Private ruling: Capital losses
Date of advice: 29 July 2022
Published: November 2022
Ruling period: Year ended 30 June XXXX
Date scheme commenced: XX/XX/XXXX

Ruling: Q1: Did you make a capital loss in the XXXX/XX income year from your investment in the XXXX Fund? | A1: No. | Q2: Has there been a CGT event with regards to the balance of your unitholding in the XXXX Fund? | A2: No.

Relevant facts and circumstances: 1. The Taxpayer own units in an investment Fund (the Fund). 2. The Fund is an Australian unregistered managed investment trust created by a Constitution. 3. The Fund provides term-based investment options that enable investors to invest money for a defined period of time with the option of monthly income distributions. The objective of the Fund is to provide investors with an attractive return. The investment Terms are set out in a Term Sheet. 4. The Fund primarily provides loans to a small group of borrowers (the Borrower). 5. Qualified investors are offered units at $1.00 each with a Minimum Investment Amount specified in the Term Sheet. 6. The Taxpayer acquired XXXXXX units in the Fund. The Term Sheet states that the investment term is for 12 months (from Allocation Date). 7. On xx/xx/xxxx, the Trustee advised the Taxpayer in writing that the investment was due to expire and outlined the options to withdraw or to rollover and continue your investment for a further term. 8. On xx/xx/xxxx, the Taxpayer submitted a Withdrawal Notice to the Fund Administrator within the requirements under the Term Sheet to fully withdraw the investment from the Fund. The Taxpayer was advised by the Trustee that due to adverse condition in the global capital market, the Borrower has failed to meet its interest and principal repayments due to the Fund and as a consequence payment on redemptions will immediately be suspended until further notice. 9. As a result of the loan to the Borrower being in default, the Trustee took legal actions which resulted in an order by the Court that the Borrower be wound up. 10. The Trustee advised that as a result of liquidation proceedings, the value of the loan to the Borrower, included within investment assets, has been written down to nil as it is currently uncertain how much of the loan will be recovered. 11. On xx/xx/xxxx, the Trustee advised that a redemption of units was made on a pro-rata basis to all current unitholders. The Trustee confirmed that XXXXX units were redeemed from the Taxpayer investment account for which the Taxpayer received $XXXXX. The Taxpayer's investment account in the Fund has a balance of XXXXXX units following the redemption. 12. In its latest report, the Liquidator advised that the liquidation of the Borrower is continuing and stated that having regard to the number of proceedings still to be resolved and the uncertainty regarding the recoveries to be made from the various investments of the Borrower, they do not expect to be in a position to estimate the timing and quantum of returns to investors until next year. No declaration was made by the Liquidator about the likelihood of any future return or distribution to creditors of the Borrower. 13. As at the date of this private binding ruling, the Taxpayer has not received any further distributions of income or capital in respect to the unitholding in the Fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20 | Income Tax Assessment Act 1997 Division 104 | Income Tax Assessment Act 1997 section 104-5 | Income Tax Assessment Act 1997 section 104-25 | Income Tax Assessment Act 1997 subsection 104-25(2) | Income Tax Assessment Act 1997 subsection 104-25(3)

Reasons for decision: Detailed Reasoning - Detailed reasoning: 1. Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or capital loss if and only if a CGT event happens to an asset of yours. The gain or loss is made at the time of the CGT event. For CGT purposes, shares in a company or units in a unit trust are included in the definition of a CGT asset. 2. CGT events are different types of transactions or events in respect to a CGT asset that may result in a capital gains or capital loss. For example, CGT event A1 is the most common event which happens if a CGT asset is being disposed. All other CGT events are listed in section 104-5 of the ITAA 1997. 3. The CGT event that is relevant to the Taxpayer's case is CGT event C2. Section 104-25 of the ITAA 1997 provides event C2 happens if ownership of an intangible CGT asset ends by the asset: (a) being redeemed or cancelled; or (b) being released, discharged or satisfied; or (c) expiring; or (d) being abandoned, surrendered or forfeited; or (e) if the asset is an option - being exercised; or (f) if the asset is a *convertible interest - being converted. 4. 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. [1] 5. Under CGT event C2, you will make a capital gain if the capital proceeds from the ending are more than the assets cost base. You will make a capital loss if those capital proceeds are less than the assets reduced cost base. [2] | Detailed Reasoning - Application to the Taxpayer's situation: 6. The Taxpayer invested XXXXXX units in the Fund. The units were issued at $1.00 each with an investment term due to expire in 12 months from the units Allocation Date. 7. The Fund objective is to generate returns for investors through providing loans to a small group of borrowers (the Borrower). 8. On xx/xx/xxxx, the Taxpayer submitted a Withdrawal Notice to the Fund Administrator within the requirement under the Term Sheet to fully withdraw the investment from the Fund. However, the Taxpayer was advised by the Trustee that due to adverse condition in the global capital market, the Borrower has failed to meet its interest and principal repayments due to the Fund and as a consequence payment on redemptions will immediately be suspended until further notice. 9. As a result of the loan to the Borrower being in default, the Trustee took legal actions which resulted in an order by the Court that the Borrower be wound-up. 10. On xx/xx/xxxx, the Trustee advised that a redemption of units was made on a pro-rata basis to all current unitholders. The Trustee confirmed that XXXXX units were redeemed from the Taxpayer investment account for which the Taxpayer received $XXXXX. The Taxpayer's investment account in the Fund has a balance of XXXXXX units following the redemption. 11. CGT event C2 happened to the redeemed units in the Fund, i.e., at the time the units were redeemed. 12. As the Taxpayer was issued XXXXXX units at a price of $1.00 per unit and the units were redeemed for the same price, the cost base of the units redeemed is $XXXXX. Therefore, no capital gains or losses were incurred from the redemption of the units as the capital proceeds you received equalled the cost base of the units. 13. There have been no further redemptions of the units or any other CGT event that has occurred in respect to the balance of the Taxpayer's unitholding in the Fund. Therefore, under the capital gains tax provisions, the Taxpayer has not realised any capital loss from the investment in the Fund which could claim against the Taxpayer's capital gains in the 2021/22 income year. | Detailed Reasoning - Question 2: Has there been a CGT event with regards to the balance of your unitholding in the XXXX Fund? | Detailed Reasoning - Detailed reasoning: 14. As stated above, CGT events are different types of transactions or events in respect to a CGT asset that may result in a capital gains or capital loss. 15. The loan to the Borrower being written down to nil by the Trustee due to uncertainty on how much of the loan can be recovered is not a CGT event for the purpose of the capital gains tax provisions 16. As discussed in question 1, CGT event C2 happened when XXXXX units were redeemed in the XXXX/XX income year. There have been no further redemptions of the units or any other CGT event that has occurred in respect to the balance of the Taxpayer's unitholding in the Fund. 17. Therefore, for the purpose of Division 104 if the ITAA 1997, no CGT event has happened to the Taxpayer's investment in the Fund apart from the redemption of XXXXX units in the XXXX/XX income year for which no capital gains or losses resulted. [1] Subsection 104-25(2) of the ITAA 1997. [2] Subsection 104-25(3) of the ITAA 1997.