Capital gains tax: CGT event C2 - ending of contractual rights

Did CGT event C2 in section 104-25 of the Income Tax Assessment Act 1997 (ITAA 1997) happen in relation to the taxpayer's contractual rights arising from their involvement in what is commonly referred to as a 'Nigerian fraud scam'?

Yes. Based on the facts of this case it is considered that CGT event C2 in section 104-25 of the ITAA 1997 has happened as the taxpayer's contractual rights under the arrangement have been discharged.

In the 2001-02 income year the taxpayer entered into a contract to facilitate the transfer of funds into their bank account in Australia. In return for providing this service the taxpayer was to receive a commission fee and reimbursement of certain expenditure they incurred to carry out the arrangement.

The taxpayer made two payments in the 2001-02 income year at the request of the other parties.

Subsequently the taxpayer discovered that the arrangement was not legitimate. Since this time the taxpayer has been unable to contact the other parties involved in the arrangement and the taxpayer has determined that they were the victim of a fraud. The arrangement has been identified as a scam by various Australian Government agencies and warnings have been placed on their websites. The taxpayer has made no further effort to comply with the terms of the arrangement.

The taxpayer did not obtain any independent advice regarding this scheme. The taxpayer expected to make a profit from the arrangement based on the representations made by other parties to the arrangement.

As a result of entering into this arrangement, it is considered that the taxpayer acquired contractual rights. These contractual rights are CGT assets (paragraph 108-5(1)(b) of the ITAA 1997).

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being released, discharged or satisfied (paragraph 104-25(1)(b) of the ITAA 1997).

In DTR Nominees Pty Ltd v. Mona Homes Pty Ltd (1978) 138 CLR 423 it was recognised that a contract can come to an end merely by being treated as being at an end by the parties. It was held in Fitzgerald v. Masters (1956) 95 CLR 420 at 432 that: Where an 'inordinate' length of time has been allowed to elapse, during which neither party has attempted to perform, or called on the other to perform, it may be inferred that the contract has been abandoned. ... What is really inferred in such a case is that the contract has been discharged by agreement, each party being entitled to assume from a long-continued ignoring of the contract on both sides that (in the words of Rowlatt J.) "the matter is off altogether".

In this situation, a substantial period of time has elapsed since the taxpayer last made a payment under the arrangement. In addition, the taxpayer's attempts to contact the other parties to the arrangement have been unsuccessful. The taxpayer has made no further payments under the arrangement and the arrangement has been identified as a scam by various Government agencies. Consistently, the other parties have made no attempt to perform their part of the bargain. Based on these facts, it is considered that the contract has been abandoned with the effect that the taxpayer's rights under the contract have been discharged. Accordingly, it is considered that CGT event C2 in section 104-25 of the ITAA 1997 has happened.

In this case, it is considered that CGT event C2 happened when the contract was abandoned with the effect that the contract was discharged (subsection 104-25(2) of the ITAA 1997). The taxpayer will make a capital gain if the capital proceeds from the ending are more than the asset's cost base. The taxpayer will make a capital loss if those capital proceeds are less than the asset's reduced cost base (subsection 104-25(3) of the ITAA 1997).