Private ruling: loss on capital or revenue account
Published: September 2011
Ruling period: Year ending 30 June 2009 | Year ending 30 June 2010 | Year ending 30 June 2011
Date scheme commenced: 1 July 2008

Ruling: A2: No | Q1: As the person hired to trade the funds in foreign currency has been charged of fraud and imprisoned, the exact realisation of the losses cannot be identified due to lack of documentation. On this basis, can the losses, if on revenue account be apportioned across the years for amendment? | A3: No. | Q2: Where the amendment is limited to the two years, can any unclaimed losses be carried forward if on revenue account? | A4: No. | Q3: Were you either: (a) in an agency arrangement at law, even though there was no deed in writing (b) a sole trader contracting the services of the trader (c) the beneficiary of a bare trust | A5: Invalid. This is not a question which directly relates to a provision of the Income Tax legislation. | Q4: Where the losses are deductible, is any recoupment of those losses via a court order to be returned as assessable income? | A6: No. | Q5: Are the losses deductible to you? | A7: No.

Relevant facts and circumstances: You provided funds to the trader who claimed to be a professional foreign currency trader to trade on your behalf. The trader was to be paid a percentage of any profit made, and the remaining profits were to be paid to you. Any losses would be born totally by you. The trader accessed more funds from you based on the insistence that the trader was making profits and could increase the profits for you if you left the profits in their control to trade with. Thinking that profits were being made you agreed to leave the profits in the control of the trader. In reality you did not receive any profits from the trading. The trader was losing your money on the overall trades in foreign currency. You were under the misconception that the trader was making large profits, and you were contemplating the receipt of those profits at some future time. You have indicated that you transferred various amounts to the trader. You lost all of your funds on the foreign currency market through the trades. The funds were lost in the foreign currency trades and were not stolen from you. The trader was trading the funds but effectively losing the funds in bad trades overall. You have supplied documents which are to be read with and form part of the facts for this ruling:

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 8-1. | Income Tax Assessment Act 1997 Part 3.1 | Income Tax Assessment Act 1997 Section 100-35 | Income Tax Assessment Act 1997 Section 104-5 | Income Tax Assessment Act 1997 Section 104-25 | Income Tax Assessment Act 1997 Section 108-5

Reasons for decision: Detailed Reasoning - Question 1a: Is the loss in foreign exchange trading on capital account? | Detailed Reasoning - Answer: Yes. Based on your facts and circumstances it is considered that you were not carrying on a business of foreign currency trading. It is accepted that you had an intention or purpose to make a profit or gain from your investment, however the transaction is not considered to be a business operation or commercial transaction on your part. Therefore the transaction is not on revenue account. However, as you anticipated that by entering into the transaction with the trader, at some time in the future you would receive a return of your capital investment, and additional interest on the amount invested, it is accepted that the transaction was more than private in nature. The investment with the trader is capital in nature and will be brought to account for taxation purposes under the CGT provisions in Part 3-1. | Detailed Reasoning - Question 1b: Is the loss in foreign exchange trading on revenue account? | Detailed Reasoning - Answer: No. This has been discussed above in the response to question 1a. | Detailed Reasoning - Question 2: As the person hired to trade the funds in foreign currency has been charged of fraud and imprisoned, the exact realisation of the losses cannot be identified due to lack of documentation. On this basis, can the losses, if on revenue account be apportioned across the years for amendment? | Detailed Reasoning - Answer: No. It has been determined that the loss is on capital account. Based on your facts and circumstances that transaction you entered into with the trader is capital in nature. The relevant CGT asset is a debt owing to you by the trader. The most specific CGT event is C2. The time of the CGT event will be in the income year in which you become legally barred, either by discharge of bankruptcy of the trader or by way of deed of release, from collecting the debt. You will make a capital loss if the capital proceeds you receive are less than the reduced cost base of the debt. | Detailed Reasoning - Question 3: Where the amendment is limited to the two years, can any unclaimed losses be carried forward if on revenue account? | Detailed Reasoning - Answer: No. It has been determined that the loss is on capital account. The time of the CGT event will be in the income year in which you become legally barred, either by discharge of bankruptcy of the trader or by way of deed of release, from collecting the debt. | Detailed Reasoning - Question 4: Were you either: (d) in an agency arrangement at law, even though there was no deed in writing (e) a sole trader contracting the services of the trader (f) the beneficiary of a bare trust | Detailed Reasoning - Answer: Invalid. This is not a question which directly relates to a provision of the Income Tax legislation. However consideration of your circumstances and the character of your transaction having regard to your facts and the matters listed in TR 92/3 the following conclusion has been made. Based on your facts and circumstances it is considered that you were not carrying on a business of foreign currency trading. It is accepted that you had an intention or purpose to make a profit or gain from your investment, however the transaction is not considered to be a business operation or commercial transaction on your part. Therefore the nature of the relationship between yourself and the trader is similar to a standard financial investment arrangement. You provided funds to the trader to deal with as the trader so desired. In return you expected a return of your capital together with additional payments for interest. | Detailed Reasoning - Question 5: Where the losses are deductible, is any recoupment of those losses via a court order to be returned as assessable income? | Detailed Reasoning - Answer: No. It has been determined that the loss is on capital account. CGT event C2 will not occur until such time as you are legally barred from collecting the debt. Therefore the CGT event C2 will not occur whilst there are any legal proceedings underway which may result in the recoupment of any of your funds. | Detailed Reasoning - Question 6: Are the losses deductible to you? | Detailed Reasoning - Answer: No. It has been determined that the loss is on capital account. The investment with the trader is capital in nature and will be brought to account for taxation purposes under the CGT provisions in Part 3-1. | Detailed Reasoning - Detailed reasoning: All references to legislation are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated. Section 8-1 contains the provisions for general deductions and states: 8-1(1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income. 8-1(2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of a capital nature; or (b) it is a loss or outgoing of a private nature; or (c) It is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. A loss or outgoing of a capital nature is dealt with under the capital gains and losses (CGT) provisions in Part 3-1. A loss or outgoing of a private nature is not deductible. Whether a loss from a transaction is of a revenue, capital or private, nature depends on the circumstances of the case. Taxation Ruling TR 92/3 Income Tax: whether profits on isolated transactions are income provides guidance in determining whether profits from isolated transactions are income. Where the contemplated profits are of a revenue nature there may be a deduction available under section 8-1 for any associated losses Taxation Ruling TR 92/4 Income Tax: whether losses on isolated transactions are deductible . The term isolated transactions refers to: (c) those transactions outside the ordinary course of business of a taxpayer carrying on a business: and (d) those transactions entered into by non-business taxpayers. TR 92/3 at paragraph 6 states: A profit from an isolated transaction is generally income when both of the following elements are present: (a) the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and (b) the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction. The taxpayer's intention or purpose to make a profit or gain is discerned from an objective consideration of the facts and circumstances of the case. If the transaction or operation is outside the ordinary course of a taxpayer's business, the intention or purpose of profit-making must exist in relation to the transaction or operation in question. TR 92/3 at paragraph 13 provides guidance on the characterisation of the transaction and states: Some matters which may be relevant in considering whether an isolated transaction amounts to a business operation or commercial transaction are the following: (i) the nature of the entity undertaking the operation of the transaction; (j) the nature and scale of other activities undertaken by the taxpayer; (k) the amount of money involved in the operation or transaction and the magnitude of the profit sought or obtained; (l) the nature, scale and complexity of the operation or transaction; (m) the manner in which the operation or transaction was entered into or carried out; (n) the nature of any connection between the relevant taxpayer and any other party to the operation or transaction; (o) if the transaction involves the acquisition and disposal of property, the nature of that property; and (p) the timing of the transaction or the various steps in the transaction. We have considered your circumstances and the character of your transaction having regard to your facts and the matters listed in TR 92/3. | Detailed Reasoning - Conclusion: Based on your facts and circumstances it is considered that you were not carrying on a business of foreign currency trading. It is accepted that you had an intention or purpose to make a profit or gain from your investment, however the transaction is not considered to be a business operation or commercial transaction on your part. Therefore the transaction is not on revenue account. However, as you anticipated that by entering into the transaction with the trader, at some time in the future you would receive a return of your capital investment, and additional interest on the amount invested, it is accepted that the transaction was more than private in nature. The nature of the relationship between yourself and the trader is similar to a standard financial investment arrangement. You provided funds to the trader to deal with as the trader so desired. In return you expected a return of your capital together with additional payments for interest. The investment with the trader is capital in nature and will be brought to account for taxation purposes under the CGT provisions in Part 3-1. | Detailed Reasoning - CGT provisions in Part 3-1: You make a capital gain or loss only if a CGT event happens. There are a wide range of CGT events. The specific time when a CGT event happens is important for various reasons, in particular, for working out whether a capital gain or loss from the event affects your income tax for the current or another income year. Section 100-35 describes what is a capital gain or loss and states: 100-35 For most CGT events: · You make a capital gain if you receive (or are entitled to receive) capital amounts from the CGT event which exceed your total costs associated with that event. · You make a capital loss if your total costs associated with the CGT event exceed the capital amounts you receive (or are entitled to receive) from the event. Section 108-5 describes CGT assets and states: 108-5(1) A CGT assets is: (a) any kind of property; or (b) a legal or equitable right that is not property. 108-5(2) To avoid doubt, these are CGT assets: (a) part of, or an interest in, an asset referred to in subsection (1); (b) goodwill or an interest in it; (c) an interest in an asset of a partnership; (d) an interest in a partnership that is not covered by paragraph (c). Note 1: Examples of CGT assets are: · land and buildings; · shares in a company and units in a unit trust; · options; · debts owing to you: · a right to enforce a contractual obligation; · foreign currency. Based on your facts and circumstances it is considered that the asset you obtained when you transferred the money to the trader was a right to have the money you invested with the trader returned to you. The relevant CGT asset in your situation is the debt owing to you by the trader. A debt is an intangible CGT asset and is specifically listed as an example of a CGT asset in Note 1 to subsection 108-5(2). If more than one CGT event can happen, the one you use is the one that is the most specific to your situation. Section 104-5 provides a summary of the CGT events. The CGT event most specific to your situation is CGT event C2. Under section 104-25 CGT event C2 happens if your ownership of an intangible CGT asset ends in certain ways, including because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited. The time of the event is when a taxpayer enters into the contract that results in the asset ending. If there is no contract, the time of the event is when the asset ends in accordance with subsection 104-25(2). Subsection 104-25(3) provides that you make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. Division 110 tells you how to work out the cost base and reduced cost base of a CGT asset. ATO ID 2003/215 Income Tax Capital Gains tax: CGT event C2 - debtor bankrupted and ATO ID 2008/58 Income Tax Capital gains tax: CGT event C2 - unsecured note provide guidance on the time when CGT event C2 happens to a debt owed to a taxpayer. The mere writing off of a debt by a taxpayer is insufficient to constitute a cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment at law or in equity for the purposes of subsection 104-25(1). The debt will continue to exist until such time as the borrower is discharged from bankruptcy and as a result all provable debts are released. Alternatively, the debt may be extinguished by forgiveness under a deed of release such that the owner of the debt is legally barred from collecting the debt. It should be noted that a debt will not be extinguished if it is merely forgiven or abandoned without any legal impediment imposed on its collection. Based on your facts and circumstances CGT event C2 in section 104-25 will happen when the trader is discharged from bankruptcy and all provable debts are released. Alternatively you may extinguish the debt by forgiveness under a deed of release such that you are legally barred from collecting the debt from the trader. | Detailed Reasoning - Conclusion: Based on your facts and circumstances that transaction you entered into with the trader is capital in nature. The relevant CGT asset is a debt owing to you by the trader. The most specific CGT event is C2. The time of the CGT event will be in the income year in which you become legally barred, either by discharge of bankruptcy of the trader or by way of deed of release, from collecting the debt. You will make a capital loss if the capital proceeds you receive are less than the reduced cost base of the debt.

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