Edited version of private advice

Authorisation Number: 1052127766849

Date of advice: 24 July 2023

Ruling

Subject: Deductions - scam

Question

Are you entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for money lost in a scam?

Answer

No.

This ruling applies for the following period

Year ended 30 June 20XX

Relevant facts and circumstances

Your tax agent confirmed that:

•                     your trustee is Company A

•                     the shareholder of Company A is Company B

•                     Person A has held 100% ownership of the shareholdings of Company B since at specified date

•                     there have been no previous directors of Company B, and

•                     Person A is a 50% beneficiary of the Trust.

On a specified date, Person A received a phone call from a third party posing as your financier from Bank A. The caller indicated that there had been unusual transactions occurring on the account and that checks were required to be undertaken to ensure the safety of your bank account.

Person A felt that the third party was pushy and intimidating.

Person A, under instruction from the caller, made multiple payments to a third-party bank account located in Australia ("receiving bank").

Person A had no knowledge or association with the receiving bank account in their duties as director of Company B or beneficiary of the Trust.

Person A made a number of transactions on a specified date to the receiving bank account.

The total amount of payments made to the receiving bank account exceeded a specified amount.

After the transactions were made, Person A visited the local Police station to lodge a Police report. Person A spoke with a Police Officer, who advised that once the money leaves Australia there is nothing that the Police can do. Therefore, no Police report was lodged.

Person A subsequently contacted Bank A, to report that a scam had occurred.

Person A provided Bank A supporting evidence in relation to the scam.

Bank A was able to recover a small amount of the total amount that was transferred.

Your tax agent advised that:

•                     Person A's late spouse was diagnosed with a medical illness.

•                     due to Person A spouse's diagnosis; Person A was susceptible to the scam, and

•                     if Person A was an employee stealing, embezzling or misappropriating of funds for their own use, a deduction would be entitled to be claimed.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 section 25-45

Income Tax Assessment Act 1997 subsection 108-5(2)

Reasons for decision

In your application, you sought to obtain a decision from the Commissioner as to whether you were entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 8-1 allows a deduction for any loss or outgoing necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income however you cannot deduct a loss to the extent the amount is an outgoing of capital, private or domestic in nature or a provision prevents it from being deductible.

The relevant elements that need to be satisfied for the amount to be deductible under section 8-1 are as follows:

•                     the outgoing is incurred in the course of carrying on a business activity

•                     there is the relevant nexus between the loss or outgoing and the carrying on of a business for the purpose of gaining or producing assessable income, and

•                     the outgoing is not of a capital or private or domestic nature.

Taxation Ruling 95/33 Income tax: subsection 51(1) - relevance of subjective purpose, motive or intention in determining the deductibility of losses and outgoings (TR 95/33) provides guidance on when an outgoing is considered to have the requisite connection to the carrying on of a business for the purpose of gaining or producing assessable income.

Paragraph 4 of TR 95/33 provides that where the outgoing does not produce any income or the amount is less than the outgoing, it is necessary to consider all the circumstances surrounding the expenditure.

Paragraph 13 of TR 95/33 provides that in the case of a company, the relevant purpose is the corporate purpose. This requires an examination of the purpose, motive or intention of the company's directors, officers and employees.

There are several judicial decisions that have concluded that the outgoings as a result of fraud did not have the requisite connection with carrying on of a business including:

•                     Commissioner of Taxation (NSW) v Ash [1938] HCA 68 (Ash) and E.H.L Burgess Pty Ltd v Commissioner of Taxation [1988] FCA 383 - where the misappropriation of money was made by employees who were considered proprietors and directed the money for their own purposes and not in the course or furtherance of the ordinary activities of the business.

•                     LEAN v Federal Court of Taxation [2010] FCAFC 1 - the taxpayer transferred funds for investment purposes not for a business purpose and subsequently those funds were misappropriated.

When reviewing your circumstances and applying the facts against the relevant legislation, which set out when an entity is entitled to claim a deduction, there is no evidence of a nexus between the outgoing or loss and the assessable income of your business, and therefore the Commissioner is unable to allow a deduction under section 8-1 of the ITAA 1997. While we appreciate your situation, the legislation does not support a deduction for your circumstances.

Furthermore, the outgoing would also not be deductible under section 25-45 of the ITAA 1997 as to be allowable an employee would have had to have transferred the funds without the owner's consent. In your case, regardless of if Person A is an employee or not, Person A is an owner of the business therefore any funds would have been transferred with their consent.