Edited version of your written advice

Authorisation Number: 1051493133360

NOTICE

This private ruling was revised following issue. This edited version has therefore been replaced with the edited version of the private ruling with the authorisation number of 1051514935995

Date of advice: 20 March 2019

Ruling

Subject: Capital gains tax event c2

Question

Has capital gains tax (CGT) event C2 as per section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happened to allow you to claim a CGT loss in regards to the amount invested in in shares in a company?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20ZZ

The scheme commences on:

1 July 20YY

Relevant facts and circumstances

You were approached in 20XX by Person A – the CEO of Company A to help facilitate funding of approximately to fund operations of their subsidiary, Company B.

The intention was to float Company A on an international stock exchange. At this time, Company A was listed on another exchange.

You invested an amount in shares in Company A and received a shareholder certificate. The amount was paid via bank account that was controlled by person A, not to a bank account where Company A is based.

The shares were officially issued in 20YY

Company A stopped trading on the exchange in 20YY.

In 20ZZ, documents were filed with an exchange which indicates that the company is either ceasing to be publically listed or it is going out of business. This means that the shares are no longer able to be traded publically.

In 20ZZ, Company A advised shareholders that they would be undergoing a spin off and all outstanding shares would become Company C (a company residing in another country). This transaction was given effect by nature of a distribution and a consent document was provided to shareholders.

At this point, you supposedly now own shares in the Company C.

You had numerous interactions with Company C during 20ZZ in order to clarify the status of your investment.

In 20ZX, you travelled to overseas to meet Person A. At the meeting, you were informed that Company A was attempting various initiatives to generate income to buy back shares from investors. In addition, person A advised that they were seeking to list the company on another stock exchange, which did not eventuate.

In 20ZX, you again travelled overseas with the aim of executing a Memorandum of Understanding to buy back all shares from the investors. Person A refused to sign the document.

In 20XY, Person A visited Australia and informed you that they were selling one of the assets of Company B to fund a share buyback of the investors’ shares.

In 20XY, Person A contacted you stating that they had lost money in property investment and was bankrupt. This is the last communication that you had with Person A.

You travelled overseas in 20XY and engaged the services of a local law firm, “Law Firm A”, to act on your behalf and other investors and seek a civil recourse.

You visited the premises which the business previously operated out of and found that it had newspaper on the windows and appeared abandoned.

A civil recourse approach was found to be unworkable due to the number of jurisdictions involved.

The only option available was to press criminal charges against Person A. The matter was submitted to the police for investigation but was stymied due to lack of conclusive evidence.

You paid the Law Firm A an amount for their services.

In 20XZ, you engaged the services of another overseas based law firm “law Firm B” to review the facts and to further explore civil and criminal approaches to recover their investment.

The law firm advised that a civil option would require funds to pursue and with little possibility of success, it was not considered an option.

In all, you travelled to overseas seven times in the period 20XX to 20XZ in an attempt to recover your investment.

In 20XY, you became aware that Person A was seeking to become a resident of another country. You attempted to prevent this and contacted the relevant embassy in order to provide information regarding the character of person A.

Relevant legislative provisions

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

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, you invested an amount in shares in Company A and duly received a shareholder certificate. Company A stopped trading on an exchange in 20YY. In 20ZZ, documents were filed with an exchange which indicates the company is either ceasing to be publically listed or is going out of business.

In 20ZZ, Company A advised shareholders that they would be undergoing a spin off and all outstanding shares would become Company C which is a company residing in another country.

You have not provided any evidence to indicate that the two companies have been liquidated or deregistered in any jurisdiction.

This means that your shares in the company have not been cancelled, surrendered or forfeited.

Although you have attempted to pursue legal recovery action, both criminal and civil, there has been insufficient evidence to proceed with any action. There is insufficient no evidence to indicate that the investment was a fraudulent scam.

As discussed above, 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.

Accordingly CGT event C2 has not happened in relation to your shares in the company.