Edited version of private advice

Authorisation Number: 1052035091991

Date of advice: 7 February 2024

Ruling

Subject: High yield investment scheme - capital loss

Question 1

Did you acquire a CGT asset (as defined in section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997)) as a result of entering into a high yield investment scheme?

Answer

Yes. You acquired a CGT asset being a contractual right at the time of entering the arrangement.

Question 2

Did a CGT event subsequently happen to that contractual right?

Answer

Yes. CGT event C1 happened in respect of the contractual right when the contractual right ended. Section 104-20 of the ITAA 1997 outlines the rules for CGT event C1.

Question 3

Are you entitled to a deduction under section 8-1 of the ITAA 1997 for interest incurred on borrowing money paid into a high yield investment scheme?

Answer

No. Deductibility of expenses under section 8-1 of the ITAA 1997 requires a connection with the production of assessable income. Where there is no genuine income-producing scheme, associated expenses are not deductible. In AAT Case 4069 (1988) 19 ATR 3117; 88 ATC 244 losses from a purported gold bullion investment were not allowed under former section 51 of the Income Tax Assessment Act 1936 (the equivalent of section 8-1 of the ITAA 1997) because the occasion of the loss was found in the misappropriation of funds, rather than a genuine income-producing scheme.

This ruling applies for the following period:

Year ending 30 June 20xx

The scheme commenced on:

January 20xx

Relevant facts and circumstances

You were interested in trading crypto assets. You learned of a crypto asset trading platform (the Platform) through a Facebook advertisement that included a false endorsement from a television show.

The Platform had a website that outlined a unique and simple investing platform and offered one-on-one training for investors. They purported to trade in certain crypto assets paired against other coins or the US dollar. The terms provided that the minimum deposit for a new trading account was $250. The minimum withdrawal amount was $100. The website has since been taken down.

You started transferring money to the Platform in January 20xx. The Platform purported to match your deposits, dollar for dollar, with trading credits. As you deposited more funds, the Platform assigned an 'account manager'.

You were given access to a trading platform, which purported to show trading activities and associated gains and losses from trading.

Soon after you were given credits and began a co-trading role, you told the account manager that you intended to cease trading as some unforeseen circumstances had occurred. The account manager told you that you would have to repay the trading credits first.

You own two investment properties and you refinanced these and your main residence to obtain additional funds.

You put in significant additional funds and received a return of approximately 25% of those additional funds between May and June 20xx.

The account manager told you that if you did not deposit additional funds into the account, your investment would disappear. You invested additional funds to hold your trading position.

In June 20xx you attempted to transfer another significant sum to the Platform, part of which was stopped by your bank. The bank informed you that you had likely been the victim of fraud. They referred you to the Australian Securities and Investment Commission (ASIC) and you realised the investment was not genuine.

In July 20xx your bank advised you they could not recover any of your funds. Approximately 3 years later a police investigation was suspended, and you were advised that your funds could not be recovered. The company operating the Platform has been deregistered and the website has been taken down.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 108-5