Edited version of private advice

Authorisation Number: 1052119013740

Date of advice: 19 May 2023

Ruling

Subject: Deduction - stolen money

Question

Are you entitled to a deduction under section 25-45 of the Income Tax Assessment Act 1997 (ITAA 1997)for the loss you incurred when your funds were stolen?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX1

Relevant facts and circumstances

You carried on a business. During the 20XX income year, the majority of the business assets were sold as your intention was to mainly trade with cryptocurrency to maintain a revenue stream.

After receiving guidance from some advisors, your trustee deposited a sum of money from the sale of the assets onto a legitimate cryptocurrency platform to start to start trading in cryptocurrency. The intention was to trade daily and the income be treated on revenue account.

Shortly after the funds were deposited into the cryptocurrency platform, the advisors used your trustee's details to log onto the platform and withdraw the funds.

The stolen funds are not recoverable and the police have confirmed this was cybercrime.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 25-45

Income Tax Assessment Act 1997 section 960-105

Reasons for decision

Section 25-45 of the ITAA 1997provides a deduction for a loss in respect of money if the loss was caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation by your employee or agent. 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.

Section 960-105 of the ITAA 1997 gives the definition of an agent as:

This Act applies to an entity as if the entity were an agent of another entity (the principal) if:

(a) the principal is outside Australia; and

(b) the entity is in Australia and, on behalf of the principal, holds money of the principal or has control, receipt or disposal of money of the principal.

The requirement that the income has been included in the taxpayer's assessable income was discussed at EHL Burgess Pty Ltd v Federal Commissioner of Taxation (1988) 88 ATC 5417; (1988) 18 ATR 1407:

...income which has been or is to be included in the assessable income of a taxpayer, but has been dealt with in such a way that it has become mingled generally in the finances of the taxpayer and can no longer be traced or identified as income of that description cannot be the subject of a s71 deduction [the predecessor to section 25-45 of the ITAA 1997].

The requirement that the income has been included in the taxpayer's assessable income was also discussed in the more recent case of Lean v FCT (2010) 75 ATR 213 (Lean):

(1) In order to satisfy s 25-45, the money that was misappropriated must be capable of being characterised as the same money that was included in the taxpayer's assessable income. It must be possible to identify misappropriated money with the money included in the taxpayer's assessable income.

(2) The act of a taxpayer in applying money of the taxpayer towards expenses or investment is sufficient to break the necessary connection between money included in the taxpayer's assessable income and a subsequent misappropriation. By applying the money towards expenses or investment the taxpayer has received the benefit of the money that was assessable income.

(3) Where the money that was included in the assessable income of a taxpayer has left the taxpayer's hands, there can be no relevant misappropriation of, or in respect of, that money.

In Lean, Edmonds J observed

Equally, where, as here, a taxpayer makes a capital gain from the disposal of an asset (CGT Event A1), it is not money that is included in his assessable income but an amount calculated by reference to the provisions of Part 3-1 of the 1997 Act starting with the capital proceeds from the disposal and the cost base of the asset. Money equal in amount to the amount of the capital proceeds may well be received by the taxpayer; indeed, in most cases, will be received, but that money is not included in the assessable income of the taxpayer. If that be right, then the money misappropriated on the facts of the present case, could never give rise to an allowable deduction under s 25-45.

The point of these observations is that, in my view, s 25-45 has an extremely limited field of operation; it is limited to income derived by cash basis taxpayers by the receipt, actual or constructive, of money where the same money is lost in and through circumstances which trigger the application of the section.

In your case, you transferred money to a cryptocurrency trading platform where your advisor used your details to steal the money. It is not considered that the advisor was granted control, receipt or disposal of your money. Therefore, they are not deemed to be an agent of yours. Additionally, when the money was transferred to the platform it lost the character of 'amounts included in assessable income'. Consequently, you are not entitled to a deduction under section 25-45 of the ITAA 1997.