Edited version of private advice

Authorisation Number: 1051997552992

Date of advice: 1 July 2022

Ruling

Subject: Tax losses - capital or revenue

Question

Are the net losses you incurred in respect of your interest in the insurance policies on revenue account?

Answer

Yes.

A profit or gain from an isolated transaction is generally income and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) when both of the following elements are present:

a)    the intention or purpose of the taxpayer in entering into the transaction was to make a profit or gain; and

b)    the transaction was entered into, and the profit was made, in the course of carrying on a business or in carrying out a business operation or commercial transaction.

For a transaction to be characterised as a business operation or a commercial transaction, it is sufficient if the transaction is business or commercial in character.

Generally, a transaction or operation has the character of a business operation or commercial transaction if the transaction or operation would constitute the carrying on of a business except that it does not occur as part of repetitious or recurring transactions or operations (Taxation Ruling TR 92/3).

From the information provided, it is accepted that your intention or purpose in entering into the transactions was to make a profit or gain and they were entered into in carrying out a commercial transaction.

Therefore, the losses are deductible under section 8-1 of the ITAA 1997 as they were necessarily incurred in gaining your assessable income.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You contracted with a foreign entity to purchase a partial interest in three life insurance policies with the expectation that you would make a quick profit.

There was no income to be made from the policies; the purchases were made specifically to obtain a profit or gain on termination of the policies.

The expected profit did not materialise within the time frame you expected.

The foreign entity filed for bankruptcy and you were offered a partial payout on two of the policies pending bankruptcy proceedings taking place. You accepted the part payment which was less than the amount you originally paid to purchase your interest.

Prior to the bankruptcy case being dealt with, you had to make annual premium payments to keep the policies alive and protect your interests.

You received final payouts for the polices which were less than the amounts you originally paid to purchase your interests.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 8-1

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