Edited version of your private ruling

Authorisation Number: 1011954339084

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Subject: capital gains tax

Question and answer:

Has there been a CGT event with regards to money paid for the acquisition of shares that was misappropriated which would give rise to a capital loss?

Yes

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts

You received a call at work a few months back from an unknown person asking you if you would like to invest in some shares.

You initially said no as you would need to get some advice.

You received another call and eventually agreed to purchasing the shares.

You deposited an amount of money in an overseas bank account.

You invested more money at a later date

Another unknown person called you to let you know that they would assist you in making more money and manage the funds and advised on other shares that you could purchase.

You made more international money transfers.

You transferred an amount of money which did not arrive overseas according to the share sellers.

You have been harassed for this amount.

You realised that you had been scammed after you were not able to recover any profits from the apparent share sales that had been made on your behalf.

You contacted the police and ASIC.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Paragraph 104-25(1) (b)

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Paragraph 108-5(1) (b)

Reasons for decision  

Capital Gains Tax

You had entered into a contract to buy and sell shares. Payments were made based on information provided to you.

As a result of entering into this arrangement, it is considered that you acquired contractual rights. These contractual rights are CGT assets (paragraph 108-5(1) (b) of the ITAA 1997).

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied (paragraph 104-25(1) (b) of the ITAA 1997).

In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423 it was recognised that a contract can come to an end merely by being treated as being at an end by the parties. It was held in Fitzgerald v. Masters (1956) 95 CLR 420 at 432 that:

Where an 'inordinate' length of time has been allowed to elapse, during which neither party has attempted to perform, or called on the other to perform, it may be inferred that the contract has been abandoned. ... What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long-continued ignoring of the contract on both sides that (in the words of Rowlatt J.) "The matter is off altogether".

You received a call at work asking you if you would like to invest in shares. You transferred money and purchased shares.

A subsequent phone call suggested that you invest in more shares and you did this.

After receiving no proceeds from your investments upon requesting them you were alerted that you had been scammed and that the scheme was a fraud by ASIC.

You contacted the police and made a statement and alerted your bank and requested that they cancel the transactions.

Based on these facts, it is considered that the contract has been abandoned with the effect that your rights under the contract have been discharged.

Accordingly, it is considered that CGT event C2 in section 104-25 of the ITAA 1997 has happened.

Accordingly, you will make a capital loss as the capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997).

Subsection 102-10(2) of the ITAA 1997 provides that you cannot deduct from your assessable income a net capital loss for any income year. However, it can be applied against your capital gains for a later income year.