Edited version of private advice

Authorisation Number: 1052120848846

Date of advice: 12 June 2023

Ruling

Subject: Investment loss - scam

Question

Are you entitled to claim a capital loss in relation to the money transferred to the company?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2020

The scheme commenced on:

1 July 2019

Relevant facts and circumstances

X is a self-managed super fund (SMSF).

A family member introduced X to the member of the SMSF.

The member was directed by X to deposit monies into the bank account of the company owned by X.

In October 20XX, the member transferred $XXXX, on behalf of the SMSF, to the company's bank account.

X advised that he used this money to invest in shares in X.

X advised that X was about to be listed and the share price was therefore about to increase significantly.

X has not provided any information to the SMSF since the 20XX income year.

In the 20XX financial year, the member became aware that X's assets had been frozen by the Australian Taxation Office.

In the 20XX financial year, the member also realised that X did not register the shares to the SMSF.

The SMSF attempted to recover funds from X via direct communication and was unsuccessful.

Between November 20XX and September 20XX, the SMSF engaged X Lawyers in an attempt to recover funds and was unsuccessful.

In November 20XX, X were engaged to recover funds. However, they had no success, and the engagement was discontinued in February 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 subsection 104-20(1)

Income Tax Assessment Act 1997 paragraph 104-20(2)(b)

Income Tax Assessment Act 1997 subsection 104-20(3)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 116-20(1)

Reasons for decision

A debt owed to the SMSF falls within the definition of a CGT asset in section 108-5.

A capital loss can only arise if a CGT event happens. Most CGT events involve a CGT asset. The gain or loss is made at the time of the CGT event. Division 104 lists all the CGT events that can happen.

From the information provided, the most relevant CGT event is considered to be CGT event C1. CGT event C2 is not considered appropriate as the debt was not redeemed, cancelled, released, discharged, satisfied, expiring, abandoned, surrendered or forfeited.

CGT event C1 happens if a CGT asset owned by a taxpayer is lost or destroyed[1]. The words 'lost' and 'destroyed' are not defined in with of the Income Tax Assessment Acts and they take their ordinary meaning. As the debt was not destroyed, it must be determined if the debt was lost.

Taxation Determination TD 1999/79: Income Tax: capital gains: does the expression 'lost or destroyed' for the purposes of CGT event C1 in subsection 104-20(1) of the Income Tax Assessment Act 1997 apply to: (a) a voluntary 'loss' or 'destruction'? (b) intangible assets? relevantly states:

The word 'lost' in its context in subsection 104-20(1) does not contemplate voluntary actions. The Macquarie Dictionary, 3rd ed, defines 'lost' as '1. past tense and past participle of lose' and defines 'lose' as '1. to come to be without, by some chance, and not know the whereabouts of: to lose a ring'. The word in its context in CGT event C1 suggests an involuntary rather than a voluntary act.

Neither of the words 'lost' or 'destroyed', in the context of CGT event C1, contemplates damage to an asset that does not amount to the asset being lost or destroyed. A CGT asset must be wholly lost - not just damaged - or wholly destroyed - not just damaged - for the circumstances to be covered by CGT event C1.

CGT event C1 does not distinguish between tangible and intangible assets. Section 104-20 refers to 'CGT asset' and this includes intangible CGT assets.

The loss of an asset includes the happening of an involuntary event which deprives the owner of the asset, for example theft.

As the SMSF did not receive any compensation or amount, the time CGT event C1 happens is when the loss was discovered.

You make a capital loss if the capital proceeds from the loss are less than the asset's reduced cost base[2].

The capital proceeds from a CGT event are the total of the money you have received, or are entitled to receive, in respect of the event happening, or the market value of any other property you have received or are entitled to receive[3].

As the SMSF did not receive any money when the debt was lost, the amount of capital proceeds will be zero.

The reduced cost base for the debt is considered to be the amount the SMSF deposited to the company.

Therefore, the capital loss the SMSF made from CGT event C1 happening is $XXXX. The time this event happened is in the income year ending 30 June 20XX, and that is the income year in which the capital loss is made.

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.

[1] Subsection 104-20(1).

[2] Subsection 104-20(3).

[3] Subsection 116-20(1).