Capital gains tax: CGT event C2 - contractual or other rights

Has CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happened to the taxpayer's rights against a company as a result of the company being placed in liquidation?

No. CGT event C2 did not happen to the taxpayer's rights when the company was placed in liquidation or when the liquidator advised the taxpayer that no funds were available to meet their claim. CGT event C2 may happen at a later time, for example, when the company is deregistered.

The taxpayer entered into a contract with a company after 19 September 1985 to acquire a specified piece of land. The taxpayer paid the purchase price but a transfer could not be effected because the land which the taxpayer was to acquire had not been subdivided.

Due to problems with the proposed subdivision, the company instructed a solicitor to lodge a caveat on behalf of several purchasers, including the taxpayer, to protect their interests.

Without notifying the taxpayer, the company removed the caveat in order to mortgage the land as security for a loan.

The company could not repay the loan. A liquidator was appointed to the company and the land was sold.

The taxpayer lodged a proof of debt with the liquidator of the company but has been advised that there are no funds available for distribution to unsecured creditors (of which the taxpayer is one).

The liquidation of the company has not been completed.

The taxpayer's asset in this case is their rights against the company in respect of the purchase price paid for the land.

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset ends because it expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. The time of the event is when a taxpayer enters into the contract that results in the asset ending. If there is no contract, the event happens when the asset ends.

The taxpayer's rights did not end when the company was placed in liquidation. Emmett J in discussing the rights of creditors in Federal Commissioner of Taxation v. Macquarie Health Corporation Limited & Ors (1998) 88 FCR 451; 98 ATC 5214; (1998) 40 ATR 349 said: There is no doubt that the effect of winding up and of sequestration is that there is a restriction imposed on the capacity of a creditor to enforce payment of a debt without the leave of the court. A creditor will not be entitled to payment from the debtor and if the creditor receives payment, he will be required to repay the amount to the liquidator or trustee in bankruptcy. In that sense, the creditor's remedies are converted into a right to prove in the winding up or in the bankruptcy. However, it does not follow, in my view, that the debt ceases to exist. The right to enforce payment is restricted. Nevertheless, the right to prove in the winding up or bankruptcy is a right to prove in respect of the debt which continues to exist.

In the context of bankruptcy Emmet J noted that 'it is the discharge from bankruptcy which extinguishes the debts of a bankrupt'. He went on to state that 'whether or not there is an analogy in the context of the winding up of a company, that question does not arise in the present case'.

The advice from the liquidator that no distribution will be made to any unsecured creditors is not enough to end the taxpayer's rights in one of the ways contemplated by subsection 104-25(1) of the ITAA 1997. If further funds became available to the liquidator, the taxpayer may be entitled to a distribution.

Accordingly CGT event C2 has not happened in relation to the taxpayer's rights.

CGT event C2 may happen if: • for example, the taxpayer executes a deed of release in favour of the company (Taxation Determination TD 95/29), or • the company is deregistered (Taxation Determination TD 2000/7).