Edited version of private advice

Authorisation Number: 1051570816951

Date of advice: 28 August 2019

Ruling

Subject: Investment in business - no return - loss

Question

Can funds invested in a business that was found to be a scam be accrued as an accounting capital loss?

Answer

Yes

Your contractual rights will be considered properly abandoned only when it is reasonably certain that there is no real hope of recovering any further funds. At this time, CGT event C2 will occur. The money paid will form part of the cost base and reduced cost base as outlined in Division 110 of the ITAA 1997.

In your case, the fees are a once and for all payment incurred to set up the investment which provides you with the enduring benefit for trading purposes for a set period of time. As such, the fees are regarded as a capital expense.

Similarly, the funds deposited into the trading accounts were paid to earn income. Such an amount is not a recurring revenue expense and is considered to be capital in nature.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

In 20XX you were contacted by Company A and offered the chance to make a high income with little risk. The business involved lay betting and the animal racing industry through an account with a trading company.

You trialled the software for a small initial outlay before accepting an offer of a managed package agreement and transferred funds into Company A's bank account. You also deposited funds into an associated company's bank account to fund an account with the trading company.

The transfers of these funds allowed you to access and monitor your account with the trading company.

Based on the apparent success of the initial investment and in response to several offers by Company A, you purchased a further purchase agreement with a seven year managed package. Further funds were transferred into your trading account. This amount was later reversed due to the account number being invalid.

The agreement came with a guarantee that returns in the first six months would result in a minimum return of 50% of the initial funds deposited or the company would refund the whole of the purchase price. This was on condition that no funds were withdrawn in the first 12 months.

You were offered another seven year package which you accepted and paid for.

This was offered as a platinum package with the same conditions as the previous package.

Another platinum package was offered to you with the same conditions as the previous packages, which you accepted and paid for.

The accounts were performing well and you accepted an offer of two managed packages for the cost of one package. You also transferred more funds into the trading account.

During a phone conversation after you had made the investments you raised concerns with Company A as you had read several comments from investors who were unhappy with their investment and considered the company was running a scam.

The company representative attempted to allay your concerns and directed you to a live online presentation where you saw a screen shot of the trading company account in their name with a reasonable balance in the account.

After seeing the representative's account, you were re-assured and entered into an agreement for three packages with a seven year term for the same price as the previous packages.

You signed a Service Provider Transfer Authority with each purchase.

You were later informed Company C had taken over the operation of the trading company from Company B.

Later in that year you had a meeting with Company A's representative. The representative had a laptop computer and showed you a live trial of a software system. At this meeting you agreed to purchase a separate lifetime lay trading software from the company.

From late in that same year the Company A representative stopped returning phone calls and could not be contacted.

You invested significant amounts of money in both Company A and B.

Early the following year you became aware of major losses from your accounts set up by Company A and after a few months it was impossible to contact anyone at Company A.

You have contacted both Company B and Company C, with no success, to try to obtain refunds of your deposits as per the agreements however only a small amount was refunded.

You later lodged a report with the state police who have investigated the matter and declared Company A as a scam. The company has ceased trading and a trial date is imminent.

There is no chance of recovering any of the funds invested in either company.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 Division 110