CGT: Bankruptcy - current year capital losses not disregarded

Does subsection 102-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) require an individual taxpayer to disregard a capital loss made in the same income year as the taxpayer became bankrupt or was released from debts under a law relating to bankruptcy?

No. Subsection 102-5(2) of the ITAA 1997 does not require an individual taxpayer to disregard a capital loss made in the same income year as the taxpayer became bankrupt or was released from debts under a law relating to bankruptcy.

The taxpayer owned shares in a company that was placed in liquidation.

During the 2001-2002 income year the taxpayer received a statement in writing from the liquidator that the liquidator had reasonable grounds to believe there was no likelihood of a return to shareholders of the company during the course of its winding up.

Earlier in the 2001-2002 income year, the taxpayer had been released from certain debts under Part X of the Bankruptcy Act 1966 .

Under subsection 104-145(1) of the ITAA 1997, CGT event G3 happens if a taxpayer owns a share in a company and its liquidator declares in writing that they have reasonable grounds to believe (as at the time of the declaration) there is no likelihood that the shareholders in the company will receive any further distribution in the course of winding up the company. In such circumstances a taxpayer can choose, under subsection 104-145(3) of the ITAA 1997, to make a capital loss equal to the reduced cost base of their share.

If the taxpayer makes the choice under subsection 104-145(3) of the ITAA 1997 by the day they lodge their 2001-2002 income tax return, or within a further time allowed by the Commissioner, the taxpayer will make a capital loss in the 2001-2002 income year equal to the reduced cost base of their share.

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 (see ATO Interpretative Decision 2003/258).

However, subsection 102-5(2) of the ITAA 1997 only disregards net capital losses made in an income year earlier than the year in which the taxpayer became bankrupt or was released from debts. It does not disregard a capital loss made in, or a net capital loss the taxpayer has for, the same year as the taxpayer became bankrupt or was released from debts.

Therefore, if the taxpayer chooses to make a capital loss from CGT event G3, the capital loss can be taken into account in determining whether the taxpayer has a net capital loss (or net capital gain) for the 2001-2002 income year and any resulting net capital loss can be carried forward to later income years.