Issue
Can an entity, holding shares in a company that has filed a winding up petition, claim a capital loss as a result of a CGT event under Division 104 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No, the entity cannot claim a capital loss in respect of the shares under division 104 of the ITAA 1997 as the shares have neither been cancelled nor has the liquidator made a valid declaration that shareholders are unlikely to receive any further distribution from the winding up of the company.
Facts
The taxpayer purchased shares in a company. A few months later, the company filed a petition with the court for winding up. The company liquidators have stated verbally that the shares are worthless. However, the liquidators considered it was too early to make a declaration in writing.
Reasons For Decision
Where taxpayers own shares in a company that has been placed in liquidation they may realise a capital loss in respect of worthless shares in one of two ways: • CGT event C2 Section 104-25 of the ITAA 1997 : when the shares are cancelled as a result of the dissolution of the company; or • CGT event G3 section 104-145 of the ITAA 1997 : where a liquidator declares in writing that there is no likelihood that the shareholders will receive any further distribution in the course of winding up the company .
In this case, the shares have not been cancelled therefore CGT event C2 has not occurred.
Neither has the liquidator made a declaration in writing stating that there is no likelihood that the shareholders will receive any further distribution in the course of the winding up of the company. A verbal declaration by the liquidators is not a valid declaration in terms of subsection 104-145(1) of the ITAA 1997. Therefore a CGT event G3 has not occurred.
The taxpayer will not be able to claim a capital loss until the liquidators make a valid declaration or the shares end on their cancellation.