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Edited version of your written advice
Authorisation Number: 1012770782708
Ruling
Subject: Loss from fraud FX trading business
Questions and Answers:
1. Is your net capital gain reported from XYZ Trading assessable?
No.
2. Is your loss of $X in relation to XYZ Trading a capital loss that happened in the year ended 30 June 2015?
Yes.
This ruling applies for the following periods:
Year ended 30 June 2013
Year ending 30 June 2015
The scheme commences on:
1 July 2012
Relevant facts and circumstances
You contributed $X to XYZ Trading for the purpose of engaging in foreign exchange (FX) trading on your behalf.
For the year ended 30 June 2013, you received a FX trading statement from XYZ Trading showing a profit for the income year, which you lodged in your tax return as a net capital gain.
However, in December 2014, you discovered XYZ Trading was a fraud, which actually did not engaged in FX trading.
The purported profits made were never paid to you and you lost your $X.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 104-25
Reasons for decision
Assessable income
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states, if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Subsection 6-5(4) of the ITAA 1997 states in working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
In the Federal Court of Australia case of Leighton v. Federal Commissioner of Taxation [2011] FCAFC 96; (2011) 2011 ATC 20-273; [2012] ALMD 1846; (2011) 84 ATR 547 (Leighton), it was held that two companies, which were respectively the parties to the share sale and purchase contracts, derived the income from the sale of the trading stock represented by shares (in the carrying on of a business), even though they did so with the intervention of an agent.
In your case, following the principles in Leighton, it is arguable you should have reported your purported gains from XYZ Trading as ordinary (business) income (rather than as capital gains) since the regular and repetitive buying and selling of trading stock is the primary mark of a business.
Regardless, under subsections 6-5(2) and 6-5(4) of the ITAA 1997, you did not derive any income from XYZ Trading since no income was ever applied or dealt with on your behalf. It follows you should amend the relevant net capital gains lodged in your tax return to nil.
Capital loss
Taxation Ruling TR 2001/14 is about non-commercial business losses. Paragraph 98 provides, for a taxpayer start to carry on a business activity, broadly, this requires the taxpayer to have: (i) made a decision to commence the business activity; (ii) acquired the minimum level of business assets to allow that business activity to be carried on; and (iii) actually commenced business operations.
Section 108-5 of the ITAA 1997 states an example of a CGT asset is 'debts owed to you'.
Section 104-24 of the ITAA 1997 states CGT event C2 happens if your ownership of an intangible CGT asset ends.
Taxation Ruling TR 92/18 is about bad debts. Paragraph 3 of the ruling provides the question of whether a debt is bad is a matter of judgment having regard to all the relevant facts. Generally, provided a bona fide commercial decision is taken by a taxpayer as to the likelihood of non-recovery of a debt, it will be accepted that the debt is bad. The debt, however, must not be merely doubtful.
Guidelines for deciding when a debt is bad are at paragraphs 31 to 33 of the ruling, which include a debt may be considered to have become bad where the debt has become statute barred; where the debtor has become bankrupt or has executed a deed of assignment or scheme of arrangement; where, if the debtor is a company, it is in liquidation or receivership and there are insufficient funds to pay the debt; and where a taxpayer has taken the appropriate steps in an attempt to recover the debt.
In your case, you did not ever commence a business of FX trading (even though you intended to) because you did not commence business operations. It follows your loss of $X is not a business or trading loss. Instead, at the time it becomes clear the $X debt owed to you is non-recoverable, CGT event C2 will happen, which will include your loss of $X.