Private ruling: CGT Losses- worthless shares
Published: April 2013
Ruling period: Income year ended 30 June 20ZZ
Date scheme commenced: 1 July 20YY

Ruling: Q1: Can the taxpayer choose to make a capital loss on a financial instrument in a company under CGT event G3 about a liquidator declaring shares worthless under section 104-145 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. In the year 19XX, the taxpayer applied and was allotted X amounts of financial instruments priced at $Y each which amounted to a total of $Z by Company A as trustee for Company B. The basic premise of these transactions was that holders of the financial instruments would provide funds to Company B in return for shares in Company C. Outcome of proceedings in court: In the year 20YY, Company A filed an appeal in court in respect of a judgment made in the year 20YY effective in 20YY. In the year 20ZZ, the court unanimously dismissed the appeal. In brief, the court found that: · Company B was at no time required to redeem the financial instruments by paying their face value in cash to holders of the financial instruments; and · Company B's debts to the holders of the financial instruments could only be discharged by Company B subscribing on behalf of financial instruments holders for shares in Company C. The court reiterated that the basic premise of the transactions was that holders of the financial instruments would provide funds to Company B in return for shares in Company C and that this placed financial instruments holders at risk because the value of their investments depended upon the value of shares of Company C. In the year 20ZZ, the taxpayer received a letter from Company A providing financial instruments holders with a final update on the status of the proof of debt lodged with the liquidator of Company B. In light of the court's decision, Company A confirmed that financial instruments holders will not receive a return on their investment.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 104-145

Reasons for decision: Summary: While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision. Subsection 104-145(1) of the ITAA 1997 provides that a CGT event G3 happens if you own shares in a company, or financial instruments issued by or created by 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 at the time of the declaration that: · 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 · 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(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. In this case, CGT event G3 happens as provided for by subsection 104-145(1) of the ITAA 1997 as Company A had declared in writing that it had reasonable grounds to believe at the time of the declaration that the converting notes in Company B have no value. In light of the court's decision, Company A had confirmed to financial instruments holders that the latter will not receive a return on their investment. As Company A had made the declaration that the financial instruments the taxpayer held were worthless, the taxpayer can choose to make a capital loss equal to the reduced cost base of the financial instruments as provided for by subsection 104-145(4) of the ITAA 1997. If the taxpayer chooses to make a capital loss, the cost base and reduced cost base of the financial instruments are reduced to nil just after Company A made the declaration as provided for by subsection 104-145(5) of the ITAA 1997.

Reasons for decision: These reasons for decision accompany the Notice of private ruling.