1 Can the company claim a deduction under section 8-1 of the ITAA 1997 for the amount lost as a result of the scam they were subjected to?
Yes Question 2 Can the company claim the amount lost as a section 40-880 of the ITAA 1997 black hole expenditure deduction? Answer Not necessary to answer Question 3 Can the company treat the amount that was lost as a capital loss under Part 3-1 of the ITAA 1997? Answer Not necessary to answer This ruling applies for the following period : Year ended 30 June 2023 The scheme commenced on: 1 July 2022
The company uses machines in its business. During the 2023 financial year, the company placed an order for a machine for use in its business from an overseas company. The company has purchased from this company 3 times previously and the order was made over the phone though the managing director. An email was then received with the invoice from an email address that has been used for previous correspondence. The first deposit was paid. The director received a confirmation email stating the funds had been received and the order was being processed. The director of the company received an email from the overseas company advising the shipment of the order was scheduled. The director received another email stating they had received a bad cheque and that new bank details are to be used for the final payment. The email stated that the new bank account was a corresponding legal account and as these emails came from the same email address as above, they were believed to be true. The company paid an amount into the new bank account.
The company received an email from the overseas company's representative stating that their email had been hacked and the payment request with the change of bank details had not been sent by them. The company's bank was advised of the scam and a cyber.gov.au cyber security form was submitted. The company's insurance company confirmed that its insurance policy did not cover a loss due to scam. The director of the company attended a police station to make a report and statement (provided). There has not been, nor will there be any reimbursement of any of the amount lost from any other party.
Income Tax Assessment Act 1997, section 8-1
Question 1 Can the company claim a deduction under section 8-1 of the ITAA 1997 for the amount lost as a result of the scam they were subjected to? Summary The amount that was lost due to a scam is deductible under the general deduction provision in section 8-1 of the ITAA 1997. Detailed reasoning The general deduction provision in section 8-1 of the ITAA 1997 allows a deduction for a loss or outgoing to the extent that it is: • incurred in gaining or producing assessable income, or • necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income. However, a deduction is not permitted to the extent the loss or outgoing is: capital or of a capital nature, private or domestic in nature, incurred in producing exempt or non-assessable non-exempt income (NANE), or a provision prevents you from deducting it. The amount was paid to the scam bank account from the company's funds during the 2023 income year. Therefore, the company incurred the loss or outgoing at this time for the purposes of section 8-1 of the ITAA 1997.
The positive limbs of section 8-1 of the ITAA 1997 are not mutually-exclusive and a business expense is frequently deductible under either. To be deductible under the first limb, a loss or outgoing must be incidental and relevant to gaining or producing assessable income ( Ronpibon Tin NL v FC of T (1949) 78 CLR 47; 8 ATD 431; [1949] HCA 15). To be deductible under the second limb, a loss or outgoing must be part of the cost of trading operations to produce income ( John Fairfax & Sons Pty Ltd v FC of T (1959) 101 CLR 30; 11 ATD 510; [1959] HCA 4). In Charles Moore & Co (WA) Pty Ltd v FC of T (1956) 95 CLR 344; 11 ATD 147; [1956] HCA 77 ( Charles Moore ) the High Court held that, as the daily banking of takings by a department store was an ordinary part of its income-producing activities, the loss of the takings by armed robbery on the way to the bank was deductible as a loss incurred in gaining or producing assessable income. The Court referred to the following statement by Rich J in Ash v FC of T (1938) 61 CLR 263:
There is no difficulty in understanding the view that involuntary outgoings and unforeseen or unavoidable losses should be allowed as deductions when they represent that kind of casualty, mischance or misfortune which is a natural or recognized incident of a particular trade or business the profits of which are in question. These are characteristic incidents of the systematic exercise of a trade or the pursuit of a vocation. The company has suffered a loss whilst attempting to pay an instalment as part of the purchase price for an item of plant to be used in its business operations The loss therefore satisfies the testing under the positive limbs of section 8-1 of the ITAA 1997. In terms of the negative limbs of section 8-1 of the ITAA 1997, the loss was not incurred in producing exempt or NANE income, nor was the loss of a private or domestic nature. The leading Australian case on whether a loss or outgoing is of a capital nature is Sun Newspapers Ltd & Associated Newspapers Ltd v FC of T (1938) 5 ATD 87; (1938) 61 CLR 337. The testing is an enquiry as to whether the expenditure relates to the structure within which the profits are earned.
The loss here arose because of a fraud perpetrated upon the taxpayer by a third party and its character derives from that circumstance. The third party induced the taxpayer into making a payment in order to obtain a financial advantage to which they were not entitled at law. There is a clear disconnect here in terms of the legal rights which were acquired in terms of the actual payments made to secure the item of plant and this loss which did not secure any of those legal rights. For these reasons, the loss cannot be imbued with any character relating to the acquisition of the item of plant. Further, it does not relate to securing anything else that is part of the profit yielding structure of the business. As such, the loss is not capital or capital in nature and a deduction is available under section 8-1 of the ITAA 1997. Question 2 Can the company claim the amount lost as a section 40-880 of the ITAA 1997 black hole expenditure deduction? Answer Not necessary to answer Question 3 Can the company treat the amount lost as a capital loss under Part 3-1 of the ITAA 1997? Answer Not necessary to answer