Edited version of private advice

Authorisation Number: 1052226713351

Date of advice: 15 March 2024

Ruling

Subject: CGT - investment scams

Question 1

Did you acquire a capital gains tax (CGT) asset when you loaned money to Person A as outlined in the agreement?

Answer 1

Yes.

Question 2

Did a CGT event happen to the CGT asset during the income year ending 30 June 20YY?

Answer 2

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You loaned multiple amounts to Person A over several months. For the purposes of this ruling, the total of these amounts are referred to as the agreement.

You were visited by Person A, who you had known for many years, both as a friend and accountant for your business and personal needs.

During that visit, they talked about an investment opportunity and suggested you become involved. Person A mentioned that the investment would deliver a XX% return on the money you invested and would not be a loan. They advised that the return would be split between you. You would receive XX% return and Person A would receive XX%.

Later that afternoon you received a text message from Person A, asking you to invest an amount of money for the purchase of a particular item of Article 1. They advised that the investment would be for the particular item of Article 1 being made in Country A and supplied to Company A. You transferred this money to their bank account using the details they provided. Later again that day, Person A requested that you transfer a further amount to cover freight costs which you subsequently did.

The following day, you transferred a further amount to Person A for a second order of a particular item of Article 1.

Several days later, you sold shares which enabled you to transfer a further amount to Person A for a particular item of Article 1.

Subsequently, you sold more shares which enabled you to transfer an amount to Person A over several days for a particular item of Article 1.

You sold XXXX. This enabled you to transfer the amount received from the sale of the XXXX to Person A over several days for a particular item of Article 1.

Several days later, Person A gave you an amount in cash, which led you to believe you were getting a return on your investment. On that same day, your friend Person B came to your house as they wanted to meet with Person A and possibly invest.

Approximately one week later, you transferred an amount to Person A for a particular item of Article 1.

Approximately one month after Person B came to your house, Person A and Person B met at your house. You and Person B had both been provided with loan agreements from Person A in regard to your investments.

Your first loan agreement related to the money you had given Person A in the first month of the transactions occurring.

You met with Person A and your friend Person B. At that meeting, Person A asked for your and Person B's original loan agreements back along with the personal cheques that he had previously provided. They ripped all of these items up.

They presented you with a new loan agreement which you signed in their presence.

Person A drove to your house. Once there, they wrote you a cheque for the sum equivalent to the amount in the loan agreement. This was given to you on the condition that you would only cash the cheque after asking Person A first as they knew it would bounce if they didn't transfer money into their account first. They advised that you should accept the cheque as security for your loan arrangement.

Person A contacted you and advised that an opportunity had arisen with regards to a particular item of Article 2. You would receive XX% return if you invested in this opportunity.

Subsequently, you sold shares in XXX and received an amount in cash. This enabled you to transfer the necessary amount to Person A for investment in the Article 2.

Person A requested an amount for an order of Article 2. They advised that you would receive a XX% return on this investment.

You applied to a bank for a personal loan and were declined. On the same date, you asked Person B to provide funds to Person A as you couldn't obtain a loan. They transferred an amount to Person A. You then transferred an additional amount to Person A to make the total amount required for the Article 2.

Over several months, you drove to City A in an attempt to collect funds owed to you. Person A stated that they had a blood clot following a vaccine and you were unable to obtain the funds.

You also made contact with other people who were also trying to collect funds from Person A. At that time, you also contacted Person A's bank and discovered that they had no balance.

You also searched for any assets that you could make a claim on. You could not find any assets held in Person A's name.

You also drove to City A as Person A was not answering their phone. You left a message for Person A to contact you, which they subsequently did.

At the time of meeting, Person A looked unwell. Person A reassured you that if anything happened to them their adult child knew all about the investments so there was no issue.

While you were with Person A, you tried to obtain a return as promised for your friend Person C for the amount invested plus interest that Person C had invested with Person A. Person A promised to return the money but did not.

Person A claimed that they had been in hospital following an adverse reaction to a vaccination.

Several weeks after that, you met with Person A. They appeared healthier and advised that they would return the money.

Following that meeting, Person A was admitted to hospital following further health complications.

You are still waiting for a return on your investment. You last heard from Person A when they called you on the phone. You are currently owed the entire amount of the funds you transferred to Person A by Person A.

You never attempted to cash the cheque given to you by Person A. You had become aware that their bank was confiscating non-sufficient funds (NSF) cheques, so you never presented the cheque to be cashed.

You made an initial complaint to the police and were provided with an incident number. As there were multiple complainants, your report was amalgamated into a master report.

Person A has been charged with stealing by direction and has pleaded not guilty. A trial has not been held yet.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-45

Income Tax Assessment Act 1997 section 108-5

Reasons for decision

Question 1

Summary

You acquired a capital gains tax (CGT) asset when you loaned money to Person A as outlined in the agreement.

Detailed reasoning

In accordance with section 108-5 of the Income Tax Assessment Act 1997 (ITAA 1997), a CGT asset is any kind of property or a legal or equitable right that is not property. The right to seek compensation is a CGT asset for the purposes of Part IIIA of the ITAA 1997.

As outlined in Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts (TR 95/35) the right to seek compensation will arise on any breach of contract, personal injury or other compensable damage or injury. The right will end when it is satisfied, surrendered, released, or discharged.

TR 95/35confirms that we will use the underlying asset approach to examine the most relevant asset to which a compensation amount most directly relates.

TD 2 Capital Gains: What are the CGT consequences for the lender(creditor) when a debt is waived? confirms that a loan is a CGT asset.

Application to your circumstances

When you entered into the agreement to loan money to Person A, you acquired a contractual right to have the loan funds repaid to you. Therefore, you have acquired a CGT asset.

We consider you to only own one CGT asset. You would include the amounts of each additional borrowing in the fourth element of its cost base and reduced cost base as expenses that were expected to increase its value.

Question 2

Summary

A CGT event did not occur in the year ending 30 June 20YY.

Detailed reasoning

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss if and only if a capital gains tax (CGT)event happens. You make the gain or loss at the time of the CGT event.

Subsection 102-25(1) of the ITAA 1997 provides that if more than one CGT event can happen, the one that you use is the one that is more specific to your situation.

CGT event C1

Section 104-20 of the ITAA 1997 provides that CGT event C1 happens when a CGT asset you own is lost or destroyed. The time of the event is when you first become aware of the loss or destruction; or if you receive compensation, when you receive the compensation.

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?(TD 1999.79) confirms that the word 'lost' is not defined in the legislation so takes its ordinary meaning.

The definition of loss in relation to a CGT event implies that an owner has been deprived of ownership involuntarily but could also occur as a result of some fault of the owner. Loss of an asset is usually restricted to situations where ownership is not assumed by another person.

Generally, the concept of 'destruction' applies only to tangible assets like buildings.

With regard to intangible CGT assets, the asset must be wholly lost, with no chance of recovery, for the circumstances to be covered by CGT event C1.

CGT event C1 will not happen to an intangible asset merely because its value is reduced (including being reduced to $nil).

CGT event C2

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 redeemed or cancelled; or expiring; or being abandoned, surrendered, or forfeited.

The occurrence of CGT event C2 includes a voluntary event.

The primary requirement for CGT event C2 is that your ownership of the asset ends. CGT event C2 will not happen while you continue to own the relevant CGT asset.

You make a capital gain if the capital proceeds from the ending are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) ITAA 1997).

Application to your circumstances

You acquired an underlying CGT asset, being a loan, when you loaned money to the investor.

The asset has not ended as a result of being abandoned, surrendered, or forfeited by you. Nor has the asset ended by being released, discharged, satisfied, redeemed, or cancelled.

As of DD June 20YY, you still owned a CGT asset. Therefore, the relevant conditions for CGT event C1 or C2 have not been met.