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Ruling

Subject: Capital Gains Tax - Investment scam - Capital Loss

Question

Can you claim your capital loss as a deduction against your income tax?

Answer

No, but you can carry forward your capital loss indefinitely to be offset against any future capital gains (not ordinary income).

This ruling applies for the following periods:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You decided to make an investment with an overseas Company X.

These investments are made in foreign currency.

You made the investment with Company X on the understanding that you will profit greatly.

You made payments in multiple instalments to Company Y with the last two instalments to Company Z with Company X acting as the middleman.

You have provided evidence of these payments in the form of bank payment receipts to confirm the telegraphic transfer of funds via your bank.

You also have provided evidence of the scheme in the form of emails between you and Company X.

You received your last correspondence from Company X informing you about your investments.

After this last correspondence, you gradually discovered that your account has disappeared, and you are unable to make any form of contact with Company X regarding your investments.

You also have ceased taking legal or any form of action to recover the funds.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1(2)

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

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-5

Income Tax Assessment Act 1997 Section 104-20

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

Claiming capital loss as a deduction against taxable income

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;-

- have you owned a CGT asset?

- has a CGT event occurred?

- if a CGT event has occurred, what type of CGT event is it?

A CGT asset does not always necessarily be 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.

In your case, you have entered into an arrangement with Company X which will result in you gaining an equity right on gaining profits from the investment in the market. Therefore, you own a CGT asset.

The CGT event will occur on the day when you have lost contact with Company X and have no knowledge of where your CGT asset has gone to.

Therefore, a CGT event has occurred.

To ascertain what type of CGT event has occurred, Section 104-5 ITAA 1997 states that there are three main types of CGT events for the end of ownership of a CGT asset.

These are:

- CGT event C1,

- CGT event C2,

- CGT event C3.

Section 104-20 ITAA 1997 states that a CGT event C1 occurs when a CGT asset is lost or destroyed, for example, a demolition of a dwelling will trigger a CGT event C1.

Section 104-25 ITAA 1997 states that a CGT event C2 occurs when a CGT asset is cancelled, surrendered, expired, abandoned, or forfeited.

Section 104-30 ITAA 1997 states that a CGT event C3 occurs when a CGT asset is an option and a company or a trustee of a unit trust sells, cancels or abandons the option.

Section 104-20 ITAA 1997 (CGT event C1) and Section 104-30 ITAA 1997 (CGT event C3) does not apply to CGT event involving scams.

If there is no chance of regaining the investment back and it is apparent that Company X has ceased to operate. Then it represents the cancellation of a CGT asset and should be treated as CGT event C2.

If there is no compensation received or any lawsuit to recover these investment funds, the CGT event should be the time when the capital loss is discovered.

This shows that when there is a CGT event occurring, it is CGT event C2 and thus, you are able to make a capital loss in your case.

Therefore your capital loss can be carried forward to the next period and onwards indefinitely until your capital loss is all used up against any future capital gains.

Subsequently, you cannot claim the capital loss as a deduction against your taxable income because Section 102-10(2) ITAA 1997 provides that you cannot deduct capital loss from your assessable income for any income year.

Also, Section 8-1(2) ITAA 1997 states that a loss of a capital nature or an outgoing of capital cannot be deducted against your ordinary assessable income, therefore in your case, your loss is of a capital nature resulting from CGT event so your capital loss is not treated as deduction.

However, you are able to carry forward your capital loss to deduct it against any future capital gains you make in the future.