CGT: Bankruptcy - prior year net capital losses disregarded

If during an income year a taxpayer was released from certain debts under Part X of the Bankruptcy Act 1966 does subsection 102-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) prevent the taxpayer from taking into account a net capital loss made in an earlier income year in working out whether they made a net capital gain for the income year or any later income year?

Yes. If during an income year a taxpayer was released from certain debts under Part X of the Bankruptcy Act 1966 subsection 102-5(2) of the ITAA 1997 prevents the taxpayer from taking into account a net capital loss made in an earlier income year in working out whether they made a net capital gain for the income year or any later income year.

The taxpayer made a net capital loss during the 2000-2001 income year.

During the 2001-2002 income year the taxpayer was released from certain debts under Part X of the Bankruptcy Act 1966 .

Under subsection 102-5(1) of the ITAA 1997 any net capital losses from earlier income years can be applied to reduce capital gains in determining the net capital gain for an income year.

However, if during the income year a taxpayer became bankrupt or was released from debts under a law relating to bankruptcy, any net capital losses they made for an earlier income year must be disregarded in working out whether they made a net capital gain for the income year or a later one (subsection 102-5(2) of the ITAA 1997).

Because the taxpayer was released from certain debts under the Bankruptcy Act 1966 (a law relating to bankruptcy) during the 2001-2002 income year, any net capital loss made in an earlier income year is disregarded. Accordingly, the net capital loss carried forward from the 2000-2001 income year cannot be taken into account in the calculation of any net capital gain in the 2001-2002 income year or any later income year.