments to Person A for investment purposes commencing in 20XX. These payments were made to Person A in return for the promise of a greater than market rate interest return. During the years from 20XX to 20XX, you made several payments to Person A totalling $XXX, XXX.

You received several payments of interest in relation to your investment from 20XX to 20XX

You reported the above payments as interest income in your income tax returns.

Person A was declared bankrupt in 20XX. They were discharged from all provable debts in the income year ending 30 June 20XX.

You were not able to recover your original investment, nor any interest payments remaining due.

You have recently sold a rental property and made a capital gain. You wish to apply the capital loss in the same income year as the capital gain. You have not made any other capital gains since 20XX.

Relevant legislative provisions

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 53 Bankruptcy Act 1966

Reasons for decision

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or loss is made only if a capital gains tax (CGT) event happens. The gain or loss is made at the time of the CGT event.

You make a capital gain or capital loss if a CGT event happens to a CGT asset.

A CGT asset is any kind of property, or a legal or equitable right that is not property. One of the examples provided in the notes to section 108-5 of the ITAA 1997 is a debt owed to the taxpayer. An unpaid loan is considered a debt that is owing to a taxpayer.

CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends in certain ways. This includes if 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 or, if there is no contract, when the asset ends.

ATO Interpretative Decision ATO ID 2003/215: Income Tax Capital Gains Tax CGT event C2- debtor bankrupted states the mere writing off of a debt by a taxpayer 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(1) of the ITAA 1997. However, when the bankrupt borrower is discharged from all provable debts, CGT event C2 happens as the debt is extinguished from that time.

Person A was discharged from all provable debts in the income year ending 30 June 20XX.

A net capital loss is not deductible from your assessable income. However, it can be applied against capital gains made in later income years. To the extent that a net capital loss has not been applied to offset capital gains in an income year, it is available to be applied against capital gains in later years.

Section 100-50 of ITAA 1997 tells you how to calculate your net capital gain or loss for a year. Step 2 requires you to reduce any remaining capital gains by any unapplied capital losses from earlier years. As you have not made any capital gains in the 20XX or subsequent income years, the full amount of your capital loss remains unapplied. You must apply this capital loss against any capital gains in the 20XX income year.

Application to your circumstances

You loaned an amount to Person A with the expectation that you would receive regular interest payments at an interest rate higher than the market rate at the time.

You received interest payments in the years from 20XX to 20XX.

In 20XX, Person A was declared bankrupt. You were listed as one of the creditors.

CGT event G3 is not applicable to your situation as the financial instrument issued was issued by an individual, not a company

CGT event C2 occurred when Person A was discharged from all provable debts. At that point, the debt is extinguished.

As you have not incurred any capital gains since that time, your capital loss is carried forward until the income year ending 30 June 20XX.

There are no time limits for carrying forward net capital losses and these losses can be offset against any capital gains realised in subsequent years.