Edited version of private advice

Authorisation Number: 1052135117381

Date of advice: 3 July 2023

Ruling

Subject: Investment loss - scam

Question

Did you realise a capital loss under subsection 104-20(1) of the Income Tax Assessment Act 1997 in the income year ended 30 June 20XX?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were seeking to invest some of your surplus funds to provide financial returns into the future.

You carried out research regarding different investment opportunities and contacted a number of investment companies to further investigate your financial opportunities.

ABC Co was one of the companies that you found in your searches.

You believed ABC Co was a financial services firm based overseas.

You noted that ABC Co ranked the highest in the search results in Google.

Following your initial contact with ABC Co, you received paperwork including their Investment Services & Products brochure and their analyst's report on the upcoming listing of Entity Inc; bank account details and registration options.

You decided to invest with ABC Co with the intention of acquiring shares for future dividends and capital gains.

As instructed by ABC Co, you made a payment of $X in late 20XX.

You received a Trade Receipt from ABC Co followed by a Trade Confirmation and Share Purchase Agreement indicating that you had purchased a certain number of shares in Entity Inc.

You made a second payment of $X the following month.

You received a Trade Receipt from ABC Co in regard to your second payment indicating the purchase of more shares in Entity Inc.

Based on the trading information being provided, your investment appeared to be performing extremely well within a very short period of time.

After discussing these results with an acquaintance, you made investigations to confirm the validity of the investments.

Having identified some inconsistencies, you became concerned about the security of your investment. In particular, it became apparent that ABC Co was inappropriately using a business name that is very similar to a legitimate overseas financial advisory business.

You alerted your bank of a potential fraud and subsequently lodged a complaint.

Your bank tried to recover your funds from the overseas bank however recovery was not successful.

You then began enquiries with an ABC Co representative.

When you expressed your desire to withdraw your investment, the ABC Co representative responded with complexities and delays.

The ABC Co representative attempted to extract further money from you to initiate the withdrawal (purportedly for a payment of withholding tax).

You did not make this additional payment given your concerns over the legitimacy of ABC Co.

After you informed the ABC Co representative that you would not be making any further payments, they ceased responding to you.

You reported the suspected fraud/scam to police in Australia but were informed that there was nothing they could do given the overseas location of ABC Co.

A witness statement you made to the Australian police on XX XX 20XX included the following additional details:

•                     The name of the website operated by ABC Co.

•                     Prior to investing, you checked that ABC Co was registered with certain financial services associations and registers.

•                     You believed that ABC Co purchased the shares in Entity Inc in your name.

•                     You contacted Action Fraud in Country A and was advised that ABC Co was a scam and you would not get your money back.

•                     You employed the services of Company Y based in Country B to track down and recover your money but they have not recovered any to date.

•                     You and Company Y have been corresponding with banks and the police in Country C.

You also reported the scam to the National Fraud Intelligence Bureau.

The International Organization of Securities Commissions (IOSCO) issued an Investor Alert regarding the scam on XX XX 20XX.

The webpage of ABC Co was taken down following the alert issued by IOSCO.

To date you have not received any compensation or received any of your money back.

You submit that there is no chance of recovering your investment.

You were not carrying on a business in relation to the investment with ABC Co.

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 104-5

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)

Income Tax Assessment Act 1997 section 116-60

Reasons for decision

All legislative references are to theIncome Tax Assessment Act 1997.

Section 102-20 states that you make a capital gain or capital loss if and only if a CGT event happens.

Section 104-5 lists the CGT events that can happen.

The gain or loss is made at the time of the CGT event.

Although you intended to acquire shares in Entity Inc, your money does not seem to have been invested in such acquisitions by ABC Co.

To date, all attempts to recover your money have been unsuccessful.

As the arrangement entered into is considered a scam, the total amount you transferred to ABC Co for investment is considered to be a debt or obligation owed by ABC Co.

From the information provided, the most relevant CGT event in your situation is considered to be CGT event C1.

Subsection 104-20(1) states that CGT event C1 happens if a CGT asset you own is lost or destroyed.

Subsection 104-20(2) relevantly adds that the time of the event is when you first receive compensation for the loss, or if you receive no compensation - when the loss is discovered.

The words 'lost' and 'destroyed' are not defined in the Income Tax Assessment Acts and they take their ordinary meaning.

Paragraph 2 of 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? 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.

Paragraph 7 of TD 1999/79 confirms that CGT event C1 does not distinguish between tangible and intangible CGT assets.

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

Therefore, the debt or obligation owed to you by ABC Co is a CGT asset.

As you did not receive any compensation for the loss, CGT event C1 happened in late 20XX when the loss was discovered.

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

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; and the market value of any other property you have received, or are entitled to receive, in respect of the event happening.

As you did not receive any money or other property when the debt was lost, the capital proceeds is nil.

The reduced cost base for the debt is considered to be the amount you paid to ABC Co to invest on your behalf.

Therefore, the capital loss you made from CGT event C1 happening is the amount you paid to ABC Co to invest on your behalf.

Other comments

•                     A capital loss you make in an income year can only be deducted from capital gains you make in that income year or later income years. There is no time limit on how long you can carry forward a net capital loss to offset against future capital gains.

•                     If you later receive money or other property for the debt you may need to increase the capital proceeds by the amounts and re-calculate the capital loss and relevantly amend your tax assessments.