Issue
Is the reimbursement of stolen monies (where that money had been previously held in a trust account) for disbursement to clients deductible under subsection 51(1) (Income Tax Assessment Act 1936 (ITAA 1936))?
Decision
Yes. The reimbursement is deductible under subsection 51(1) ( Income Tax Assessment Act 1936 (ITAA 1936))?
Facts
The firm operates as a real estate agency whose activities include the receipt, holding and disbursement of monies in trust for various rental clients. A safe containing cash held on behalf of the firm's rental property clients was stolen. This cash was to have been banked to the firm's trust account, and the theft was reported to the local Police Station. The safe and its contents were never found.
Over the ensuing months the firm was required to use its own funds to reimburse the rental trust account, to enable disbursement to its landlord clients. The firm did not have insurance cover for this loss and has, therefore, not been reimbursed for this loss.
Reasons For Decision
In Charles Moore & Co (WA) Pty Ltd v FC of T (1956) 95 CLR 344 the High Court suggested that three questions determine the deductibility of losses by dishonesty under subsection 51(1) (ITAA 1936). These are: (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 of that 'kind of casualty mischance or misfortune which is a natural or recognised incident' of the income-earning activities or business operations? ( FC of T (NSW) v As h (1938) 61 CLR 263). (3) The loss is not one of capital, or of a private, domestic, or capital nature? ( Sweetman v Commr of Inland Revenue (Fiji); Williams v Commr of Inland Revenue (Fiji) 96 ATC 5107; 34 ATR 209).
The monies concerned were that of the firm's clients and had not been derived as the firm's income.
On the basis of the decisions referred to above, in this case a deduction is allowed to the firm for the reimbursement of the stolen monies as it meets the tests for deductibility in subsection 51(1) of the ITAA 1936.