Edited version of private advice

Authorisation Number: 1052375323094

Date of advice: 24 March 2025

Ruling

Subject: Investment scam - capital loss

Question 1

Will a capital loss arise under section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) to Person A as a result of an investment scam in the income year ended 30 June 20YY?

Answer

Yes.

Question 2

Will a capital loss arise under section 104-25 of the ITAA 1997 to Company A as a result of an investment scam in the income year ended 30 June 20YY?

Answer

Yes.

Question 3

Will a capital loss arise under section 104-25 of the ITAA 1997 to the Investment Trust as a result of an investment scam in the income year ended 30 June 20YY?

Answer

Yes.

This ruling applies for the following period:

Income year ended 30 June 20YY

Relevant facts and circumstances

1.  On DD MM 20YY, whilst searching online for fixed term deposits in which to invest, Person A unwittingly initiated contact with a fake XX Bank Australia (XX) webform (https://www.XX-XXXX.com).

2.  Following that initial contact with the fake website, Person A was contacted by individuals impersonating representatives from XX (Impersonators) and proceeded to complete various forms provided to them by the Impersonators and provide them with relevant identification documentation.

3.  Person A's intention was to establish 3 separate terms deposits of $XX each in the names of Person A, Company A and the Investment Trust respectively.

4.  Person A is a director and the sole shareholder of Company A, as well as the sole director and shareholder in the corporate trustee of the Investment Trust.

5.  On DD MM 20YY, a separate 'contract note for capital market operations' (Contract Note) was issued in the name of each of the 3 investors. Each Contract Note was for an investment of $XX in a 12-month term deposit, accruing interest at a rate of 6.45%.

6.  The payment instructions provided on the 3 Contract Notes are to the same BSB and account number.

7.  On DD MM 20YY, $YY was transferred by Person A into the XXX bank account of Company A.

8.  On DD MM 20YY, Person A's accountant made a payment of $ZZ from Company A's XXX bank account to finalise the Contract Notes.

9.  On DD MM 20YY, Person A realised the funds had been transferred to a XXX Australia Bank (XXX) account instead of an XXX account.

10.  On DD MM 20YY, Person A contacted:

(a)          XXX, who advised that the email address she had been communicating with in relation to the Contract Notes was not XXX;

(b)          XXX in relation to the transferred money and was advised that as the account was not in their name they could not provide any information other than to confirm that the account existed; and

(c)          XXX Scam Assist, who advised they had contacted XXX and had been advised there were no funds left in that account.

11.  It was at this point that Person A had confirmed that the monies invested had been misappropriated, and that they were a victim of a scam.

12.  person A subsequently undertook the following action to try to retrieve the $ZZ:

(a)          reported the matter to the Australian Cyber Security Centre;

(b)          employed solicitors to liaise with XXX and XXX;

(c)          repeatedly contacted the Police to follow up the matter;

(d)          lodged a complaint with the Australian Financial Complaints Authority (AFCA); and

(e)          sent numerous letters to local Ministers.

13.  On DD MM 20YY, the AFCA responded to Person A's complaint, concluding that XXX had not acted in error in processing the transaction, and was therefore not required to compensate Company A.

14.  It had become clear to Person A during the year ended DD MM 20YY that recovery of the monies invested was not possible.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 section 104-25

Income Tax Assessment Act 1997 paragraph 104-25(1)(b)

Income Tax Assessment Act 1997 subsection 104-25(2)

Income Tax Assessment Act 1997 subsection 104-25(3)

Income Tax Assessment Act 1997 paragraph 108-5(1)(b)

Further issues for you to consider

This private ruling is confined to the questions addressed in the ruling. The Commissioner has not considered the treatment of any proceeds in the event such proceeds are ever recovered from the Impersonators or received in connection with a claim for compensation.

You may apply for another private ruling on these or any other matters.

Reasons for decision

All subsequent legislative references are to the ITAA 1997.

Summary

A capital loss of $XX was realised by each of Person A, Company A and the Investment Trust under section 104-25 as a result of their ownership of contractual rights under their respective Contract Note being abandoned in the year ended DD MM 20YY.

Detailed reasoning

Section 102-20 states that a capital gain or capital loss is made only if a CGT event happens. The gain or loss is made at the time of the CGT event.

Paragraph 104-25(1)(b) provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied.

The time of a CGT event C2 is when you enter into the contract that results in the asset ending or, if there is no contract, when the asset ends (subsection 104-25(2)).

A capital loss is made from CGT event C2 happening if your capital proceeds from the event are less than the asset's reduced cost base (subsection 104-25(3)).

As a result of Person A, Company A and the Investment Trust entering the arrangement with the Impersonators, it is considered that they each acquired contractual rights. These contractual rights are CGT assets pursuant to paragraph 108-5(1)(b).

A contract can come to an end merely by being treated as being at an end by the parties (see DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423).

The other parties to the Contract Notes (the Impersonators) have not made an attempt to perform their part of the contract, i.e. (amongst other things) to establish 3 interest-bearing term deposits in the names of Person A, Company A and the Investment Trust. It has become apparent that the arrangement was part of a scam to which all 3 entities fell victim, and all attempts to have the invested monies recovered from the Impersonators have been unsuccessful.

Based on these facts, it is considered that the Contract Notes have been abandoned with the effect that the rights of the Contract Note holders have been discharged. Accordingly, CGT event C2 under section 104-25 has happened to Person A, Company A and the Investment Trust.

CGT event C2 happened when the Contract Notes were abandoned by the holders with the effect that their rights under the Contract Notes were discharged (i.e. in the year ended DD MM 20YY).

The 3 entities each made a capital loss equal to their original investment. 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.