Edited version of private advice

Authorisation Number: 1052311443175

Date of advice: 01 October 2024

Ruling

Subject: CGT - capital losses

Question

Did a capital loss arise in respect of the loan you made to the Company upon the Company's deregistration in the 20XX income year under subsection 104-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes, a capital loss arose and may be used in calculating any net capital gain that may arise in a future income year.

This ruling applies for the following period:

Income tax year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You lodged your final return in 2018 upon retirement from the workforce.

In 20XX, you loaned $XXXX to the Company for their research and development towards a potential future product.

You didn't charge the Company interest.

You were a shareholder of the Company from XX XX 20XX to XX XX 20XX and a Company secretary from XX XX 20XX to XX XX XXXX.

There were never any capital repayments of the loan.

You had an income producing motive in making the loan.

The issuing of shares was deferred until the amount of money loaned to the Company was finalised.

On XX August 20XX, the Company was voluntarily deregistered with the Australian Securities and Investments Commission.

Relevant legislative provisions

Income Tax Assessment Act 1997 paragraph 8-1(1)(a)

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 subsection 104-25(1)

Income Tax Assessment Act 1997 subsection 104-25(2)

Income Tax Assessment Act 1997 subsection 104-25(3)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 108-20(1)

Income Tax Assessment Act 1997 paragraph 108-20(2)(d)

Income Tax Assessment Act 1997 subsection 108-25(2)

Reasons for decision

Section 108-5 of the ITAA 1997 states that a CGT asset can be any kind of property or a legal or equitable right that is not property.

Subsection 104-25(1) 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 timing of the C2 event is when you enter into the contract that results in the asset ending, or if there is no contract - when the asset ends (subsection 104-25(2) of the ITAA 1997).

You make a capital loss if the capital proceeds are less than the assets reduced cost base (subsection 104-25(3) of the ITAA 1997).

However, any capital loss you make from a personal use asset is disregarded (subsection 108-20(1) of the ITAA 1997). Paragraph 108-20(2)(d) of the ITAA 1997 states a personal use asset includes a debt arising other than in the course of gaining or producing your assessable income.

The phrase 'in the course of gaining or producing your assessable income' is used in paragraph 8-1(1)(a) of the ITAA 1997 which is the general deduction provision. For that purpose it has been held that a loan provided interest free by a shareholder to a company with a motive of enhancing the company's profitability and deriving dividends comes within that statutory language (FCT v Total Holdings (Aust) Pty Ltd (1979) 9 ATR 885 (Total Holdings)).

An intangible asset is one that lacks a physical presence and includes a loan.

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.

Application to your circumstances

In your circumstances, you had a CGT asset being the loan which was abandoned, surrendered or forfeited for the purposes of section 104-25 of the ITAA 1997 upon the company's deregistration. The asset's cost base was the amount of the loan and the capital proceeds were nil as the loan had a nil market value at the time of deregistration.

Therefore, CGT event C2 happened and the amount of the capital loss upon the Company's deregistration was the amount of the loan.

Subsection 108-20(1) of the ITAA 1997 does not apply as the loan was made with a motive of gaining or producing assessable income by way of dividends when the company became profitable (Total Holdings).

A capital loss is not a deduction that can be claimed against other income but rather it is available to be carried forward to reduce capital gains made in future years. For further information please refer to QC 66020 Calculating your CGT | Australian Taxation Office (ato.gov.au). The recognition of the capital loss does not require amendment of your 2018 assessment. Rather, it is relevant to any future income tax assessment should a capital gain arise necessitating lodgement of a tax return at that time.