Edited version of private advice

Authorisation Number: 1052421970292

Date of advice: 15 August 2025

Ruling

Subject: Investment scam

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for money lost in a scam?

Answer 1

No.

Question 2

Did you realise a capital loss under subsection 104-20(1) of the Income Tax Assessment Act 1997 in the income year ended 30 June 20YY?

Answer 2

Yes.

This private ruling applies for the following period:

Year ending 30 June 20YY

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

You were cold called in early MM 20YY about an investment opportunity regarding Company A. The caller said they were from Investment Firm B.

DD MM 20YY you received an introduction follow-up email from an investment advisor reporting to be from Investment Firm B. The email included the investment advisor contact information and an introduction brochure to Investment Firm B. The email also included a Company ABC Investors Guide in the name of Investment Firm B. The guide detailed a PRE-IPO opportunity to invest in the company ABC.

During a phone call, the investment advisor told you that for a minimum investment of US$X,000 you could obtain XX units of Company A. Once you had agreed, you were sent a share purchase agreement (dated DD MM 20YY), which had payment terms of X days.

The Company A prospectus emailed to you

Key operations:

•                     The company specialises in providing affordable and realisable XX services, pioneering global XX through XX Company B, and developing a product.

Initial Public Offer (IPO) investing:

Eligibility and Process>

Pre-IPO investing allows early access to a company's growth trajectory, with opportunities for significant returns as the company matures. Investment Firm B provides access to Company A shares through private secondary markets, usually reserved for accredited investors.

Access to Shares: Typically, available to venture capitalists or employees, but now accessible through private secondary markets.

Investor requirements: Usually requires investors to be accredited and meet specific financial criteria.

Path to the IPO: Entrepreneur A has indicated the XX Company B's IPO will occur before Company A's, with plans to separate the two entities. Internet Company B's estimated valuation is $XXX billion, understanding its importance in Company A's growth strategy.

As part of the IPO XX.X billion shares are expected to be issued, with XX.X million shares restricted, and XX.XX million shares circulated. This IPO will allow investors to directly participate in XX Company B's business.

Rights Offering: Company A's shareholders will have the right to purchase shares of XX Company B at the predetermined price before the public offering.

Investing

You transferred $X,XXX on the DD/MM/20YY for the purchase of XX units in Company A.

You were than offered warrants (up to X for every unit you held), so you purchased XXX Company A warrants on the DD MM 20YY $XX,XXX.

You did receive fraudulent documents reporting to represent ownership of the initial shares purchased on DD/MM/20YY representing XX units.

You have also provided copies of bank transfers for the above amounts showing the transfers.

To date you have not received any received any returns, interest nor dividends from your investments.

During your dealings regarding the possible investments, you were in contact with two other representatives from the impersonators of Investment Firm B.

Attempts you have made to follow-up your investments

You tried to contact Investment Firm B on DD MM 20YY with no response for X days.

You then tried calling your contacts number Impersonator AB and the number had been disconnected.

The main office number kept going to message bank.

You called the Authorities link to report the possible fraud.

You submitted a fraud form to the Government Cyber Security Centre with reference - XXXXXXX.

You reported the fraud to fraudsters bank, the bank you transferred money to.

You reported the fraud to your bank.

You lodged a misconduct report with the relevant securities authority (copy attached to the application) dated DD/MM/20YY detailing the fraud.

A Cyber Report was lodged (attached to the ruling application).

You took steps to protect your own identity as a result of the fraudulent incident.

You contacted the real Investment Firm via their Legal Personal Representative(LPR) accountants on record.

You tracked real Investment Firm down to find out that they used to be based at the same office location that was on used by the fraudsters documentation.

You received an email form the LPR advisory on DD MM 20YY stating that you had been the victim of a potential scam using Investment Firm B's name.

The Director of Investment Firm B had subsequently phoned and lodged reports.

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 104-5

Income Tax Assessment Act 1997 subsection 104-20(1)

Income Tax Assessment Act 1997 paragraph 104-20(2)(b)

Income Tax Assessment Act 1997 subsection 104-20(3)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 116-20(1)

Income Tax Assessment Act 1997 section 116-60

Reasons for decision

Question 1

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for money lost in a scam?

Answer

No.

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income except to the extent they are losses or outgoings of capital or of a capital, private or domestic nature.

Case law has found that the loss, if due to misappropriation, is not deductible under section 8-1 of the ITAA 1997 but is capital in nature.

In AAT Case 4069 (1988) 19 ATR 3117; 88 ATC 244 the taxpayer company, at the suggestion of its solicitor, entrusted moneys to that solicitor as its agent for the purposes of acquiring gold bullion and its immediate pre-arranged re-sale at a profit. However, the solicitor misappropriated the money in advance of the proposed scheme. The company claimed as a deduction the loss incurred as a result of its dealings with the solicitor.

Mr P M Roach, Senior Member, determined that a deduction was not allowed because the taxpayer proposed to embark on a course of action intended to produce a profit and the sum of money to be invested in that project was capital as it was to provide the profit-making structure. The act of misappropriation by the solicitor occasioned the loss, not any dealing in bullion.

The view that a loss due to possible misappropriation is not deductible but is capital in nature is supported by Income Tax Ruling IT 2228 Income tax: futures transactions. In IT 2228 the Commissioner discusses the income tax implications of the various aspects of futures trading. Paragraph 36 deals with losses sustained as a result of fraudulent action of futures brokers or dealers. While your case does not involve a broker or dealer of futures, the same principles apply.

The Commissioner states:

36. Furthermore, it seems that there may be a number of cases where taxpayers engaged in futures transactions may have incurred losses not from futures contracts themselves but from futures brokers or dealers acting in a fraudulent manner. In managed accounts, for instance, a taxpayer may have deposited $20,000 with a broker to enter into futures contracts on the taxpayer's behalf. The taxpayer may be advised by the broker at a relevant time that losses amounting to $10,000 have been suffered. In fact, the losses will not have been incurred from genuine futures transactions. They may be incurred from fictitious transactions and, in some case, from misappropriation of the taxpayer's funds. It is difficult to say the losses incurred in these circumstances are losses incurred in carrying on a business or in carrying out a profit-making undertaking or scheme. They have more the character of losses of capital. Claims for deductions for losses incurred in these circumstances should be disallowed.

In your case, although it was your intention to make an investment, no income earning activity actually commenced. The funds you gave to the other party have the character of a loss or outgoing which is of a capital nature rather than a revenue nature. As the loss is capital in nature, you are not entitled to a deduction under section 8-1 of the ITAA 1997.

Question 2

Did you realise a capital loss under subsection 104-20(1) of the Income Tax Assessment Act 1997 in the income year ended 30 June 2025?

Answer

Yes.

Section 102-20 of Income Tax Assessment Act 1997 (ITAA 1997) states that you make a capital gain or capital loss if and only if a CGT event happens.

Section 104-5 of ITAA 1997 lists the CGT events that can happen.

The gain or loss is made at the time of the CGT event.

Although you intended to acquire shares in Company A, your money does not seem to have been invested in such acquisitions by the impersonators of Investment Firm B.

To date, all attempts to recover your money have been unsuccessful.

As the arrangement entered into is considered a scam, the total amount you transferred to the impersonators of Investment Firm B for investment is considered to be a debt or obligation owed by the impersonators of Investment Firm B.

From the information provided, the most relevant CGT event in your situation is considered to be CGT event C1.

Subsection 104-20(1) of ITAA 1997 states that CGT event C1 happens if a CGT asset you own is lost or destroyed.

Subsection 104-20(2) ITAA 1997 relevantly adds that the time of the event is when you first receive compensation for the loss, or if you receive no compensation - when the loss is discovered.

The words 'lost' and 'destroyed' are not defined in the Income Tax Assessment Acts and they take their ordinary meaning.

Paragraph 2 of Taxation DeterminationTD 1999/79: Income Tax: capital gains: does the expression 'lost or destroyed' for the purposes of CGT event C1 in subsection 104-20(1) of the Income Tax Assessment Act 1997 apply to:(a) a voluntary 'loss' or 'destruction'? (b) intangible assets? states:

The word 'lost' in its context in subsection 104-20(1) does not contemplate voluntary actions. The Macquarie Dictionary, 3rd ed, defines 'lost' as '1. past tense and past participle of lose' and defines 'lose' as '1. to come to be without, by some chance, and not know the whereabouts of: 'to lose a ring'. The word in its context in CGT event C1 suggests an involuntary rather than a voluntary act.

Paragraph 7 of TD 1999/79 confirms that CGT event C1 does not distinguish between tangible and intangible CGT assets.

A debt owed to you falls within the definition of a CGT asset in section 108-5 of the ITAA 1997.

Therefore, the debt or obligation owed to you by the impersonators of Investment Firm B is a CGT asset.

As you did not receive any compensation for the loss, CGT event C1 happened in MM 20YY when the loss was discovered.

You make a capital loss if the capital proceeds from the CGT event are less than the asset's reduced cost base.

The capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening; and the market value of any other property you have received, or are entitled to receive, in respect of the event happening.

As you did not receive any money or other property when the debt was lost, the capital proceeds is nil.

The reduced cost base for the debt is considered to be the amount you paid to the impersonators of Investment Firm B to invest on your behalf.

Therefore, the capital loss you made from CGT event C1 happening is the amount you paid to the impersonators of Investment Firm B to invest on your behalf.

Other comments

A capital loss you make in an income year can only be deducted from capital gains you make in that income year or later income years. There is no time limit on how long you can carry forward a net capital loss to offset against future capital gains.

If you later receive money or other property for the debt you may need to increase the capital proceeds by the amounts and re-calculate the capital loss and relevantly amend your tax assessments.