Edited version of private advice

Authorisation Number: 1052224162638

Date of advice: 18 April 2024

Ruling

Subject: Scam - bank account funds

Question

Can you claim a capital loss on the theft of your bank account funds, against the net capital gain declared in your income tax return from the sale of your investments?

Answer

No. The loss of the bank funds, due to scamming activities, is not a capital gains tax event.

This ruling applies for the following periods:

DD MM 20YY

The scheme commenced on:

DD MM 20YY

Relevant facts and circumstances

You have been subject to a scam lasting approximately 6 to 7 weeks. It has taken at least another 7 months trying to recover new licences, change passwords and block anyone trying to use your identities.

In late XXX / early XXX 20XX your partner's iPad was blocked with a message you believed was received from Microsoft Technical Support advising your computer had been compromised; hackers were targeting your financial information using Adware. The message said to call Microsoft Technical Support to unblock the iPad and secure the information.

You believed you were contacting the Microsoft Technical Department.

The 'Microsoft Technical Department' advised you that certain actions needed to be made to your computer. You were then transferred to a senior manager of the 'scam' entity.

The 'senior manager' invited you to participate in a 'sting' arrangement, explaining that Microsoft were working with government agencies to catch hackers.

The scammer advised that the government would place additional funds into your savings account. These funds would be used to make external transfers hoping the hackers would follow the money trail and expose their IP address.

You were asked to make transfers into a bank account.

The scammer provided you with muti digital security codes required by you to access your account when your account was no longer part of the 'sting' arrangement.

The scammer advised you that 2 hackers had been caught and arrested, and a third 'smarter' hacker was targeting your investment account.

You were advised to sell your investments (held in joint names) and transfer the funds into a 'safe offline' account you were told to open with a bank.

You told the scammer that expenses would be incurred, and you would have capital gains tax (CGT) to pay from selling the investments. The scammer advised that they had consulted with their superiors/government agencies and had been advised that all the expenses would be covered, and the accounts would be restored after the 'sting' was completed.

The scammer advised that they were close to catching the hacker. They required you to make one or two more transfers into the bank account. It was emphasised that it was the government's money that was at risk.

The scammer continued to ask you to make further transfers from your accounts. You told the scammer that you could not continue with the 'sting' arrangement, and requested your accounts be reinstated with the withdrawn funds. The scammer advised that this might not be possible until the 'sting' was completed but would consult with their superiors who would talk with the government agencies. The scammer advised that the government agencies were not happy but there were one or two agencies who were sympathetic. The scammer believed that the others might be convinced to restore the accounts, and this could happen as early as the following week.

A Cyber Report (Cyber.gov.au) was submitted by you and this was referred to the Police for investigation.

You have attempted to pursue the loss of the funds with the bank, and your request has been referred to the security department. No response has been received from the security department.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 116-60

Reasons for decision

Section 8-1 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 purpose 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.

Case law has found that the loss, if due to misappropriation, is not deductible under section 8-1 but is capital in nature.

In the Administrative Appeals Tribunal Case 4069 (1988) 19 ATR 3117; 88 ATC 244 the taxpayer company, at the suggestion of its solicitor, entrusted moneys to that solicitor as its agent for the purposes of acquiring gold bullion and its immediate pre-arranged re-sale at a profit. However, the solicitor misappropriated the money in advance of the proposed scheme. The company claimed as a deduction the loss incurred as a result of its dealings with the solicitor.

Mr P M Roach, Senior Member, determined that a deduction was not allowed because the taxpayer proposed to embark on a course of action intended to produce a profit and the sum of money to be invested in that project was capital as it was to provide the profit-making structure. The act of misappropriation by the solicitor occasioned the loss, not any dealing in bullion.

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a taxpayer can only make a 'capital gain' or a 'capital loss ' if a 'CGT event' happens. It is not possible to make a capital gain or capital loss if there is no CGT event. A capital gain or capital loss is made at the time of the relevant CGT event.

CGT event A1 happens when a taxpayer disposes of a CGT asset. The disposal of the CGT asset takes place if a change of ownership occurs from the taxpayer to another entity, whether because of some act or event or by operation of law.

The sale of your XXX shares is a CGT A1 event because you disposed of the shares and a change of ownership occurred. You reported the gain on the share sale, as a capital gain, in your 20XX income tax return.

You deposited the funds, received from the shares, into a bank account the scammer advised was a secure account. The withdrawal of the funds from your bank account, by the scammer, is not a CGT event and therefore no capital loss occurred.

Section 116-60 of the ITAA 1997 provides that the capital proceeds from a CGT event are reduced if your employee or agent misappropriates (whether by theft, embezzlement, larceny or otherwise) all or part of those proceeds. The capital proceeds are reduced by the amount misappropriated.

An agent can be described as someone who acts on behalf of another.

In your situation, there was no employee or agent arrangement between yourself and the scammer. The scammer was not acting upon your instructions to invest the funds on your behalf. The access to your bank account, by the scammer and subsequent theft, is not considered to be a CGT event. Therefore, you cannot claim the loss, by theft of the funds against the capital gains declared in the 20XX income year.

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