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Edited version of private advice
Authorisation Number: 1012687834871
Ruling
Subject: Business deductions - scam
Question 1
Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for an amount paid for an asset that you never received?
Answer
No
Question 2
Are you entitled to a deduction under section 40-25 of the ITAA 1997 for the decline in value of an asset that you never received?
Answer
No
Question 3
If the answer to question 2 is yes, which method can you use?
Answer
Not applicable
Question 4
Are you entitled to a deduction for a bad debt for an amount that you paid for an asset that you never received?
Answer
No
Question 5
Will the scam result in a capital gains tax (CGT) event occurring?
Answer
Yes
This ruling applies for the following period:
Year ended 30 June 2014
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
You responded to an online advertisement for an asset that was listed for sale. The asset was intended to be used in the partnership business.
The seller instructed you to deal with a third party freight company as the seller had left the country and the asset was being held by the freight company on behalf of the seller.
You transferred $X to the freight company who was to pay the amount to the seller once it was confirmed that you were satisfied with the asset.
You subsequently realised that you were the victim of a scam and that the online seller and freight company, were fraudulent. You have never received the asset or a refund of the money you paid.
You have discussed the matter with your bank, who have agreed it was a scam and advised that it is unlikely you will recover the money you paid.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 25-35
Income Tax Assessment Act 1997 Division 40
Income Tax Assessment Act 1997 Section 40-25
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
Section 8-1
Section 8-1 of the ITAA 1997 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.
In this case, you paid an amount to acquire a capital asset. It follows that the payment is capital in nature and accordingly, not deductible under section 8-1 of the ITAA 1997. The fact that you never received the asset does not alter the nature of the payment.
Decline in value
Section 40-25 of the ITAA 1997 allows a deduction for the decline in value (as worked out under Division 40 of the ITAA 1997) of a depreciating asset that you held for any time during the income year.
As you have never held the asset, you cannot claim a deduction for the decline in value of that asset.
Bad debt
A deduction for a bad debt may be claimed under section 25-35 of the ITAA 1997.
To qualify for a bad debt deduction under section 25-35 of the ITAA 1997, the debt, in addition to being bad, must satisfy two criteria:
1. There must be a physical writing off of the debt.
2. The debt must have been brought into account by the taxpayer as assessable income. This condition does not apply to taxpayers in the business of lending money.
In this case, as a debt has not been brought into account as assessable income and you do not carry on a business of lending money, the bad debt cannot be claimed as a deduction under section 25-35 of the ITAA 1997.
CGT
Under section 108-5 of the ITAA 1997 an asset for CGT purposes is any form of property or a legal or equitable right that is not property.
Under section 102-20 of the ITAA 1997 you make a capital gain or capital loss as a result of a CGT event.
Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if the ownership of an intangible CGT asset ends by the asset:
(a) being redeemed or cancelled
(b) being released, discharged or satisfied
(c) expiring; or
(d) being abandoned, surrendered or forfeited.
The time of the event is when you enter into the contract that results in the asset ending or if there is no contract, when the asset ends.
In this case, we consider that you acquired contractual rights upon entering into the agreement with the online seller. These contractual rights are a CGT asset, as per paragraph 108-5(1)(b) of the ITAA 1997. Accordingly, CGT event C2 will occur if your rights (to receive the asset) are surrendered, abandoned or forfeited.