Broadly, a declaration must be in writing and state that there is reasonable grounds to believe that no further distributions will happen in connection with the worthless shares.
An investor cannot claim a capital loss where the declaration considers that the shares are worthless but it does not make a declaration that the shares are of little to no value.
Financial instruments include (but are not limited to) the following assets:
- Convertible notes
- Promissory notes
- Futures contracts
- Loans to the company
- Forward contracts and currency swap contracts
- Rights or options to acquire any of the above listed securities, including rights or options to acquire shares.
For shares, a declaration must be in writing and state that there are reasonable grounds to believe that there is no likelihood that shareholders in the company will receive any further distribution for their shares.
For financial instruments, the declaration must be in writing and state that the financial instruments have no value or have only negligible value.
Where the above requirements for declarations are not satisfied, an investor may not claim a capital loss.
To be able to crystallise a capital loss in respect of worthless shares there are generally three options:
- Continue to hold the worthless shares and wait for a court order to be issued cancelling the shares
- Where the relevant declarations have been made by the company administrator or liquidator, an investor may claim a capital loss in the income year the declaration is made
The investor may be able to sell their shares or financial instruments. Certain organisations such as www.delisted.com.au provide a service where they will purchase certain worthless shares
If no declaration is made by a liquidator or administrator, or the investor has not chosen to make a capital loss following a declaration, an investor may make a capital loss on their worthless shares when a court order is given to dissolve the company and the shares are cancelled. In addition, if a company is wound up voluntarily, shareholders may realise a capital loss either three months after a liquidator lodges a tax return showing that the final meeting of the company has been held, or on another date declared by a court.
An investor is not able to claim a capital loss where the assets they hold are regarded as being on revenue account for taxation purposes. This typically includes traditional securities and assets held by an investor as trading stock.
In addition, units in a unit trust or financial instruments relating to trusts are not considered to be eligible assets for which investors may be able to claim a capital loss.
Certain interests acquired under employee share schemes are also not considered eligible assets for which investors may be able to claim a capital loss.
If an investor chooses to make the capital loss when a declaration is made, the capital loss is equal to the reduced cost base of the shares at the time of the declaration by the liquidator or administrator. The cost base and reduced cost base of the worthless shares are then reduced to nil just after the liquidator or administrator makes the declaration. The capital loss can only be crystallised in this respect in the year the declaration was made.