Edited version of private advice

Authorisation Number: 1052293070683

Date of advice: 30 August 2024

Ruling

Subject: Capital losses

Question

Has a CGT event happened in relation to your loans in the income year ending 30 June 20XX or 30 June 20XX?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Company A, Company B, Company C and Company D are a part of Group A.

On Date one, you entered into a contract with Company A to provide an unsecured loan of Amount A. You were to be paid interest on a per annum basis for providing this loan.

On Date two, you entered into a contract with Company D for the purchase of an off-the-plan apartment (Apartment one).

You paid a deposit to Company C for the purchase of Apartment one.

On Date three, Company D went into liquidation.

On Date four, you signed a contract with Company B. The terms of this contract included that you loaned a capital amount of amount two to Company B with the term of the loan being the completion of Apartment one.

Interest would accrue on the loan at a specific rate per annum. Repayment of the capital and interest amounts was to occur on completion of the apartment.

The capital and accrued interest was also to be repayable by Company B on demand in the event of default on completion of Apartment one.

As a result of certain dealings, the amount that you transferred to Company B on Date four was amount four.

On Date four, you also paid a deposit of amount four to be held for Apartment one.

At the date of rescission of the contract entered into on Date one with Company A on or about Date four, interest owed to you was amount five.

On Date six, you signed a contract for the purchase of an off-the-plan apartment (Apartment two).

On Date six, you transferred amount six to Company A which represented a deposit for purchase of Apartment two.

You are listed as a creditor being owed amount seven in the liquidator's report.

Company A went into liquidation on Date six.

On Date seven, you received a letter from the administrators, who advised that it was uncertain how much, if any, of your deposit you may receive back if you had agreed to release it to Company A. as an unsecured loan.

On Date eight, the administrators advised in their Voluntary Administrator Report that in order to complete the development that included Apartment two on a commercially sound basis and having regard to their legal obligations in relation to the sale of the property, they would be unable to recognise any previous payments of deposits.

On Date eight, you received a letter from the receivers with a proposal for you to continue with the contract for purchase of Apartment two (the Proposal). The Proposal was that if you completed the sale contract at the purchase price specified in your contract, Company A would recognise your deposit as a credit against the purchase price. However, any deposit above a set percentage of the purchase price would not be recognised under the Proposal.

On Date nine, you received a letter from the receivers giving you the opportunity to accept the declaration as part of the Proposal.

Construction of Apartment two was complete in 20XX.

You did not proceed with a contract to purchase Apartment one.

On Date ten, you received a letter from the receivers for Company A referencing their prior without prejudice invitation to treat (the Proposal) dated Date eight in relation to your existing contract of sale for Apartment 1. The letter advised that while you accepted the proposal you did not accept the declaration by the required due date. As a result, the apartment would now be marketed for public sale.

On Date ten, you also received a non-adoption letter from the receivers as you did not accept the Proposal. This letter allowed you to apply for and receive a refund of stamp duty already paid.

Apartment two was sold by mortgagee sale in 20XX.

On Date eleven, the director of the Group declared bankruptcy.

On Date twelve, you expressed interest in a class action being bought against the Group in an attempt to recoup some of your money. However, this action did not go ahead as insufficient funding was obtained to support bringing the action.

Unsecured creditors have been advised to stop all recovery action.

You have not received any indication from the liquidators regarding when the process of liquidation may be finalised.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 100-20

Income Tax Assessment Act 1997 section 102-25

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-145

Reasons for decision

Question

Summary

A capital gains tax (CGT) event did not happen in relation to your loans in the income year ending 30 June 2021 or 30 June 2022.

Detailed reasoning

CGT event C1

Section 104-20 of the ITAA 1997 provides that a capital gains tax (CGT) event happens when a CGT asset you own is lost or destroyed. The time of the event is when you first become aware of the loss or destruction; or if you receive compensation, when you receive the compensation.

Taxation Determination TD 1999/79 Income tax: capital gains: does the expression 'lost or destroyed' for the purposes of CGT event C1 in subsection 104-20(1) of the Income Tax Assessment Act 1997 apply to:(a)a voluntary 'loss' or 'destruction'? (b)intangible assets?(TD 1999.79) confirms that the word 'lost' is not defined in the legislation so takes its ordinary meaning.

The definition of loss in relation to a CGT event implies that an owner has been deprived of ownership involuntarily but could also occur as a result of some fault of the owner. Loss of an asset is usually restricted to situations where ownership is not assumed by another person.

Generally, the concept of 'destruction' applies only to tangible assets like buildings.

With regard to intangible CGT assets, the asset must be wholly lost, with no chance of recovery, for the circumstances to be covered by CGT event C1.

CGT event C1 will not happen to an intangible asset merely because its value is reduced (including being reduced to $nil).

CGT event C2

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being redeemed or cancelled; or expiring; or being abandoned, surrendered, or forfeited.

The occurrence of CGT event C2 includes a voluntary event.

The primary requirement for CGT event C2 is that your ownership of the asset ends. CGT event C2 will not happen while you continue to own the relevant CGT asset.

You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) ITAA 1997).

CGT event G3

Section 100-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states you can make a capital gain or loss only if a capital gains tax (CGT) event happens.

Subsection 104-145(1) of the ITAA 1997 provides that CGT event G3 happens if you own shares in a company, or financial instruments issued by or created by or in relation to a company, and a liquidator or administrator of the company declares in writing that the liquidator or administrator 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, or shareholders in the relevant class of shares, will receive any further distribution for their shares; or

(b) for financial instruments - the instruments, or class of instruments that includes instruments of that kind, have no value or have only negligible value.

Subsection 104-145(2) of the ITAA 1997 provides that the time of the event is when the declaration was made.

Subsection 104-145(3) of the ITAA 1997 provides that financial instruments referred to in subsection(1) include loans to the company.

Subsection 104-145(4) of the ITAA 1997 provides that you can choose to make a capital loss equal to the reduced cost base of your shares or financial instruments at the time of the declaration.

Subsection 104-145(5) of the ITAA 1997 provides that if you make the choice, the cost base and reduced cost base of the shares or financial instruments are reduced to nil just after the declaration was made.

Section 102-25 of the ITAA 1997 provides that if more than one CGT event can happen, the one you use is the one that is the most specific to your situation.

Application to your circumstances

You paid a deposit to Company C for the purchase of Apartment one. You later released this deposit as an unsecured loan to them. You also loaned a further amount to Company B and a further amount to Company A.

As you have loaned amounts to the various companies, the most specific CGT event to your situation is CGT event G3.

You have not received any written advice from the administrators stating that the loans have no value or have only negligible value. Therefore, a CGT event has not happened in relation to your loans in the income year ending 30 June 20XX or 30 June 20XX.