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Edited version of your written advice
Authorisation Number: 1013099176769
Date of advice: 29 September 2016
Ruling
Subject: Investment losses
Questions and answers
1. Are you entitled to a deduction for any of the investment losses you have made on Investment 1, Investment 2, Investment 3, or Investment 4?
No
2. Did you make a capital loss on Investment 1 in the 2013-14 income year?
Yes
3. Did you make a capital loss on Investment 2 in the 2014-15 income year?
Yes
4. Did you make a capital loss on Investment 3 and Investment 4 in the 2015-16 income year?
Yes
This ruling applies for the following periods:
Year ending 30 June 2014
Year ending 30 June 2015
Year ending 30 June 2016
Year ending 30 June 2017
Year ending 30 June 2018
Year ending 30 June 2019
Year ending 30 June 2020
The scheme commenced on:
1 July 2013
Relevant facts and circumstances
You entered into four investments at different times in the last ten years.
Each of the investments turned out to be a scam of which you were a victim.
With each investment you made repeated phone calls and sent numerous emails and got no response.
For Investment 1, you realised in the 2013-14 income year that you would not be receiving any payments as the investment was a scam.
For Investment 2, you realised the investment was a scam in the 2014-15 income year when the business ceased and you were not getting any response to your phone calls or emails.
For Investments 3 and 4, you stopped contacting the respective companies involved in the 2015-16 income year, on not getting any response to your phone calls or emails, and receiving advice that the investments were a scam.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 8-1
Income Tax Assessment Act 1997 Section 102-5
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 of the Income Tax Assessment Act 1997 (TAA 1997) allows a deduction for expenditure to the extent that it is incurred in the gaining or producing of assessable income, or in the carrying on of a business to gain or produce assessable income. No deduction is allowable to the extent that the expenditure is private, domestic or capital in nature.
The funds which you lost were to be used to purchase capital gains tax (CGT) assets. Funds which are used to purchase CGT assets are capital in nature, therefore the loss of these funds retains this capital nature. As such, no deduction is allowable for the losses you have made for your four investments.
Capital loss
A capital loss can only arise if a capital gains tax (CGT) event happens. Most CGT events involve a CGT asset. The gain or loss is made at the time of the CGT event.
As a result of entering into the arrangements with Investment 1, Investment 2, Investment 3 and Investment 4, it is considered that you acquired contractual rights. These contractual rights are CGT assets for the purposes of paragraph 108-5(1)(b) of the ITAA 1997.
The CGT event that may be relevant in your situation is CGT event C2- cancellation, surrender and similar endings.
CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being cancelled, surrendered, released, discharged, satisfied or abandoned. (paragraph 104-25(1)(b) of the ITAA 1997).
In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12 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.
Your case
In your case for each of the four investments, several months have elapsed since you last had any response from the other party to the arrangement. In addition, your attempts to contact the other party to the arrangements have been unsuccessful. For each investment, the other party has made no attempt to perform their part of the contract and you have determined you are the victim of a scam transaction in each of the four cases. You will not recover any payments for each investment.
As a substantial period of time has passed, for each investment, with non-action from either party, it may be inferred that the contract has been abandoned with the effect that your rights under the contract have ceased. Therefore, CGT event C2 in section 104-25 of the ITAA 1997 has happened and you will be entitled to a capital loss for Investment 1 in the 2013-14 income year, Investment 2 in the 2014-15 income year and Investments 3 and 4 in the 2015-16 income year.
A capital loss cannot be offset against income from other sources but must be offset against capital gains and may be carried forward to offset against future capital gains.