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Edited version of your private ruling
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Ruling
Subject: Investment losses
Question
Are you entitled to a deduction for the money lost as a result of a fraudulent investment?
Answer
No.
This ruling applies for the following periods:
Year ended 30 June 2012
The scheme commences on:
1 July 2011
Relevant facts and circumstances
You were contacted by an individual who posed as an employee of a managed index fund.
The individual advised you of an investment opportunity.
You deposited money which you had saved from your wages. Tax had been paid on this income when it was earned.
You deposited the money into their nominated account and they referred you to a website to check your account balance periodically.
Two months after this, you were contacted by an investigator were informed that the managed index fund was being investigated as a scam.
The money the fund had obtained from their clients was never invested and there was no such index fund.
When you attempted to recover your money, the website was no longer available.
You were not able to get in contact with the fund.
You have been informed that the index fund has been liquidated and fraud charges have been laid against the perpetrators.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1, and
Income Tax Assessment Act 1997 section 108-5(1)(b).
Reasons for decision
Summary
As the investment loss is considered to be capital in nature, you are not entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).
Detailed Reasoning
Section 8-1 of the 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 purposes 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. To be entitled to a tax deduction under section 8-1 of the ITAA1997 the loss would have to be incurred in carrying on a business of options trading for the purposes of gaining or producing assessable income.
In Taxation Ruling 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 in your case the loss was occasioned by the fraudulent actions of X, 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, you are not considered to be carrying on a business of investing. The money you gave to the fund has the character of a loss or outgoing which is of a capital nature rather than a revenue nature. The outlay brought into existence an asset that was to provide enduring benefits. The fact that the funds were fraudulently misappropriated by the fund does not change the nature of the loss. As the loss is capital in nature, you are not entitled to a deduction under section 8-1 of the ITAA 1997.
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