ATO Interpretative Decision

ATO ID 2002/400 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as it is a straight interpretation of the law, a reference to these types of deductions has been included on the ' Other operating expenses' for businesses page (QC33867).
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Can a sole trader claim a deduction under either section 8-1 or section 25-45 of the Income Tax Assessment Act 1997 (ITAA 1997) for money misappropriated by their spouse?

Decision

No, a sole trader cannot claim a deduction under either section 8-1 or section 25-45 of the ITAA 1997 for money misappropriated by their spouse.

Facts

The taxpayer is a sole trader. The taxpayer's spouse was not an employee of the business but did bank the takings and maintain the books of account. The taxpayer's spouse misappropriated significant sums of money over a two year period. The money was misappropriated prior to banking into the taxpayer's business account.

Reasons for Decision

Section 8-1 of the ITAA 1997 broadly allows a deduction for any losses or outgoings to the extent to which they are incurred in gaining or producing assessable income, except to the extent the losses or outgoings are of a capital, private or domestic nature.

In Charles Moore & Co. (W.A.) Pty Ltd v. Federal Commissioner of Taxation (1956) 95 CLR 344, [1956] HCA 77, the High Court suggested that three questions determine the deductibility of losses caused by dishonesty, under section 8-1 of the ITAA 1997:

(1)

Is the occasion of the loss found in the income earning activities or business operations of the taxpayer?

(2)

Is the nature or character of the loss a mischance or misfortune which is a natural or recognised incident of the income earning activities or business operations?

(3)

Is the loss one of capital, or of a private, domestic or capital nature?

The taking of the money by the spouse was not a natural or recognised incident of the taxpayer's income earning activities but due to the closeness of the husband/wife relationship. The theft from the business by the spouse of the proprietor cannot be considered a mischance or misfortune which is a natural or recognised incident of the income earning activities or business operations. The money was not removed by an employee or agent but by the spouse who was conducting the banking duties due to the private relationship with the proprietor. As such, the loss does not have the necessary nexus to the derivation of assessable income, or the carrying on of a business for that purpose, to satisfy subsection 8-1(1) of the ITAA 1997.

Section 25-45 of the ITAA 1997 provides a deduction for a loss incurred by a taxpayer through theft, stealing, embezzlement, larceny, defalcation or misappropriation by an employee or agent of the taxpayer. The loss must be in respect of money which has been included in the taxpayer's assessable income and must be discovered in the income year in which the deduction is claimed.

The taxpayer's spouse misappropriated funds from the business while banking the takings. The spouse was not undertaking the duties as an employee nor as an agent but due to the ordinary domestic relationship of husband and wife.

Therefore, a deduction is not allowable under either section 8-1 or section 25-45 of the ITAA 1997 for moneys stolen by the taxpayer's spouse.

Amendment History

Year of income:  Year ended 30 June 1998 Year ended 30 June 1999

Legislative References:
Income Tax Assessment Act 1997
   Section 8-1
   Section 25-45

Case References:
Charles Moore and Co v. Federal Commissioner of Taxation
   95 CLR 344
   

Keywords
Deductions & expenses
Losses from fraud, theft & embezzlement

Business Line:  Small Business

Date of publication:  28 March 2002

ISSN: 1445-2782