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This edited version has been archived due to the length of time since original publication.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: 1051211045103

Date of advice: 11 April 2017

Ruling

Subject: Loss of investment funds

Question 1

Are you entitled to a deduction for income declared in prior year's returns and subsequently lost in a failed investment?

Answer

No

Question 2

Has any capital gains tax event occurred to enable a capital loss to be made in relation to the losses from your failed investment?

Answer

No

This ruling applies for the following period

Year ended 30 June 2016

The scheme commenced on

1 July 2015

Relevant facts

You deposited funds in an investment fund. You made further deposits and withdrawals, and all income received from the investment was reinvested back into the same investment.

You declared the investment income in your tax returns for the relevant years.

Circumstances led to a steering committee of the investors being set up to investigate where their investments were held, due to some investors having difficulties in withdrawing funds. Reports provided by the investment fund indicated that funds were available for withdrawal, and that the investments still had value.

The steering committee reported that no sizeable funds had been located. Following this the steering committee appointed an administrator for the trading companies.

The administrators were subsequently appointed as the liquidator. So far, no funds have been recovered, and cash discovered in the bank accounts of the investment fund was used to engage the liquidators in the investigation, which is still in progress.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-45

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.

Reasons for decision

Deduction

Section 25-45 of the Income Tax Assessment Act 1997 (ITAA 1997) provides a deduction for a loss in respect of money if the loss was caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation by your employee or agent. The loss must be in respect of money which has been included in the taxpayer's assessable income and must be discovered in the income year in which the deduction is claimed.

Section 960-105 of the ITAA 1997 gives the definition of an agent as:

You are not entitled to a deduction under section 25-45 of the ITAA 1997 for the missing funds because the losses were not misappropriated or stolen by an agent or employee of yours.

If the loss is not deductible under section 25-45 of the ITAA 1997, it may still be deductible under section 8-1 of the ITAA 1997 provided the loss caused by the relevant criminal action represents that kind of casualty, mischance or misfortune which is a natural or recognised incident or a particular trade or business: Ash v. Federal Commissioner of Taxation (1938) 5 ATD 76; 61 CLR 263 per Rich J at p 277. That is, the deduction under section 8-1 will only be available if the loss was necessarily incurred in carrying on a business.

In your case you deposited funds in an investment. You are not considered to be carrying on an investment business. Furthermore your loss is capital in nature.

Therefore no deduction is allowed under section 8-1 of the ITAA 1997.

Capital gains tax provisions

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens. The gain or loss is made at the time of the CGT event.

As a result of you having an investment with the investment fund, it is considered that you acquired contractual rights. These contractual rights are CGT assets (section 108-5 of the ITAA 1997).

The relevant CGT events are event A1, C2 and G3.

CGT event A1 as outlined in section 104-10 of ITAA 1997 occurs when you dispose of a CGT asset.

CGT event C2 as outlined in section 104-25 of ITAA 1997 occurs when a CGT asset is cancelled surrendered or has a similar ending.

CGT event G3 as outlined in section 104-145 of ITAA 1997 occurs when a liquidator or administrator declares shares or financial instruments are worthless.

In your case, you have not disposed of your investment; therefore CGT event A1 is not relevant.

You have not cancelled or surrendered the CGT asset, so CGT event C2 doesn't apply.

CGT event G3 happens if you own financial instruments issued by or created by or in relation to a company and a liquidator or administrator of the company declares in writing that the liquidator or administrator has reasonable grounds to believe that the financial instruments have no value or have only negligible value.

Section 104-145 of the ITAA 1997 provides that CGT event G3 occurs when a liquidator or administrator declares shares or financial instruments are worthless.

A liquidator has been appointed, but you have not as yet been advised in writing that your investment is worthless.

Therefore CGT event G3 has not occurred yet.

Further information:

Although CGT event G3 has not yet occurred, it seems likely from the information provided that this will be the case in the future. If and when this occurs, the timing of CGT event G3 will be taken to be the year in which you are advised in writing that your investments are worthless.

A net capital loss is not deductible from your assessable income. However, it can generally be offset against capital gains made in later income years. To the extent that a net capital loss cannot be used to offset capital gains in an income year, it can be carried forward to a later income year.

If you do not have any capital gains in the year of declaration, your capital loss is carried forward.

Capital losses may be carried forward as net capital losses without a time limit and are offset against any capital gains realised in subsequent years.

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