Private ruling: Fees paid
Published: March 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014 | Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2012

Ruling: Q1: Are you entitled to a deduction for the licence fees and additional fees paid? | A1: No. | Q2: Will a capital gains tax (CGT) event occur when your contractual rights under the agreement are abandoned? | A2: Yes. | Q3: Do the fees form part of your cost base for CGT purposes? | A3: Yes.


Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1. | Income Tax Assessment Act 1997 Section 102-20. | Income Tax Assessment Act 1997 Section 108-5. | Income Tax Assessment Act 1997 Section 104-25. | Income Tax Assessment Act 1997 Division 110.

Reasons for decision: Detailed Reasoning - Allowable deductions: Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature. A number of significant court decisions have determined that for an expense to be an allowable deduction: • it must have the essential character of an outgoing incurred in gaining assessable income or, in other words, of an income-producing expense ( Lunney v. FC of T ; (1958) 100 CLR 478), • there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin NL v. FC of T , (1949) 78 CLR 47), and • it is necessary to determine the connection between the particular outgoing and the operations or activities by which the taxpayer most directly gains or produces his or her assessable income ( Charles Moore Co (WA) Pty Ltd v. FC of T , (1956) 95 CLR 344; FC of T v. Hatchett , 71 ATC 4184). A person who derives assessable income from investments may deduct certain expenditure incurred in connection with that income. However, money put into an investment account to earn income is generally regarded as a capital amount. The following guidelines for determining whether a loss or outgoing is of a capital nature have been set down by the High Court in Sun Newspapers Ltd. and Associated Newspapers Ltd. v. Federal Commissioner of Taxation (1938) 5 ATD 23; 5 ATD 87; 61 CLR 337: • the expenditure is related to the business structure itself, that is, the establishment, replacement or enlargement of the profit yielding structure rather than the money earning process, or • the nature of the advantage has lasting and enduring benefit, or • the payment is 'once and for all' for the future use of the asset or advantage rather than being recurrent and ongoing. A licence is generally a capital asset. In your case, the licence fees are a once and for all payment incurred to set up the investment which provides you with the enduring benefit for trading purposes for a period of several years. As such, the licence fees are regarded as a capital expense. Similarly, the money placed into the trading accounts was paid to earn income. Such an amount is not a recurring revenue expense and is considered to be capital in nature. Both the licence fees and the money placed into the accounts are capital expenses. Paragraph 8-1(2)(a) of the ITAA 1997 denies a deduction for capital expenses. Therefore any loss of your capital investment with entity A is not deductible. However, the amounts form part of the cost base of your capital asset as discussed below. | Detailed Reasoning - Capital gains tax provisions: Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens. The gain or loss is made at the time of the CGT event. As a result of you entering into the arrangement with LTS, it is considered that you acquired contractual rights. These contractual rights are CGT assets (section 108-5 of the ITAA 1997). Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being abandoned, surrendered or forfeited or being released, discharged or satisfied. The time of a CGT event C2 is when you enter into the contract that results in the asset ending or, if there is no contract, when the asset ends. In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423 it was recognised that a contract can come to an end merely by being treated as being at an end by the parties. It was held in Fitzgerald v. Masters (1956) 95 CLR 420 at 432 that: Where an 'inordinate' length of time has been allowed to elapse, during which neither party has attempted to perform, or called on the other to perform, it may be inferred that the contract has been abandoned. ... What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long-continued ignoring of the contract on both sides that (in the words of Rowlatt J.) "the matter is off altogether". In your case you had funds fraudulently taken from your account. You received no further contact from entity A. Your attempts to contact the relevant parties have been largely unsuccessful. You subsequently contacted the police. The Commissioner takes the view that in certain circumstances contractual rights can be discharged or come to an end merely by being treated as being at an end by the parties. That is, a CGT event C2 will happen when the contractual rights are abandoned. From the information provided, it is considered that it is unlikely that you will have any of the licence fees returned. However, further amounts of the deposit amount may be recovered. In your case, your contractual rights will be considered properly abandoned only when it is reasonably certain that there is no real hope of recovering any further funds. At this time, CGT event C2 will occur. The fees paid will form part of the cost base and reduced cost base as outlined in Division 110 of the ITAA 1997.

Relevant facts: You entered into an agreement with entity A hoping to receive a high rate of return. | Under the agreement you paid licence fees. The licence was for several years. Additional payments were deposited into an account. | Entity A operated on your behalf and also provided access to an analysis information package. Relevant information is received by the software and transmitted to your account. | Part of the agreement included you acknowledging that there is a risk associated that may potentially involve losing capital and you were willing to accept this risk. | Initially the investment performed well but a short time later money disappeared from your account with entity A. | You have tried to contact entity A and other related contacts, but they have not been contactable via phone or email. | You lodged a fraud report with the police. | A small amount has been recovered. | Entity A has been placed in the hands of liquidators. | You believe there is no chance of recovering any of the licence fees at all.