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2 comments so far

  • When can we claim capital loss in a unit trust which was listed on the ASX, but has now been delisted and is being wound up. The trust in question is Rubicon America Trust, ordered to be wound up in 2009 or 2010. The liquidator has stated that no returns to unit holders are likely, but that they do not plan to declare the units worthless, because units in unit trusts are not "financial instruments". There must be a point at which investors can write off their investment and crystalline capital loss. Your answer would be much appreciated.

    Commenter
    Jvhandyman
    Date and time
    March 27, 2013, 4:57AM
    • Q: When can we claim capital loss in a unit trust which was listed on the ASX, but has now been delisted and is being wound up? The trust in question is Rubicon America Trust, ordered to be wound up in 2009 or 2010. The liquidator has stated that no returns to unit holders are likely, but that they do not plan to declare the units worthless, because units in unit trusts are not "financial instruments". There must be a point at which investors can write off their investment and crystallise capital loss.
       
       
      A: Company law restricts the transfer of shares in the company where a company is placed in liquidation or administration. This means that, in the absence of special capital gains tax (CGT) rules, you may not be able to realise a capital loss on shares that have become worthless – unless you declare a trust over them.
       
      However the CGT legislation sets out rules that determine the timing when a capital gain or loss arises. One such rule, CGT event G3, prescribes the circumstances when you can choose to realise a capital loss on worthless shares prior to the dissolution of the company (if you acquired the shares on or after 20 September 1985).
       
      This applies if you own shares in a company and a liquidator or administrator declares in writing that there is no likelihood you will receive any further distribution in the course of winding up the company.
       
      Financial instruments relating to a company can also be declared worthless by a liquidator or administrator. However,  CGT event G3 does not apply to units in unit trusts or financial instruments relating to trusts such as the Rubicon America Trust (RAT). This is because units in a unit trust are not included in the definition of assets able to use the G3 concession.
       
      In the ATO statement on its web site concerning the application of CGT G3, it indicates that you may not be able to realise a capital loss “unless you declare a trust over them”.
       
      Accordingly, the creation of a trust arrangement over the RAT units will give rise to a disposal of the units for market value consideration. As the units are effectively worthless,  a capital loss can be claimed if the units are held on capital account.
       
      Where units are proposed to be sold under such a wash sale, the potential application of Part IVA – the general anti-avoidance provisions – to cancel the benefit needs to be considered (TR 2008/1).
       
      Reliance on the ATO web site could be a defence to Part IVA penalties (if Part IVA were applied to deny the capital loss), and illustrates that perhaps the ATO does recognise that the legislation is defective in not extending the G3 concession to listed unit trusts. Note also capital losses can only be offset against capital gains.
       
      John Ross  is a  tax partner at Pitcher Partners Sydney

      Commenter
      John Ross
      Date and time
      April 10, 2013, 11:44AM

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