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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your written advice

Authorisation Number: 1013088784302

Date of advice: 22 September 2016

Ruling

Subject: capital gains tax

Question

Can you claim a capital loss in the relevant financial year?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20YY

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You and a relative decided that you would make an investment to an entity.

You made the investment through two different loans to the entity that was administered by a contract.

The first loan was made in an income year and was to be repaid to you in three years.

You then provided an additional loan in an income year which was to be repaid to you in one year.

You were not to receive interest on the loan amount, but would receive a share of profits from the entity.

Both loans have now expired and you have not received any repayment of either loan or profits that should have been paid to you.

At a point in time you became aware that this arrangement may have been a scam.

It was at this time that you received an email from the entity offering you a full refund of your loaned amount.

You replied to the email confirming that you would like your loans to be repaid in full.

You exchanged numerous emails however it became clear to you the amount that you had loaned to the entity would not be repaid. You've had no further contact with the entity.

After a television program aired, an investigation and debt recovery firm became involved. The firm was able to build a case against the entity.

The case has been referred to a court in Australia however no outcome has been reached. The entity has stalled the process considerably and it may be a number of years before a decision is reached.

You believe at this stage you will not receive any compensation for the investment loans that you have provided to the entity.

You are a part of the class action that is currently taking place against an entity.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-10(2)

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 104-30

Income Tax Assessment Act 1997 Section 108-5

Reasons for decision

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that generally you make a capital gain or capital loss if a Capital Gains Tax (CGT) event has occurred to a CGT asset in which you own.

There are three factors to consider before you can make a capital gain or loss:

A CGT asset is not always defined as a kind of property, as Section 108-5 ITAA 1997 states that a CGT asset can also be a legal or equity right, the examples provided in this section includes debts owed to you and a right to enforce a contractual obligation.

Section 104-5 of the ITAA 1997 states there are three different types of CGT events that may occur for the end of ownership of a CGT asset. Specifically CGT event C2 occurs when your ownership of an intangible asset ends. CGT event C2 occurs if a taxpayer's ownership period of an intangible CGT asset ends because it is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, forfeited or expired.

If the taxpayer enters into a contract that results in the asset ending, the time of the CGT event C2 is when the taxpayer enters into that contract. If there is no contract, CGT event C2 happens when the asset comes to an end.

You make a capital loss from CGT event C2 happening if your capital proceeds from the event are less than the asset's reduced cost base.

Application to your circumstances

In this case, you and a relative are involved in a class action against an individual associated with the partnership. While you do not believe you will receive any compensation from this action at this stage we do not consider you have abandoned your contractual rights. Therefore, CGT event C2 has not occurred and you and your spouse cannot claim a capital loss in the relevant financial year.

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