Private ruling: Deductions for losses
Published: August 2013

Ruling: Questions and answers: | 1. Are you entitled to a deduction for losses you sustained when money you sent overseas was stolen? | No. | 2. Are you entitled to a FOREX deduction for a loss you sustained when money you sent overseas was stolen? | No.

Relevant facts and circumstances: Your spouse transferred money into a company's trading account overseas on your behalf. You made a number of transfers over a period of months. During this period you were sent e-mails advising of trades being made on your behalf. You discussed with advisors over the phone and gave authority on what trades were to be made. You were under the belief you were making these trades and selling when the prices were good to make a profit. The company was a scam promoter. You made a request for the money in the trading account to be transferred to you and this is when you found out that you had been scammed. The operation was shut down and all e-mail addresses and phone numbers are invalid. This was a one off investment and you are not in the business of investing. You reported the scam to the authorities and you have not received any of your money back.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1 | Income Tax Assessment Act 1997 Division 775

Reasons for decision: Detailed Reasoning - General deductions: The general deduction provisions of the tax law are contained in section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) which allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, or in carrying on a business to gain or produce assessable income. Deductions are not allowed under section 8-1 of the ITAA 1997 if the outgoing for which a deduction is sought is capital, private or domestic in nature. Taxation Ruling IT 2228 Income tax: Futures Transactions provides guidance on the nature of losses incurred by a taxpayer in circumstances where the loss is caused by a futures broker or dealer acting in a fraudulent manner, or by the misappropriation of the taxpayer's funds. Taxation Ruling IT 2228 specifies that losses sustained in such cases are capital in nature. In your case, the actions of the overseas company amount to misappropriation of your funds. As stated above, such losses are capital in nature and not deductible under section 8-1 of the ITAA 1997. | Detailed Reasoning - Foreign currency gains and losses: The general principle of Division 775 of the ITAA 1997 is that foreign currency gains are included in your assessable income and foreign currency losses are deductible against your assessable income. These gains and losses are referred to as foreign exchange (forex) realisation gains and forex realisation losses. You may experience forex realisation gains and losses whenever a forex realisation event occurs. There are five main types of forex realisation events: 1. forex realisation event 1 happens if you dispose of foreign currency, or a right to receive foreign currency, to another entity, for example acquisition and disposal of a bond denominated in foreign currency; 2. forex realisation event 2 happens if you cease to have a right to receive foreign currency (otherwise than because you disposed of the right to another entity), for example where the right is discharged by receipt; 3. forex realisation event 3 happens if you cease to have an obligation to receive foreign currency, for example where an entity fulfils such an obligation; 4. forex realisation event 4 happens if you cease to have an obligation to pay foreign currency, for example delivery of currency under a foreign currency spot contract; and 5. forex realisation event 5 happens if you cease to have a right to pay foreign currency. It is important to note that a forex realisation event must occur before a forex gain or loss can be realised. Generally, you can deduct from your assessable income for an income year a forex realisation loss that you make as a result of a forex realisation event that happens during that year (subsection 775-30(1) of the ITAA 1997). In your case, as the circumstances surrounding your loss do not fit within any of the forex realisation events as detailed above, your loss incurred as a result of money fraudulently taken from you cannot be claimed as a forex deduction.