Edited version of your written advice

Authorisation Number: 1012906173039

Date of advice: 4 November 2015

Ruling

Subject: CGT Loss

Question 1

Has any capital gains tax (CGT) event in Division 104 of the Income Tax Assessment Act 1997 (ITAA1997) happened to allow you to claim a CGT loss in regards to the agreements you signed with Company A and Company B?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20YY

The scheme commences on

1 July 20XX

Relevant facts and circumstances

You signed an agreement of sale with Company A to acquire an asset which was part of a proposed development. You have paid an amount under this agreement.

You signed an agreement of sale with Company B to acquire an asset which was part of a proposed development. You have paid an amount under this agreement

Upon completion of the development it was your intention sell the assets at a profit and make a capital gain.

Since you have signed the agreements you have discovered that the developer and the agent have personally gone bankrupt.

The developer and their agent have been non-contactable in recent times and there have been no contact has been made regarding the recovery of funds by investors.

You are unable to pursue legal avenues to recover your investment due to a lack of monetary resources.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 Section 108

Reasons for decision

Capital gains tax (CGT) is the tax you pay on certain gains you make. Section 102-20 of the ITAA 1997 provides that you make a capital gain or capital loss as a result of a CGT event happening to an asset in which you have an ownership interest. 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. An example of a CGT asset is a debt owed to you.

The CGT event that may be most relevant in this situation is CGT event C2. 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.

The mere writing off of a debt (by a taxpayer) is insufficient to constitute a cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment at law or in equity.

In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423 it was recognised that in certain circumstances contractual rights can be discharged or come to an end merely by being treated as being at an end by the parties. It will be considered that the entity made a capital gain/loss at the time the contractual rights end by being abandoned.

ATO Interpretive Decision ATO ID 2003/828 considered a case where a taxpayer entered into a contract to facilitate the transfer of funds into their bank account. In return for providing services the taxpayer was to receive a commission fee and reimbursement of expenses.

The taxpayer subsequently discovered that the arrangement was not legitimate. The taxpayer's attempts to contact the other parties involved were unsuccessful; the taxpayer made no further effort to comply with their requirements under the agreement.

Based on the fact that neither party had continued to comply with their obligations under the contract, and that several government authorities identified the scheme as a fraudulent scam it was determined that CGT event C2 had occurred as the contractual rights had been abandoned.

Your case can be distinguished from ATO ID 2003/828. In your case the sale and purchase agreements that you have entered into with Company A and Company B appear to have no milestones and specific dates that must be contractually met by the other parties. This means that both companies have yet to fail to meet their contractual obligation in regards to the development and the agreements are still valid. Also, until recently, there have been assurances from the developer that the development, is still proceeding as planned, even though there has been no specific physical evidence yet. You have provided no evidence to indicate that the development was a fraudulent scam.

It has been indicated that the developer and the agent have been made personally bankrupt. The agreements you have are with Company A and Company B, even though the developer and the agent may be shareholders and directors of these companies, the companies themselves are considered to be separate legal entities. You have not provided any evidence to indicate that the two companies have been liquidated or deregistered.

Accordingly CGT event C2 has not happened in relation to your rights under the agreements you signed with Company A and Company B.