Edited version of private ruling

Authorisation Number: 1011838698853

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital loss

Questions and Answers:

1) Did you make a capital loss in the 2009-10 income year from investment A?

No

2) Did you make a capital loss in the 2009-10 income year from investment B?

No

3) Will you be able to offset any future capital loss from investments A and B against your salary and wage income?

No

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You provided funds to a broker who was a trusted friend for two investments. One investment was in the form of a loan to Company A (investment A) and the other was a smaller investment (investment B). At the time of making the investments, you did not know that the broker was bankrupt.

Both investments A and B were promoted to you with official documents, official deeds of loan and variation, letters and websites as completely legitimately and guaranteed to be repaid.

The broker embezzled/misappropriated the entire amount which you had given for Investment B.

The broker was charged with:

· obtaining benefit by deception

· fraudulent misappropriation

· dealing in the proceeds of crime.

The matter is being investigated by police who are still gathering evidence from victims of this case. You have been speaking to the various officials and have provided statements to the police including evidence of your efforts to retrieve your investments.

You have made the following points with regard to your investment in Company A:

· Company A's administrator is in the process of selling assets to recover some of the significant amounts owed by the director of Company A.

· According to a report to creditors, the director of Company A owes money to many other individuals and companies. You are listed as one of the creditors with an amount of $X shown as owing to you. The amount has been calculated based on the interest rates present in the contracts which were promised to you by the broker and signed for by the director of Company A. The administrator still considers the amount of $X as owing to you and would consider the amount to be much larger today.

· You have stated that the administrator has not been able to get any money from the director of Company A.

· You have spent money in legal fees and have been advised it is pointless to legally pursue the director of Company A who owes money to so many.

The administrator has advised that there is still a slim chance that the victims, including yourself, may receive some compensation.

You have made the following points with regard to investment B:

· To recover the money, you have tried many emails, all of which you have on record and have been included in police statements you have prepared.

· You have made numerous phone calls which you have recorded and added as evidence in your police statements.

· You have sent several emails to the broker's private trustee who has acknowledged there is a debt owing to you.

· You have been advised by both solicitors and ITSA, the Australian regulatory body for bankrupts that it is a waste of time and money to legally pursue the broker who is a bankrupt.

· You phoned both ITSA and the bankrupt's personal trustee and it was confirmed to you that the broker has not been discharged from bankruptcy and that this is for a minimum of 3 years by ITSA regulations in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-5.
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Section 108-5.

Reasons for decision

A capital gains tax (CGT) asset under section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997) is any kind of property, or a legal or equitable right that is not property. It also includes part of, or an interest in, property or a legal or equitable right that is not property. Examples include land and buildings, debts owed to a taxpayer, or a right to enforce a contractual obligation. Generally you make a capital gain or a capital loss if a CGT event happens to a CGT asset you own.

As a result of entering into the arrangements with Company A and also the arrangement for investment B, it is considered that you acquired contractual rights. These contractual rights are CGT assets for the purposes of paragraph 108-5(1)(b) of the ITAA 1997. The most relevant CGT event for consideration in this case is CGT event C2 in section 104-25 of the ITAA 1997. CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset:

a) being redeemed or cancelled; or

b) being released, discharged or satisfied; or

c) expiring; or

d) being abandoned, surrendered or forfeited; or

e) if the asset is an option - being exercised; or

f) if the asset is a convertible note - being converted.

As per subsection 104-25(3) of the ITAA 1997, you make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base.

For each of your two investments, we need to determine if CGT event C2 (cancellation, surrender or similar event) has occurred. A capital loss can be claimed in the income year in which CGT event C2 happens, providing a capital gain has been made in that year. Otherwise the capital loss can be carried forward to future years until a capital gain is made and applied against the capital gain.

Investment with Company A

You invested a large sum in Company A. The director of Company A, signed the required deeds, but did not invest your money as agreed. The investment was promoted to you with official documents, official deeds of loan and variation, letters and websites as completely legitimately and guaranteed to be repaid.

Taxation determination TD 2000/7 provides that when a company is deregistered CGT event C2 happens in respect of its shares. When a company is deregistered it ceases to exist. In that case the company's debts, if any, will be abandoned, surrendered or forfeited for the purposes of section 104-25 of the ITAA 1997.

Company A's administrator is in the process of selling assets to recover some of the significant amounts owed by the director of Company A.

We acknowledge you have taken much action to recover your lost funds. However at this point in time you are considered to still be a creditor according to a report to creditors, with an amount of $X owing to you. The administrator still considers the amount as owing to you. At this stage Company A has not been deregistered. The administrator has indicated that there is still a slim chance that creditors, including yourself, may receive some compensation.

For the 2009-10 income year it cannot be said that the contract has been abandoned with the effect that the contract has been discharged. It cannot be said that you will not recover any payments. Once Company A has become deregistered and/or the administrator has declared in writing that you are no longer a creditor, it can be said that the contract has been discharged and CGT event C2 has occurred. Thus you may be entitled to claim a capital loss in future in respect of investment A.

Investment B

You invested an amount in investment B. Once again the investment was promoted to you with official documents and official deeds.

You paid the same broker for this investment also who embezzled/misappropriated the entire sum which was meant for this investment.

In a situation such as yours where your investments have been embezzled, the relevant CGT asset is the right to sue your purported broker to seek compensation for the loss.

It has been noted that to date you have tried to recover the money kept by the broker by sending many emails, including emails to the broker's private trustee, who has acknowledged there is a debt owing to you. You have prepared police statements, and made numerous phone calls to various officials.

You have been dealing with solicitors and ITSA, the Australian regulatory body for bankrupts. The broker was made bankrupt before you commenced your investments. At this stage the broker has not been discharged from bankruptcy.

When a borrower is being bankrupted, CGT event C2 happens to a debt owed by a lender when the borrower is discharged from all provable debts under the Bankruptcy Act 1966. In your case, however, you began your investment after the broker became bankrupt. Only debts incurred prior to the date of bankruptcy are included in the bankruptcy. Thus the date they are discharged from bankruptcy is not relevant in your case.

In your situation the relevant date for CGT event C2 occurring will be when you have no legal right to recover the money owed to you by the broker. Whilst we acknowledge the actions you have taken so far, at this stage you are still able to take action to recover the misappropriated funds. The legal right to recover funds may end under a certain Limitation of Actions Act.

Debt forgiveness

CGT event C2 also happens to a debt owed by a lender if the right to recover funds ends by the debt being forgiven. This must be done legally.

The mere writing off of a debt by a taxpayer is insufficient to constitute a cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment at law or in equity for the purposes of subsection 104-25(1) of the ITAA 1997. A debt may be extinguished by forgiveness under a Deed of release such that the owner of the debt is legally barred from collecting the debt. A debt will not be extinguished if it is merely forgiven or abandoned without any legal impediment imposed on its collection. An example is a Deed of release which states that you relinquish the person the (broker) from and forgive and release the person from payment of monies owed to you.

The effect of such clause is that the debt owed to you the broker will have been extinguished by forgiveness under the Deed of release and you will not have the right to sue in relation to the debt. When this happens, CGT event C2 will occur.

Claiming capital losses

You have asked about claiming capital losses. We shall now consider what capital losses are and when they can be claimed.

Losses are either capital losses or revenue losses and will be categorised according to whether the relevant income has been classed as capital gains or ordinary (business) income.

A revenue loss is a loss arising from carrying on a business for the purpose of earning income. For example, a share trader is in the business of buying and selling shares and thus the losses are revenue losses which can be offset against revenue income such as salary and wage income.

By contrast, where an investor disposes of assets such as shares held for investment purposes, the losses are capital losses.

A capital loss cannot be offset against income from other sources but must be offset against capital gains and may be carried forward to offset against future capital gains.

In your case, as you are an investor, the losses you make are capital losses and whilst we appreciate your circumstances, the losses cannot be offset against your salary and wage income. As mentioned above, a capital loss can be claimed in the income year in which CGT event C2 happens, providing a capital gain has been made in that year. Otherwise the capital loss can be carried forward to future years until a capital gain is made and applied against the capital gain

Summary

You made two investments through a broker, a person whom you trusted. You were not aware at the time of making the investments that they were bankrupt. You suffered two financial losses. The losses cannot be claimed in the 2009-10 income year, but may be claimed in the income year when CGT event C2 happens.

For investment A, a capital loss may arise when the company becomes deregistered and/or the administrator has declared you are no longer a creditor. With regard to the funds which were embezzled by the broker for investment B, the relevant date for CGT event C2 occurring will be when you have no legal right to recover the money owed to you by the broker. Alternatively, your debt may be extinguished by forgiveness under a Deed of release such that the owner of the debt is legally barred from collecting the debt.

In conclusion, whilst we appreciate your situation, any future capital loss cannot be offset against your salary and wage income, but can be carried forward to be offset against a capital gain.