Private ruling: Capital gains tax - investment scam
Date of advice: 5 May 2016
Published: June 2016
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Is the taxpayer entitled to a capital loss under CGT event C2? | A1: Yes.

Relevant facts and circumstances: The taxpayer purchased units in investment A, by making payments to company A. The taxpayer received information about investment A from company A up until a certain date. After this date communication ceased abruptly and the taxpayer has received no information from company A in relation to investment A since that date. The taxpayer has tried to communicate with company A without success. It then became apparent to the taxpayer that the investment was a scam. It was then found that company A was listed as a fraudulent company on the ASIC website. The taxpayer contacted ASIC and the taxpayer was advised that they could contact a certain authority but there was a high probability that they would be unable to recoup any funds. The taxpayer then contacted a lawyer and they were advised that there would be next to no chance of a claim being successful. The taxpayer has decided not to sue as there would very little chance that they would successfully recoup any money from the scheme creators.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-20, | Income Tax Assessment Act 1997 section 102-25, | Income Tax Assessment Act 1997 section 104-5, | Income Tax Assessment Act 1997 section 104-10, | Income Tax Assessment Act 1997 section 104-20, | Income Tax Assessment Act 1997 section 104-25, | Income Tax Assessment Act 1997 section 104-30, | Income Tax Assessment Act 1997 section 104-145 and | Income Tax Assessment Act 1997 section 108-5.

Reasons for decision: Summary: A CGT asset under section 108-5 of the ITAA 1997 is any kind of property, or a legal or equitable right that is not property. It also includes part of, or an interest in, property or a legal or equitable right that is not property. Examples include land and buildings, debts owed to a taxpayer, or a right to enforce a contractual obligation. Generally you make a capital gain or a capital loss of a CGT event occurs to a CGT asset you own. You make a capital gain or capital loss if and only if a CGT event happens (section 102-20 of the ITAA 1997). The gain or loss is made at the time of the CGT event. Section 102-25 of the ITAA 1997 sets out the ordering rules as to which CGT event happens in a particular situation or circumstance. It is important that the correct CGT event is identified in accordance with the rules so that the proper CGT consequences can be determined for that particular situation or circumstance. This is also necessary as capital gains and losses may be calculated differently for different CGT events and exemptions may only apply to certain CGT events. In your case, the possible CGT events that may be relevant are: • CGT event A1 - disposal of a CGT asset (section 104-10 of the ITAA 1997) • CGT event G3 - liquidator declares shares or financial instruments worthless (section 104-145 of the ITAA 1997), or • CGT event C2 - cancellation, surrender and similar endings (section 104-25 of the ITAA 1997). As you were not able to contact the firm to dispose of the investment, CGT event A1 has not occurred. CGT event G3 has not occurred as there is no evidence that a liquidator has been appointed and there has not been a declaration that the company is being wound up. The most relevant CGT event in this situation may be CGT event C2. CGT event C2 occurs if your ownership of an intangible CGT asset ends by cancellation, surrender, redemption, release, discharge, satisfaction, abandonment, surrender, or forfeiture If it is the case that you have not received any legitimate investment, the relevant CGT asset will be a right to sue the relevant party for your loss. If CGT event C2 occurs in relation to the right, you will make a capital loss if the capital proceeds from the ending of the CGT event are more than the asset's cost base. You will make a capital loss if those capital proceeds are less than the asset's cost base. It is viewed that CGT event C2 has occurred in relation to your right to sue company A when you made the decision that it was not economical for you to pursue legal action against them. Therefore, you will be able to claim a loss in relation to the abandonment of your right to sue in the 2015-16 financial year.