Edited version of private advice

Authorisation Number: 1051666541485

Date of advice: 27 April 2020

Ruling

Subject: Capital gains tax

Question 1

Did a capital gains tax (CGT) event C2 occur when your contractual rights for your investment were abandoned?

Answer

Yes.

Question 2

Did the CGT loss from your CGT event C2 happen in the 20XX-XX income year?

Answer

Yes.

Question 3

Do the payments made to purchase the shares form part of your cost base for CGT purposes?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts

You were dealing with a share broking house in country A called entity B to purchase shares.

Money was transferred in the 20XX-XX income year.

Prior to transferring the funds to entity B, you received email communication, including application forms, from entity B for the investments.

Entity B was soliciting further investment. You became increasingly concerned about entity B's intent.

On xxxx you emailed country A's relevant authorities requesting confirmation of the registration of entity B.

You engaged lawyers to act on your behalf. A letter was sent to entity B on xxxx but no response was received by the lawyers.

On xxxx, country A authorities replied to your email confirming that the license number did not appear on the relevant Public Register and that you should refrain from dealing with an entity without a valid licence.

In light of the information provided on xxxx by country A and advice from your legal advisors, you advised entity B that you wished to sell your investments and that the funds be repatriated.

On xxxx, entity B advised you that the closure of your account and final repatriation of funds will now be completed within a time frame of approximately 15 working days.

It became apparent to you that the investment was a scam.

Since xxxx you have tried to communicate with entity B without success. You continued to email entity B asking about when the funds would be repatriated.

Entity B asked for a document to be filled out and returned. You completed this form and on xxxx was advised that this form had been lodged with the relevant authorities.

The last communication from entity B on this matter was xxxx.

It has been made clear to you that there is very little chance that you will successfully recoup any money from entity B.

On xxxx, country A listed entity B as an unlicensed entity on their website warning investors.

In country C the Financial Markets Authority issued a warning on xxxx regarding entity B being a scam.

Entity D published a list of companies that have been reported as scams on xxxx which included entity B.

You abandoned the thought that any money would ever be received and ceased pursuing entity B in the year ended 30 June 20XX.

You were not carrying on a business in relation to the above investments.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 8-1.

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.

Reasons for decision

Allowable deductions

Section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) allows a deduction for a loss or an outgoing to the extent to which it is incurred in gaining or producing assessable income, except where the loss or outgoing is of a capital, private or domestic nature.

In your case, the money paid is not from business activities and is capital in nature. As the associated loss is capital in nature, no deduction is allowable under section 8-1 of the ITAA 1997.

Capital gains tax provisions

Section 102-20 of the ITAA 1997 states that a capital gain or capital loss is made only if a CGT event happens. The gain or loss is made at the time of the CGT event.

As a result of you entering into the arrangement with entity B, it is considered that you acquired contractual rights. These contractual rights are CGT assets (section 108-5 of the ITAA 1997).

Section 104-25 of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being abandoned, surrendered or forfeited or being released, discharged or satisfied.

The time of a CGT event C2 is when you enter into the contract that results in the asset ending or, if there is no contract, when the asset ends.

You make a capital loss from CGT event C2 happening if your capital proceeds from the event are less than the asset's reduced cost base.

In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423 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".

The Commissioner takes the view 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. That is, a CGT event C2 will happen when the contractual rights are abandoned.

In your case you paid $xxxx to purchase shares. You never received confirmation that you owned the shares and sought legal action following your concerns about entity B. Your attempts to contact the relevant parties have been largely unsuccessful. You have received no further communication from entity B since xxxx. Entity B has been identified by various authorities as a scam.

You abandoned the thought that any money would ever be received and ceased pursuing entity B in the year ended 30 June 20XX. It is considered that CGT event C2 happened in that income year as you abandoned your rights in that year.

The reduced cost base of your CGT asset includes the initial payments of $xxxx as this was money paid in respect of acquiring your rights (Division 110 of the ITAA 1997).