Edited version of your private ruling

Authorisation Number: 1011990229494

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Subject: capital gains tax - shares - right to sue - capital loss

Question: Has capital gains tax event C2 occurred to enable you to claim a capital loss in relation to your failed investment?

Answer: Yes

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You are a share investor.

You were contacted by a representative of a broking firm, Firm A, based overseas in relation acquisition of shares in an overseas company, Company A after 20 September 1985.

Following this initial contact, you were provided with information about Company A.

You undertook research and determined that Firm A appeared to be a legitimate broker, which was not listed on the Australian Securities and Investments Commission (ASIC) Cold Call Back list.

During your research, you did not find any negative information about Firm A.

A buy was placed on your behalf for the purchase of a number of shares in Company A and you sent the purchase amount via telegraphic transfer to a predetermined recipient in payment for the shares.

A few weeks later, you were contacted by another representative of Firm A who recommended that you dispose of your Company A shares and use the proceeds to purchase shares in Company B, which were due to be listed on a foreign stock exchange.

You received trade confirmation from Firm A indicating the sale of your Company A shares and the purchase of your Company B shares.

You purchased further shares in Company B, with the purchase amount sent by you via telegraphic transfer to the predetermined recipient in payment for the shares.

You received a trade confirmation from Firm A in relation to the acquisition of the Company B shares.

You were contacted by a representative of Firm A, and following this contact, purchased additional shares in Company B, with the purchase amount being sent by you via telegraphic transfer to the designated recipient.

You received a trade confirmation from Firm A in relation to the acquisition of the Company B shares.

You did not receive any share certificates or any other documentation in relation to the acquisition of the Company A or Company B shares.

Your Company B shares were to be sold and you were contacted for your banking details for the deposit of the sale proceeds which would be deposited into your account on between specified dates.

The funds were not received and you sent numerous emails, and attempted phoning the office of Firm A on numerous occasions without success.

A short time later, you checked the ASIC website and found that Firm A was now on the Cold Call Black List.

You lodged a formal complaint with ASIC and received a response which advised that ASIC is not able to take any action if a company is outside their jurisdiction, and it appeared that Firm A were unlicensed overseas operators.

Upon receiving the letter from ASIC, you decided that it was uneconomical for you to pursue legal action against Firm A.

You have provided copies of a number of documents which should be read in conjunction with, and form part of, this private ruling:

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-25

Reasons for decision

You may make a capital gain or a capital loss when a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event is CGT event A1 which occurs when you dispose of your ownership interest to another entity.

CGT event C2 occurs if your ownership of an intangible CGT asset ends by cancellation, surrender, redemption, release, discharge, satisfaction, abandonment, surrender, or forfeiture. It is considered that it is not possible to abandon or surrender a share.

If it is the case that you have not received any legitimate shares, the relevant CGT asset will be a right to sue the relevant party for your loss. If CGT event C2 occurs in relation to the right, you will make a capital loss if the capital proceeds from the ending of the CGT event are more than the asset's reduced cost base. You will make a capital loss if those capital proceeds are less than the asset's reduced cost base.

Application to your case

In your case, you were approached by a number of people representing the overseas broking firm of Firm A in relation to the acquisition of shares in companies located in overseas countries.

You authorised the purchasing and disposal of shares by Firm A, and while you received trade confirmation from Firm A in relation to the acquisition and disposal of shares, you did not receive any share certificates or any other documentation in relation to the shares.

As you have not received any legitimate shares, it is viewed that the relevant CGT asset in this case is your right to sue Firm A to seek compensation for your loss.

When you did not receive the sale proceeds as organised, you sent numerous emails, and attempted phoning the office of Firm A on numerous occasions without success.

You lodged a formal complaint with ASIC on 20 December 2010 and upon receiving their response, you decided that it was uneconomical for you to pursue legal action against Firm A.

It is viewed that CGT event C2 has occurred in relation to your right to sue Firm A when you made the decision that it was not economical for you to pursue legal action against them. Therefore, you will be able to claim a loss in relation to the abandonment of your right to sue in the 2010-11 income year.