Private ruling: Capital loss from loan to private company
Published: September 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Q1: Did you make a capital gains tax (CGT) loss, in relation to a debt owed to you by your private company, on the day the company was deregistered? | A1: Yes

Relevant facts and circumstances: During the year ended 30 June 2011, you, as sole shareholder and director, registered your private company for the purpose of conducting share market options trading activities. In order to conduct trading activities, you had made capital contributions to your company, from your savings, from which the company incurred an overall trading loss. During the year ended 30 June 2013, the company was deregistered but, due to its overall trading loss, was unable to repay you the total of your original contributed (i.e., loaned) capital to the company.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 110-55

Reasons for decision: Summary: Section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) explains a debt owed to you is a CGT asset. Section 104-25 of the ITAA 1997 explains CGT event C2 happens when a CGT asset ends. Section 104-25 of the ITAA 1997 further explains you make a capital loss if the capital proceeds from the ending of the CGT asset are less than the asset's reduced cost base. The reduced cost base of a CGT asset is defined in section 110-55 of the ITAA 1997, which does not allow interest expense in its third element. Therefore, interest expense incurred on borrowings, in relation to a debt owed to you, will not form part of the reduced cost base. The time of CGT event C2 in relation to a debt owed to you will occur when you enter into the contract that results in the asset ending (for example, a settlement deed) or, if there is no contract, when the asset ends (for example, it becomes irrecoverable at law, when a company is deregistered). In your case, the funds you loaned (contributed) to the company was a CGT asset. When the company was deregistered, the debt owed to you by the company ended (which was the happening of CGT event C2 under section 104-25 of the ITAA 1997). As your capital proceeds from the ending of the debt were less than its reduced cost base, the amount of the debt you were unable to recover is a capital loss made by you. Your capital loss happened on the day the company was deregistered, which made the debt owed to you irrecoverable at law.