Investments in a company in liquidation or administration

Shareholders and investors

You may be able to claim a capital loss if you're:

• a shareholder, and a liquidator or an administrator of a company declares in writing that they have reasonable grounds to believe there is no likelihood that shareholders will receive any further distribution for their shares
• an investor who holds a financial instrument in a company, and the liquidator or administrator of the company makes a declaration in writing that the financial instrument has no value or negligible value – such financial instruments may include  
  • convertible notes
  • debentures
  • bonds
  • promissory notes
  • loans to the company
  • futures contracts
  • forward contracts and currency swap contracts relating to the company
  • rights or options to acquire any of these, including rights or options to acquire shares in a company.

Liquidator or administrator's role

The decision about whether or not to make a declaration, and the time at which to make it, rests solely with the liquidator or administrator. They can make written declarations in relation to shares and financial instruments in the same statement – for example, a declaration in relation to a share and an option to acquire a share.

You can't claim a capital loss for a financial instrument, such as a right or option to acquire a share, if a liquidator or an administrator declares they consider the shares are worthless but does not make a declaration that they consider the financial instrument is of no value or has only negligible value.

When you can't choose to make a capital loss

You can't choose to make a capital loss for:

• a financial instrument where any profit made on the disposal or redemption of it would be included in your assessable income or any loss would be deductible – such as a traditional security or qualifying security
• a unit in a unit trust or a financial instrument relating to a trust
• certain interests acquired under employee share schemes.

Employee share schemes

If your shares or rights were acquired under an employee share scheme (ESS), these CGT rules do not apply to:

• a right acquired before 1 July 2009
• an ESS interest or an ESS interest that is a beneficial interest in a right that is forfeited and is taken to have been acquired.

This ensures the tax consequences for shares you acquire for less than their market value are dealt with under the ESS tax rules before any potential capital gains tax rules apply.

Conditions that must be satisfied

You may choose to make a capital loss if all the following conditions apply:

• You are an Australian resident for income tax purposes.
• You hold a share or financial instrument relating to a company that went into liquidation or administration.
• You acquired the share or financial instrument after 19 September 1985.
• A liquidator or administrator of the company made a written declaration that they believed the shares were worthless or the financial instruments had no value or negligible value.
• Any gain or loss you would make on the share or financial instrument is a capital gain or capital loss – that is, you hold the share or financial instrument as an investment asset and  
  • not as trading stock (see Share trading as business)
  • not as part of carrying on a business
  • not to make a short-term or ‘one-off’ commercial gain.

Working out the capital loss

If you choose to make the capital loss when the declaration is made, your capital loss is equal to the reduced cost base of the shares (or financial instruments) at the time of the declaration by the liquidator or administrator. If you make the choice, the cost base and reduced cost base of the shares (or financial instruments) are reduced to nil just after the liquidator or administrator makes the declaration. This is relevant for working out if you make a capital gain from any later capital gains tax (CGT) event happening to the shares (or financial instruments).

You indicate that you have chosen to make the capital loss by the amounts you show at the capital gains tax question on your tax return for that year.

Receiving further payments after the declaration

You may receive a further payment in respect of your shares if, for example, court action was successful in recovering money for the company or its shareholders.

• Company dissolved more than 18 months after a payment: If you receive a payment after the date of the declaration and the payment is not assessable to you as a dividend, you may make a capital gain at the time you receive the payment.
• Company dissolved within 18 months of a payment: If the payment is made to you by a liquidator after the declaration and the company is dissolved within 18 months of a payment, the payment is included as capital proceeds on the cancellation of your shares (rather than you making a capital gain at the time of the payment). In preparing your tax return you may delay declaring any capital gain until your shares are cancelled, unless you are advised by the liquidator in writing that the company will not cease to exist within 18 months of you receiving the payment.

 

Where a company liquidation affects a large number of people, we may provide specific guidance on the tax implications. For further information you can:

• ask the company for details
• go to our legal database and search <company name> for class rulings – you may need to refine your search by ‘Rulings’.