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The Clogged Loss Rule
Under this rule a person’s capital loss determined in respect of the disposal of an asset to a connected person is treated as a ‘clogged’ loss. In other words, the capital loss is ring-fenced and may be set off only against capital gains arising from disposals to the same connected person.
Whether a capital loss will be ring-fenced will depend on the relationship between the parties and the timing of that relationship.
A person must disregard any capital loss determined in respect of the disposal of an asset to the persons set out in the table below. Capital losses of this nature are ‘clogged’ (ring-fenced). The table also sets out the time when the relationship between the parties must be determined. One of the reasons for determining the relationship immediately after the disposal is that in some cases the relationship is established only after the transaction. This typically occurs, for example, in an asset-for-shares swap under which one person disposes of an asset to a company in exchange for shares in that company.
Person who must disregard capital losses
| Type of acquirer | When relationship with acquirer must be determined | Effective date |
| Connected person in relation to disposer | Immediately before disposal | 1 October 2001 |
| A company that is a member of the same group of companies as the disposer. | Immediately after disposal | Commencement of years of assessment ending on or after 1 January 2004 |
| A trust with a company beneficiary that is a member of the same group of companies as the disposer. | Immediately after disposal |
