Edited version of private advice

Authorisation Number: 1052363936683

Date of advice: 24 February 2025

Ruling

Subject: Loss from scam

Question 1

Are you entitled to a capital loss in your Australian tax return?

Answer 1

No.

Question 2

Are you entitled to a deduction for the interest incurred on your loan to purchase the dwelling in Country Z along with the legal fees incurred to pursue compensation?

Answer 2

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

XX XX 20XX

Relevant facts and circumstances

You were a foreign resident for tax purposes in the 20XX-XX income year.

You became a resident of Australia for tax purposes for the 20XX-XX income year.

You were a foreign resident for tax purposes in the 20XX-XX and 20XX-XX income years.

You are still currently a foreign resident for tax purposes.

You attempted to purchase a dwelling in Country Z in XX 20XX.

Your intention was to rent the dwelling out during the periods you and your family were visiting Australia.

You obtained a loan from a bank to purchase the dwelling.

You paid a deposit to the seller in Country Z.

You paid an additional deposit to the seller in Country Z.

Later in the same month, the first deposit was returned to you as you were informed the payment had been made to the wrong account.

A subsequent payment was transferred via your bank, to complete the purchase.

You realised in the following month that the seller of the dwelling had not received your payment.

The amount was lost due to criminal fraud resulting in a misdirected payment, leading to a total and irrevocable loss of these funds.

You lost the opportunity to purchase the dwelling along with the second deposit and the final balance payment.

You pursued your bank for compensation, lodging a statement of claim on XX XX 20XX.

You withdrew your court proceedings against the bank for compensation on XX XX 20XX.

You are not pursuing any other avenues for compensation for your loss.

Despite the loss, you are still required to repay the bank loan and interest on this loan established for this transaction.

You incurred expenses taking action to attempt to recover your funds shortly after the loss was discovered and then later in pursuing the court proceedings against the bank.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 section 104-160

Income Tax Assessment Act 1997 section 855-10

Income Tax Assessment Act 1997 section 855-45

Reasons for decision

Question 1

Summary

The CGT asset in your case was the right to seek compensation. Two CGT events, I1 and C2, happened in relation to your CGT asset.

For Australian CGT purposes you were deemed to have acquired your right to seek compensation when you became an Australian resident, with the first element of its cost base being its market value which is considered to have been nil. Subsequently, CGT event I1 happened when you stopped being an Australian resident. This did not result in a capital loss given the cost base was nil.

Later, CGT event C2 happened to your CGT asset on XX XX 20XX when you abandoned your pursuit of compensation. Any capital gain or loss is disregarded because you were a foreign resident just before the CGT event and your right to seek compensation was not taxable Australian property.

Detailed reasoning

Having regard to Taxation Ruling TR 95/35 Income tax: capital gains: treatment of compensation receipts, the relevant CGT asset in your case was the right to seek compensation.

CGT event I1

For Australian CGT purposes, you were deemed under section 855-45 of the Income Tax Assessment Act 1997 (ITAA 1997) to have acquired your right to seek compensation when you became an Australian resident for tax purposes.

Subsection 855-45(2) of the ITAA 1997 states that the first element of its cost base is deemed to be the market value of the CGT asset at that time.

Given the substantial uncertainty concerning the possibility of you being able to obtain any compensation, it is considered that there would not have been a market for this right and therefore the market value would have been nil.

Subsequently, CGT event I1 happened under section 104-160 of the ITAA 1997 when you stopped being an Australian resident. This did not result in a capital loss given the cost base of the CGT asset was nil.

CGT event C2

Section 104-25 of the ITAA 1997 states that CGT event C2 happens if a taxpayer's ownership of an intangible CGT asset ends because the asset expires or is redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered, or forfeited.

A capital gain is made if the capital proceeds from the ending are more than the asset's cost base. A capital loss is made if those capital proceeds are less than the asset's reduced cost base. The capital gain or loss is the difference between the amounts.

The time of the event (and so the time when a capital gain or loss is made) is:

•                     when the taxpayer enters the contract that results in the asset ending, or

•                     If there is no contract - when the asset ends.

CGT event C2 happened to your right to seek compensation when you ceased the pursuit of compensation with the bank on XX XX 20XX.

Section 855-10 of the ITAA 1997 states that you disregard a capital gain or capital loss from a CGT event if:

a)            you are a foreign resident just before the CGT event happens; and

b)            the CGT event happens in relation to a CGT asset that is not taxable Australian property.

Five categories of CGT assets that are taxable Australian property are set out in the table in section 855-15 of the ITAA 1997:

1. Taxable Australian real property;

2. A CGT asset that:

a. Is an indirect Australian real property interest; and

b. Is not covered by item 5;

3. A CGT asset that:

a. You have used at any time in carrying on a business through a permanent establishment in Australia; and

b. Is not covered by item 1, 2 or 5;

4. An option or right to acquire a CGT asset covered by item 1, 2 or 3; and

5. A CGT asset that is covered by subsection 104-65(3) of the ITAA 1997 (choosing to disregard a gain or loss on ceasing to be an Australian resident).

Section 855-20 of the ITAA 1997 states that a CGT asset is taxable Australian real property if it is:

a. real property situated in Australia; or

b. a mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, petroleum or quarry materials are situated in Australia.

You were a foreign resident just before the time CGT event C2 occurred on XX XX 20XX and your right to seek compensation does not satisfy the definition of taxable Australian property. Therefore, any capital gain or loss is disregarded under section 855-10 of the ITAA 1997.

Question 2

Summary

A deduction is not allowable for your interest or legal expenses as they are not considered to be incurred in earning assessable income.

Detailed reasoning

Section 8-1 of the 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 relation to the interest on the bank loan, it may have been your intention to use those funds to purchase the dwelling in Country Z but that is not what actually happened, that is, you did not end up acquiring the property so no rental income assessable for tax in Australia has been earned. Also, at the time you took out the loan and attempted to purchase the dwelling in Country Z, you were a foreign resident and therefore any rental income from the foreign rental property would not have been assessable income in Australia.

The legal expenses incurred in pursuing compensation for the loss of funds intended to have been used to purchase the dwelling, are also not considered to have been incurred in earning assessable income. In addition, these legal expenses were incurred in pursuit of a capital sum and therefore are capital in nature.

A deduction is not allowable under section 8-1 of the ITAA 1997 for either of these expenses. There are no other provisions which would allow a deduction for the loan interest or the legal expenses.