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Edited version of private ruling
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Ruling
Subject: capital gains tax and shares - capital gain tax event
Issue 1
Has a capital gains tax event occurred to enable you to claim a capital loss resulting from a failed investment in Company?
No.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Issue 2
Question 1
Has a capital gains tax event occurred to enable you to claim a capital loss resulting from a failed investment through Company B?
No.
This ruling applies for the following period
Year ended 30 June 2010
The scheme commenced on
1 July 2009
Relevant facts and circumstances
Issue 1
You invested in a non-resident company through an investment company.
You were issued with share certificate for a parcel of shares acquired several years ago.
A sum of Australian dollars was transferred to the investment company through a currency exchange company located overseas.
The investment company merged with another non-resident company. The company had a website address.
More than a year ago, you were advised that the company would not be listed on the stock exchange.
You made several attempts to dispose of the shares to a 3rd party which failed.
The shares have a declared value of zero in a "statement of holdings".
Issue 2
You had an opportunity to invested in international commodity options in unleaded petrol through an investment company.
You conducted basic checks into the company's background and felt confident in their credentials and proceeded with your investment.
You had access to a company website.
You forwarded a sum of Australian dollars to the company through a currency exchange company located overseas.
You have contacted a foreign regulator of futures and option commodities, by email to confirm the existence of the company. The response indicated that they did not exist.
You found that the company website is no longer accessible.
You have discovered that the transaction is likely to have been a fraudulent scheme.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 102-20,
Income Tax Assessment Act 1997 Section 104-10,
Income Tax Assessment Act 1997 Section 104-25,
Income Tax Assessment Act 1997 Section 104-145,
Income Tax Assessment Act 1997 Section 108-5 and
Income Tax Assessment Act 1997 Section 102-25.
Reasons for decision
You make a capital gain or capital loss if, and only if, a capital gains tax event (CGT) happens to a CGT asset that you have an ownership interest in. The gain or loss is made at the time of the CGT event.
The CGT events that may be relevant to your situation are:
CGT event A1 - Disposal of a CGT asset;
CGT event C2 - Cancellation, surrender and similar; and
CGT event G3 - Liquidator or administrator declares shares or financial instruments worthless.
CGT event A1 - Disposal of a CGT asset.
CGT event A1 occurs if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity.
In your situation, you have not disposed of the shares.
CGT event C2 - Cancellation, surrender and similar endings.
CGT event C2 occurs if the CGT asset ends by cancellation, surrender, redemption, release, discharge, satisfaction, abandonment, surrender, or forfeiture of an intangible CGT. At this point in time, no such ending of the CGT asset has occurred.
However, in your circumstances, this CGT event may occur in the future if the companies are wound up and de-registered.
CGT event G3 - Liquidator or administrator declares shares or financial instruments worthless.
CGT event G3 happens if you own a share or financial instrument in a company and its liquidator or administrator declares in writing that he or she has reasonable grounds to believe (as at the time of the declaration) there is no likelihood that the debtors of the company, or shareholders of a relevant class of shares, will receive any further distribution in the course of winding up the company.
If this CGT event occurs, you can choose to make a capital loss equal to the reduced cost base of your share (at the time of the declaration).
At this point in time, you have not been advised that the company involved is in the process of being wound up. You have also not received a notice that a liquidator or administrator has been appointed or that a declaration has been made that there is no likelihood that the shareholders or debtors will receive any further distributions in the course of winding up.
As CGT event G3 has not occurred at this time, you will not be able to choose to make a capital loss. If in the future a liquidator or administrator is appointed to this company and they make a declaration, you will be able to choose to make a capital loss.
As no CGT events have occurred in relation to your shares, you have not made a capital loss at this time. You may make a capital loss when you are able to establish that either CGT events A1, C2 or G3 occur.
Issue 2
Ownership of a CGT asset
Where a taxpayer has an opportunity to invest in a non-resident company and provides funds through an overseas currency exchange and does not received share certificates in return for their investment, the taxpayer may suspect that their investment may have been embezzled and that they do not own any shares.
In your situation, you have made repeated attempts to confirm your investment without success. You have contacted a foreign regulator of futures and option commodities, by email to confirm the existence of the company. The response indicated that they did not exist. You have provided funds but have not received share certificates in return for your investment.
Capital gains tax
A capital gains tax (CGT) asset 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 occurs. The gain or loss is made at the time of the CGT event.
If an investment in company shares has been embezzled, you do not hold ownership of the shares, the relevant CGT asset will be the right to sue Company B.
CGT event C2 relates to your right to sue, which is a CGT asset in it own right, however as no CGT event as occurred in relation to your right to sue, you have not made a capital loss at this time.
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