4.6.5.110 Failed Financial Investments

Summary

This topic discusses:

  • failed financial investments,
  • special rules that can assist people with failed investments,
  • where fraud is involved, and
  • valuation of a failed financial investment.

Failed financial investments

A failed financial investment is an investment that has ceased to operate in the way it was outlined in the investment contract or terms and conditions of an investment agreement.

Act reference: SSAct section 9(1)-'financial investment'

Policy reference: SS Guide 4.6.5.60 Assessing Loans & Guarantor Arrangements

Special rules to assist people with failed investments

Whether a person can be assisted by a deeming exemption or by the hardship rules will depend on their particular circumstances.

Where the person has their rate of payment assessed under the income test they MAY be able to have the loan exempt from deeming. A loan exempted from deeming is NOT deemed to be producing income. A deeming exemption does NOT change the asset value of the loan.

The hardship rules MAY be used to disregard the value of an unrealisable asset such as a failed loan where the person has their rate of payment assessed under the assets test.

For an investment to be considered an unrealisable asset under the hardship rules, the investor MUST have started to take all reasonable action to get back their capital. An investment CAN be treated as unrealisable even if at some future date the investor may be able to get some or all of their capital back.

Policy reference: SS Guide 4.4.1.40 Exemption of Financial Investments from Deeming, 4.6.7.10 General Provisions for Hardship

Where fraud is involved

A person may consider they have made a particular sort of financial investment, including lending money to a company or individual (or legal practitioner) for a specific purpose. In some instances where fraud is involved this arrangement may be a sham. The money may not have been invested but taken for personal use.

Example: A person may think they are investing in a company. The documents may show that neither a loan, nor any other kind of investment, occurred.

Some fraudulent arrangements are complex and involve forged documents or moving money through a number of companies. In the initial stages some fraudulent schemes pay interest to investors so it may be some time before the real nature of the scheme is identified.

Until it has been established that fraud had definitely occurred a person may be able to be assisted by a deeming exemption or the hardship rules, or by access to the PLS if appropriate. Once it has been established that the money has been misappropriated and/or no investment exists, no asset value is maintained, until the receiver/liquidator states that the 'investors' will receive some monies back. Evidence establishing that fraud has occurred may include (but is not limited to):

  • statements made by ASIC, or
  • statements made by a relevant company receiver, or
  • the judgement of a state or federal court of law, or
  • statements made by a relevant state law society.

Some defrauded investors may be able to take action to secure compensation for some or all of their loss of capital. The POSSIBILITY that they may qualify for this type of assistance is NOT an asset.

Valuation of a failed financial investment

The value of the asset is the last recorded value before appointment of the receiver until the receiver states what the current value of the asset is. If the receiver states a range of values that investors may receive then the value of that asset is the lower of that range of values. The value of any asset held by the person may change as further information becomes available.

Example: The receiver of the company has stated that investors may recover between 5 and 20 cents in the dollar. After the statement is made the asset's value is adjusted to 5 cents in the dollar.

Policy reference: SS Guide 4.6.5.60 Assessing Loans & Guarantor Arrangements, 4.6.5.65 Loans that No Longer Exist, 4.4.2 Deeming of Financial Investments

Last reviewed: 20 March 2015