Class Ruling CR 2024/50

What this ruling is about: 1. This Ruling sets out the income tax consequences for the customers of Digital Surge Pty Ltd (Digital Surge) on 8 December 2022, that result from Digital Surge entering into voluntary administration on that date and from subsequent events. 2. Details of this scheme are set out in paragraphs 15 to 33 of this Ruling. 3. All legislative references in this Ruling are to the Income Tax Assessment Act 1997, unless otherwise indicated. Who this Ruling applies to 4. This Ruling applies to you if you: 5. This Ruling does not apply to anyone who is subject to the taxation of financial arrangements rules in Division 230 in relation to the scheme outlined in paragraphs 15 to 33 of this Ruling. Note: Division 230 will not apply to individuals unless they have made an election for it to apply. When this Ruling applies 6. This Ruling applies from 1 July 2022 to 30 June 2028. Administration 7. The following did not result in income tax consequences for Participating Creditors: CGT event C2 8. Under section 104-25, CGT event C2 happened: 9. CGT event C2 will also happen when the Creditors' Trust makes any further payments to an Eligible Customer Creditor. Capital gain or capital loss 10. A capital gain under CGT event C2 is made if the capital proceeds from the ending of the asset are more than the asset's cost base. You make a capital loss if the capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). Capital proceeds 11. The capital proceeds from the CGT event C2 that happened on termination of the DOCA is the market value of the Claim released against Digital Surge at the time the CGT event happened (subsection 116-20(1)). That market value is calculated as if the CGT event C2 had not occurred and was never proposed to occur (subsection 116-30(3A)). 12. Under subsection 116-20(1), the capital proceeds from CGT event C2 that happens as a result of the Creditors' Trust paying any amount to a Participating Creditor will be the total of any of the following paid to them: Cost base 13. Under Division 110, the cost base of each CGT asset will depend on the individual circumstances of the Participating Creditor. However, the first element of the cost base of the Claim against the Creditors' Trust will include the market value of the Claim against Digital Surge (subsection 110-25(2)). 14. Where CGT event C2 happens as a result of the Creditors' Trust making a payment to an Eligible Customer Creditor, the cost base will be proportionate to the cost base of the original Claim against the Creditors' Trust multiplied by the percentage of that Claim satisfied by the payment (subsection 112-30(3)). 15. The following description of the scheme is based on information provided by the applicant. If the scheme is not carried out as described, this Ruling cannot be relied upon. Background 16. Digital Surge is an Australian proprietary company limited by shares. The company operates digital asset and fiat currency broker accounts for third parties (Customers). 17. Customers sign up to access services offered by Digital Surge and contribute digital assets and fiat currency to accounts held and maintained by Digital Surge. 18. In order to create an account with Digital Surge, users are required to sign up through the company's website. In doing so, they agree to be bound by terms and conditions (T&Cs). 19. The T&Cs provide that Digital Surge does not act in the capacity of a trustee or custodian with respect to digital assets or fiat currency received from Customers. The T&Cs provide that Digital Surge becomes the legal owner of any assets received from Customers, and that they are not required to hold digital assets or fiat currency in segregated accounts for each Customer. 20. The T&Cs provide that, on demand, Digital Surge is to pay an amount to a Customer equal to the value credited to that Customer's account. Whether this payment is in the form of fiat currency or digital asset is at the discretion of Digital Surge. Administration 21. Under a broker agreement, Digital Surge transferred assets into the control of FTX Trading Ltd (Bahamas) and FTX Australia Pty Ltd. 22. On 11 November 2022, FTX Trading Ltd was placed into bankruptcy in the United States and FTX Australia Pty Ltd was placed into voluntary administration. On 8 December 2022, Digital Surge was placed into voluntary administration. 23. On 24 January 2023, at the second creditors meeting, it was resolved that Digital Surge would enter into a DOCA. 24. On 15 February 2023: Deed of Company Arrangement 25. The following relevant definitions are contained within the DOCA: 26. The key terms of the DOCA are: Creditors' Trust Deed 27. The relevant definitions contained in the DOCA set out at paragraph 25 of this Ruling have the same meaning in the Deed. 28. Additionally, the following relevant definition is contained within the Deed: 29. The key terms of the Deed are that: Post administration 30. The effect of the actions described in paragraph 24 of this Ruling were that: 31. On 17 February 2023, Digital Surge made the following payments on behalf of the Creditors' Trust to: 32. The payments made on 17 February 2023, were made either in digital currency, fiat currency or a mixture of both. When this Ruling does not apply 33. This Ruling will not apply to an entity if they are not an Eligible Priority Customer Creditor or Eligible Customer Creditor. Commissioner of Taxation 14 August 2024 Nature of claims 34. A CGT asset is any kind of property, or a legal or equitable right that is not property. [1] 35. The result of the T&Cs is that the Customer ceases to be the legal owner of the fiat currency or digital asset received by Digital Surge. In turn, the Customer obtains a right to demand repayment. That right is a CGT asset. [2] 36. The Claim that a Participating Creditor has against the Creditors' Trust is similarly a defined right to payment (albeit subject to the availability of amounts to make that payment). [3] Administration 37. Once appointed, administrators have control of the company and are able to perform the functions that the company or any of its officers could perform but for it being in administration. [4] 38. The appointment of administrators does not affect the CGT asset in the hands of the Customers. While Part 5.3A of the Corporations Act 2001 may temporarily place restrictions on their ability to exercise their rights, it does not affect them in a way that causes any CGT event to happen. 39. Part 5.3A of the Corporations Act 2001 similarly binds the creditors to act in accordance with the terms of the DOCA once it is executed. However, the DOCA does not affect the CGT asset held by the Participating Creditors in any way that would cause a CGT event to happen prior to its termination. 40. CGT event E1 does not happen for the Participating Creditors on settlement of the Creditors' Trust because they are not the ones who created the trust by deed or settlement. [5] Deed of Company Arrangement termination 41. When the DOCA is terminated, Digital Surge is released from all Claims held by Participating Creditors. [6] As a result, CGT event C2 happens for the Participating Creditors. [7] 42. The capital proceeds from a CGT event are the total of any money received in respect of the event happening, and the market value of any other property received in respect of the event happening. [8] 43. There is no determinative test for identifying a proprietary right. It is necessary to consider a range of factors while treating none as determinative. Factors that should be considered include (but are not limited to) [9] : 44. In weighing the relevant factors, it is considered that the Claims against Digital Surge and the Creditors' Trust are property within the meaning of Part 3-1. 45. As the Claim against the Creditors' Trust is property, its market value forms part of the capital proceeds received by Participating Creditors when the DOCA terminated. 46. If the market value of the Claim against Digital Surge at the time the DOCA terminated was more or less than those capital proceeds, the Participating Creditors' capital proceeds are replaced with the market value [11] of the Claim against Digital Surge. [12] 47. The value of a Participating Creditor's Claim against Digital Surge will form part of the first element of cost of the Claim they receive against the Creditors' Trust. [13] 48. Whether any other amounts form part of the cost base of this CGT asset will depend on the individual circumstances of the Participating Creditor. Payments 49. When an Eligible Priority Customer Creditor received a payment in the amount of the entirety of their Claim against the Creditors' Trust, their right to payment by the Creditors' Trust was satisfied in full and CGT event C2 happened. [14] 50. Where an Eligible Customer Creditor receives a payment that partially satisfies their right to payment from the Creditors' Trust, CGT event C2 happens. [15] In this situation, the cost base of the asset to which CGT event C2 happens is determined proportionately in accordance with the formula in subsection 112-30(3). 51. Where an Eligible Customer Creditor receives a payment that completely satisfies their right to payment from the Creditors' Trust, CGT event C2 happens. [16] The cost base will be the amount of the cost base that has not been apportioned to any previous partial payments. [17] © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Class of entities or scheme: 25. The following relevant definitions are contained within the DOCA: 26. The key terms of the DOCA are: | Creditors' Trust Deed: 27. The relevant definitions contained in the DOCA set out at paragraph 25 of this Ruling have the same meaning in the Deed. 28. Additionally, the following relevant definition is contained within the Deed: 29. The key terms of the Deed are that: | Post administration: 30. The effect of the actions described in paragraph 24 of this Ruling were that: 31. On 17 February 2023, Digital Surge made the following payments on behalf of the Creditors' Trust to: 32. The payments made on 17 February 2023, were made either in digital currency, fiat currency or a mixture of both. | When this Ruling does not apply: 33. This Ruling will not apply to an entity if they are not an Eligible Priority Customer Creditor or Eligible Customer Creditor. Commissioner of Taxation 14 August 2024 | Nature of claims: 34. A CGT asset is any kind of property, or a legal or equitable right that is not property. [1] 35. The result of the T&Cs is that the Customer ceases to be the legal owner of the fiat currency or digital asset received by Digital Surge. In turn, the Customer obtains a right to demand repayment. That right is a CGT asset. [2] 36. The Claim that a Participating Creditor has against the Creditors' Trust is similarly a defined right to payment (albeit subject to the availability of amounts to make that payment). [3] | Administration: 37. Once appointed, administrators have control of the company and are able to perform the functions that the company or any of its officers could perform but for it being in administration. [4] 38. The appointment of administrators does not affect the CGT asset in the hands of the Customers. While Part 5.3A of the Corporations Act 2001 may temporarily place restrictions on their ability to exercise their rights, it does not affect them in a way that causes any CGT event to happen. 39. Part 5.3A of the Corporations Act 2001 similarly binds the creditors to act in accordance with the terms of the DOCA once it is executed. However, the DOCA does not affect the CGT asset held by the Participating Creditors in any way that would cause a CGT event to happen prior to its termination. 40. CGT event E1 does not happen for the Participating Creditors on settlement of the Creditors' Trust because they are not the ones who created the trust by deed or settlement. [5] | Deed of Company Arrangement termination: 41. When the DOCA is terminated, Digital Surge is released from all Claims held by Participating Creditors. [6] As a result, CGT event C2 happens for the Participating Creditors. [7] 42. The capital proceeds from a CGT event are the total of any money received in respect of the event happening, and the market value of any other property received in respect of the event happening. [8] 43. There is no determinative test for identifying a proprietary right. It is necessary to consider a range of factors while treating none as determinative. Factors that should be considered include (but are not limited to) [9] : 44. In weighing the relevant factors, it is considered that the Claims against Digital Surge and the Creditors' Trust are property within the meaning of Part 3-1. 45. As the Claim against the Creditors' Trust is property, its market value forms part of the capital proceeds received by Participating Creditors when the DOCA terminated. 46. If the market value of the Claim against Digital Surge at the time the DOCA terminated was more or less than those capital proceeds, the Participating Creditors' capital proceeds are replaced with the market value [11] of the Claim against Digital Surge. [12] 47. The value of a Participating Creditor's Claim against Digital Surge will form part of the first element of cost of the Claim they receive against the Creditors' Trust. [13] 48. Whether any other amounts form part of the cost base of this CGT asset will depend on the individual circumstances of the Participating Creditor. | Payments: 49. When an Eligible Priority Customer Creditor received a payment in the amount of the entirety of their Claim against the Creditors' Trust, their right to payment by the Creditors' Trust was satisfied in full and CGT event C2 happened. [14] 50. Where an Eligible Customer Creditor receives a payment that partially satisfies their right to payment from the Creditors' Trust, CGT event C2 happens. [15] In this situation, the cost base of the asset to which CGT event C2 happens is determined proportionately in accordance with the formula in subsection 112-30(3). 51. Where an Eligible Customer Creditor receives a payment that completely satisfies their right to payment from the Creditors' Trust, CGT event C2 happens. [16] The cost base will be the amount of the cost base that has not been apportioned to any previous partial payments. [17] © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).

Ruling: 1. This Ruling sets out the income tax consequences for the customers of Digital Surge Pty Ltd (Digital Surge) on 8 December 2022, that result from Digital Surge entering into voluntary administration on that date and from subsequent events. 2. Details of this scheme are set out in paragraphs 15 to 33 of this Ruling. 3. All legislative references in this Ruling are to the Income Tax Assessment Act 1997, unless otherwise indicated. | Who this Ruling applies to: 4. This Ruling applies to you if you: 5. This Ruling does not apply to anyone who is subject to the taxation of financial arrangements rules in Division 230 in relation to the scheme outlined in paragraphs 15 to 33 of this Ruling. Note: Division 230 will not apply to individuals unless they have made an election for it to apply. | When this Ruling applies: 6. This Ruling applies from 1 July 2022 to 30 June 2028. | Administration: 7. The following did not result in income tax consequences for Participating Creditors: | CGT event C2: 8. Under section 104-25, CGT event C2 happened: 9. CGT event C2 will also happen when the Creditors' Trust makes any further payments to an Eligible Customer Creditor. | Capital gain or capital loss: 10. A capital gain under CGT event C2 is made if the capital proceeds from the ending of the asset are more than the asset's cost base. You make a capital loss if the capital proceeds are less than the asset's reduced cost base (subsection 104-25(3)). | Capital proceeds: 11. The capital proceeds from the CGT event C2 that happened on termination of the DOCA is the market value of the Claim released against Digital Surge at the time the CGT event happened (subsection 116-20(1)). That market value is calculated as if the CGT event C2 had not occurred and was never proposed to occur (subsection 116-30(3A)). 12. Under subsection 116-20(1), the capital proceeds from CGT event C2 that happens as a result of the Creditors' Trust paying any amount to a Participating Creditor will be the total of any of the following paid to them: | Cost base: 13. Under Division 110, the cost base of each CGT asset will depend on the individual circumstances of the Participating Creditor. However, the first element of the cost base of the Claim against the Creditors' Trust will include the market value of the Claim against Digital Surge (subsection 110-25(2)). 14. Where CGT event C2 happens as a result of the Creditors' Trust making a payment to an Eligible Customer Creditor, the cost base will be proportionate to the cost base of the original Claim against the Creditors' Trust multiplied by the percentage of that Claim satisfied by the payment (subsection 112-30(3)). 15. The following description of the scheme is based on information provided by the applicant. If the scheme is not carried out as described, this Ruling cannot be relied upon. | Background: 16. Digital Surge is an Australian proprietary company limited by shares. The company operates digital asset and fiat currency broker accounts for third parties (Customers). 17. Customers sign up to access services offered by Digital Surge and contribute digital assets and fiat currency to accounts held and maintained by Digital Surge. 18. In order to create an account with Digital Surge, users are required to sign up through the company's website. In doing so, they agree to be bound by terms and conditions (T&Cs). 19. The T&Cs provide that Digital Surge does not act in the capacity of a trustee or custodian with respect to digital assets or fiat currency received from Customers. The T&Cs provide that Digital Surge becomes the legal owner of any assets received from Customers, and that they are not required to hold digital assets or fiat currency in segregated accounts for each Customer. 20. The T&Cs provide that, on demand, Digital Surge is to pay an amount to a Customer equal to the value credited to that Customer's account. Whether this payment is in the form of fiat currency or digital asset is at the discretion of Digital Surge. | Administration: 21. Under a broker agreement, Digital Surge transferred assets into the control of FTX Trading Ltd (Bahamas) and FTX Australia Pty Ltd. 22. On 11 November 2022, FTX Trading Ltd was placed into bankruptcy in the United States and FTX Australia Pty Ltd was placed into voluntary administration. On 8 December 2022, Digital Surge was placed into voluntary administration. 23. On 24 January 2023, at the second creditors meeting, it was resolved that Digital Surge would enter into a DOCA. 24. On 15 February 2023: | Deed of Company Arrangement: 25. The following relevant definitions are contained within the DOCA: 26. The key terms of the DOCA are: | Creditors' Trust Deed: 27. The relevant definitions contained in the DOCA set out at paragraph 25 of this Ruling have the same meaning in the Deed. 28. Additionally, the following relevant definition is contained within the Deed: 29. The key terms of the Deed are that: | Post administration: 30. The effect of the actions described in paragraph 24 of this Ruling were that: 31. On 17 February 2023, Digital Surge made the following payments on behalf of the Creditors' Trust to: 32. The payments made on 17 February 2023, were made either in digital currency, fiat currency or a mixture of both. | When this Ruling does not apply: 33. This Ruling will not apply to an entity if they are not an Eligible Priority Customer Creditor or Eligible Customer Creditor. Commissioner of Taxation 14 August 2024 | Nature of claims: 34. A CGT asset is any kind of property, or a legal or equitable right that is not property. [1] 35. The result of the T&Cs is that the Customer ceases to be the legal owner of the fiat currency or digital asset received by Digital Surge. In turn, the Customer obtains a right to demand repayment. That right is a CGT asset. [2] 36. The Claim that a Participating Creditor has against the Creditors' Trust is similarly a defined right to payment (albeit subject to the availability of amounts to make that payment). [3] | Administration: 37. Once appointed, administrators have control of the company and are able to perform the functions that the company or any of its officers could perform but for it being in administration. [4] 38. The appointment of administrators does not affect the CGT asset in the hands of the Customers. While Part 5.3A of the Corporations Act 2001 may temporarily place restrictions on their ability to exercise their rights, it does not affect them in a way that causes any CGT event to happen. 39. Part 5.3A of the Corporations Act 2001 similarly binds the creditors to act in accordance with the terms of the DOCA once it is executed. However, the DOCA does not affect the CGT asset held by the Participating Creditors in any way that would cause a CGT event to happen prior to its termination. 40. CGT event E1 does not happen for the Participating Creditors on settlement of the Creditors' Trust because they are not the ones who created the trust by deed or settlement. [5] | Deed of Company Arrangement termination: 41. When the DOCA is terminated, Digital Surge is released from all Claims held by Participating Creditors. [6] As a result, CGT event C2 happens for the Participating Creditors. [7] 42. The capital proceeds from a CGT event are the total of any money received in respect of the event happening, and the market value of any other property received in respect of the event happening. [8] 43. There is no determinative test for identifying a proprietary right. It is necessary to consider a range of factors while treating none as determinative. Factors that should be considered include (but are not limited to) [9] : 44. In weighing the relevant factors, it is considered that the Claims against Digital Surge and the Creditors' Trust are property within the meaning of Part 3-1. 45. As the Claim against the Creditors' Trust is property, its market value forms part of the capital proceeds received by Participating Creditors when the DOCA terminated. 46. If the market value of the Claim against Digital Surge at the time the DOCA terminated was more or less than those capital proceeds, the Participating Creditors' capital proceeds are replaced with the market value [11] of the Claim against Digital Surge. [12] 47. The value of a Participating Creditor's Claim against Digital Surge will form part of the first element of cost of the Claim they receive against the Creditors' Trust. [13] 48. Whether any other amounts form part of the cost base of this CGT asset will depend on the individual circumstances of the Participating Creditor. | Payments: 49. When an Eligible Priority Customer Creditor received a payment in the amount of the entirety of their Claim against the Creditors' Trust, their right to payment by the Creditors' Trust was satisfied in full and CGT event C2 happened. [14] 50. Where an Eligible Customer Creditor receives a payment that partially satisfies their right to payment from the Creditors' Trust, CGT event C2 happens. [15] In this situation, the cost base of the asset to which CGT event C2 happens is determined proportionately in accordance with the formula in subsection 112-30(3). 51. Where an Eligible Customer Creditor receives a payment that completely satisfies their right to payment from the Creditors' Trust, CGT event C2 happens. [16] The cost base will be the amount of the cost base that has not been apportioned to any previous partial payments. [17] © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).


Appendix: Nature of claims: 34. A CGT asset is any kind of property, or a legal or equitable right that is not property. [1] 35. The result of the T&Cs is that the Customer ceases to be the legal owner of the fiat currency or digital asset received by Digital Surge. In turn, the Customer obtains a right to demand repayment. That right is a CGT asset. [2] 36. The Claim that a Participating Creditor has against the Creditors' Trust is similarly a defined right to payment (albeit subject to the availability of amounts to make that payment). [3] | Administration: 37. Once appointed, administrators have control of the company and are able to perform the functions that the company or any of its officers could perform but for it being in administration. [4] 38. The appointment of administrators does not affect the CGT asset in the hands of the Customers. While Part 5.3A of the Corporations Act 2001 may temporarily place restrictions on their ability to exercise their rights, it does not affect them in a way that causes any CGT event to happen. 39. Part 5.3A of the Corporations Act 2001 similarly binds the creditors to act in accordance with the terms of the DOCA once it is executed. However, the DOCA does not affect the CGT asset held by the Participating Creditors in any way that would cause a CGT event to happen prior to its termination. 40. CGT event E1 does not happen for the Participating Creditors on settlement of the Creditors' Trust because they are not the ones who created the trust by deed or settlement. [5] | Deed of Company Arrangement termination: 41. When the DOCA is terminated, Digital Surge is released from all Claims held by Participating Creditors. [6] As a result, CGT event C2 happens for the Participating Creditors. [7] 42. The capital proceeds from a CGT event are the total of any money received in respect of the event happening, and the market value of any other property received in respect of the event happening. [8] 43. There is no determinative test for identifying a proprietary right. It is necessary to consider a range of factors while treating none as determinative. Factors that should be considered include (but are not limited to) [9] : 44. In weighing the relevant factors, it is considered that the Claims against Digital Surge and the Creditors' Trust are property within the meaning of Part 3-1. 45. As the Claim against the Creditors' Trust is property, its market value forms part of the capital proceeds received by Participating Creditors when the DOCA terminated. 46. If the market value of the Claim against Digital Surge at the time the DOCA terminated was more or less than those capital proceeds, the Participating Creditors' capital proceeds are replaced with the market value [11] of the Claim against Digital Surge. [12] 47. The value of a Participating Creditor's Claim against Digital Surge will form part of the first element of cost of the Claim they receive against the Creditors' Trust. [13] 48. Whether any other amounts form part of the cost base of this CGT asset will depend on the individual circumstances of the Participating Creditor. | Payments: 49. When an Eligible Priority Customer Creditor received a payment in the amount of the entirety of their Claim against the Creditors' Trust, their right to payment by the Creditors' Trust was satisfied in full and CGT event C2 happened. [14] 50. Where an Eligible Customer Creditor receives a payment that partially satisfies their right to payment from the Creditors' Trust, CGT event C2 happens. [15] In this situation, the cost base of the asset to which CGT event C2 happens is determined proportionately in accordance with the formula in subsection 112-30(3). 51. Where an Eligible Customer Creditor receives a payment that completely satisfies their right to payment from the Creditors' Trust, CGT event C2 happens. [16] The cost base will be the amount of the cost base that has not been apportioned to any previous partial payments. [17] © AUSTRALIAN TAXATION OFFICE FOR THE COMMONWEALTH OF AUSTRALIA You are free to copy, adapt, modify, transmit and distribute this material as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).


What this Ruling is about | If this Ruling applies to you, and you correctly rely on it, we will apply the law to you in the way set out in this Ruling. That is, you will not pay any more tax or penalties or interest in respect of the matters covered by this Ruling.


Related rulings: TD 2014/12
Legislative references: ITAA 1936 6(1) ITAA 1997 Pt 3-1 ITAA 1997 104-25 ITAA 1997 104-25(1)(b) ITAA 1997 104-25(3) ITAA 1997 104-55(1) ITAA 1997 108-5 ITAA 1997 108-5(1) ITAA 1997 109-5(1) ITAA 1997 Div 110 ITAA 1997 110-25(2) ITAA 1997 112-30(3) ITAA 1997 112-30(4) ITAA 1997 116-20(1) ITAA 1997 116-30(2)(b)(ii) ITAA 1997 116-30(3A) ITAA 1997 Div 230 ITAA 1997 995-1(1) Corporations Act 2001 Pt 5.3A Corporations Act 2001 437A
Case references: National Provincial Bank Ltd v Ainsworth [1965] AC 1175