Edited version of private advice

Authorisation Number: 1052145637416

Date of advice: 13 September 2023

Ruling

Subject: Business purchase loss - scam

Question 1

Is the Company entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for money transferred to D?

Answer

Yes.

Question 2

Is the Company entitled to claim a deduction under section 25-45 of the ITAA 1997 for money transferred to D?

Answer

No.

Question 3

Is the Company entitled to claim a deduction under section 40-880 of the ITAA 1997 for money transferred to D?

Answer

No.

Question 4

Is the potential sale of assets activity considered to be of a similar to the Company's trade services business activity and able to be grouped together for the purposes of the non-commercial loss provisions in Division 35 of the ITAA 1997?

Answer

Invalid question, the non-commercial loss provisions are not applicable to this entity.

Question 5

Is the Company entitled to claim a capital loss in relation to the money transferred to D?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2022

The scheme commenced on:

1 July 2021

Relevant facts and circumstances

B Pty Ltd (the Company) operates a trade services business. C is the sole director and 100% shareholder of the Company.

C used an application to make contact with a company, D (the Seller) to purchase a capital asset for use in the Company's trade services business that cost more than $300.

The Seller was based overseas.

C was initially intending on purchasing one asset but was advised by the Seller that there was a minimum number they had to purchase. The purchaser intended to sell the additional assets.

The Company transferred money to purchase the assets.

Over a period of time the Company made a number of transactions and sent further money overseas. The assets were never received.

A police report was made.

Relevant legislative provisions

Income Tax Assessment Act 1997 Division 104

Income Tax Assessment Act 1997 subsection 104-20(1)

Income Tax Assessment Act 1997 paragraph 104-20(2)(b)

Income Tax Assessment Act 1997 subsection 104-20(3)

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 subsection 116-20(1)

Reasons for decision

Question 1

Is the Company entitled to claim a deduction under section 8-1 of the ITAA 1997 for money transferred to the Seller?

Summary

The money transferred to the Seller is deductible under section 8-1 of the ITAA 1997.

Detailed reasoning

Section 8-1 of the ITAA1997 allows a deduction for any loss or outgoing necessarily incurred in carrying on a business for the purpose of gaining or producing your 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 of the ITAA 1997, are as follows:

•                     the outgoing is incurred

•                     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

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

For any assets or set of assets that costs $300 or more, the decline in value of the asset is to be claimed over time under Division 40 of the ITAA 1997. A depreciating asset is 'an asset that has a limited effective life and be reasonably expected to decline in value over time' (subsection 40-30(1) of the ITAA 1997). Section 40-25 of the ITAA 1997 allows you to deduct an amount equal to the decline in value for an income year of a depreciating asset that you held for any time during the year to the extent that it was used for a taxable purpose. A taxable purpose includes the purpose of producing assessable income (subsection 40-25(7) of the ITAA 1997). It starts to decline from its start time. 'The start time of a depreciating asset is when you first use it, or have it installed ready for use for any purpose' (subsection 40-60(2) of the ITAA 1997).

The acquisition of trading stock is claimed as a deduction when it is acquired and becomes part of your trading stock (section 70-15 of the ITAA 1997).

'If a taxpayer which carries on a business enters into an isolated transaction, that transaction is only on revenue account if the intention or purpose of profit-making exists in relation to the transaction in question' (paragraph 9 of Taxation Ruling TR 92/4 Income tax: whether losses on isolated transactions are deductible (TR 92/4)). A loss is generally deductible if the taxpayer intended to derive a profit from the transaction and the transaction was entered into in the course of carrying on a business (paragraph 16 of TR 92/4).

An expense will generally deductible if it is sufficiently connected to the earning of assessable income. If the expense produces no assessable income, an examination of the taxpayer's subjective purpose in making the outgoing is required (paragraph 4 of Taxation Ruling TR 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)). If it can be seen that the outgoing was genuinely incurred in an assessable income producing activity, a deduction is allowed (paragraph 5 of TR 95/33). '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' (paragraph 13 of TR 95/33). Where a taxpayer carries on a business, to determine if a deduction is 'clearly appropriate' 'regard must be had to the nature of the business activity, the business purpose for which the outgoing was incurred, the objective circumstances surrounding the incurring of the expenditure, and the character of the expense' (paragraph 24 of Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith).

In Charles Moore & Co (WA) Pty Ltd v FCT (1956) 95 CLR 344; 11 ATD 147 (Charles Moore Case) the High Court suggested that three questions determine the deductibility of losses caused by dishonesty under section 8-1 of the ITAA 1997:

(i) Is the 'occasion of the loss' found in the income earning activities or business operations of the taxpayer?

(ii) Is the nature or character of the loss of that 'kind of casualty, mischance or misfortune which is a natural or recognised incident' of the income earning activities or business operations? This was a reference to the comments of Rich J in Commissioner of Taxation (NSW) v Ash (1938) 61 CLR 263 (Ash's Case), at page 277.

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

In the Charles Moore Case, the previous day's takings of the taxpayer's department store were stolen at gunpoint from two employees while on their way to the bank. The High Court allowed a deduction for the loss on the grounds that the act of banking takings was an integral part of the taxpayer's business activities and the risk of robbery was inherent to the act of banking.

The company paid for the purchase of the assets in the 2021-22 income year from an overseas Seller. The one asset was a depreciating asset that would have been eligible for a deduction over its effective life under Division 40 of the ITAA 1997 had the company received and held them.

The payment for all of the assets (the majority being for trading stock purchases) that were not delivered, including expenses for insurance, customs fees, were expenses necessarily incurred in carrying on the business of the Company or in acquiring trading stock. They were purchased for a profit-making purpose. The amounts are available as a deduction under paragraph 8-1(1)(b) of the ITAA 1997.

Question 2

Is the Company entitled to claim a deduction under section 25-45 of the ITAA 1997 for money transferred to the Seller?

Summary

The money transferred to the Seller is not deductible under section 25-45 of the ITAA 1997.

Detailed reasoning

Section 25-45 of the ITAA 1997 provides 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.

In the present case, the loss was not caused by the actions of an employee or an agent of the entity. Rather the loss was caused by a supplier with whom the entity had contracted to make a purchase. Also, the funds lost were not included in the entity's assessable income. A deduction is not allowable under section 25-45 of the ITAA 1997.

Question 3

Is the Company entitled to claim a deduction under section 40-880 of the ITAA 1997 for money transferred to the Seller?

Summary

The money transferred to the Seller is not deductible under section 40-880 of the ITAA 1997.

Detailed reasoning

Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues sets out the Commissioner's views on the interpretation of the operation of section 40-880 of the ITAA 1997. This provision is for business-related capital expenditure.

The expense was incurred in purchasing sets of assets, one set for the Company, the others to be sold. The stock to sell to others would be trading stock on revenue account and not capital expenditure. The Company is not entitled to deduct the purchase cost of the sets of assets under section 40-880 of the ITAA 1997.

Question 4

Is the sale of the assets activity considered to be of a similar nature to the Company's trade services business activity and able to be grouped together for the purposes of the non-commercial loss provisions in Division 35 of the ITAA 1997?

Summary

According to paragraph 2 of Taxation Ruling TR 2001/14 Income tax: Division 35 - non-commercial losses, states the ruling (and legislation) applies only to individuals (including an individual as a partner). As the taxpayer is a company, the non-commercial loss provisions in Division 35 of ITAA 1997 are not applicable.

Question 5

Is the Company entitled to claim a capital loss in relation to the money transferred to the Seller?

Summary

There was no ownership of a capital asset or expenditure in respect of a capital structure so there is no capital loss for the Company to claim under section 104-20 of the ITAA 1997.

Detailed reasoning

Section 102-20 of the ITAA 1997 states that you make a capital gain or capital loss if and only if a CGT event happens. Section 104-5 lists the CGT events that can happen.

From the information provided, there was no CGT event applicable as there was no ownership of a capital asset and no expenditure in respect of a capital structure. The sets of power tools that were planned to be purchased by the company never actually existed and no contract was entered into. There is no capital loss to claim.