1 Is the loss incurred by the Trust as a result of the theft of its funds, deductible under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Yes. Question 2 If not deductible under section 8-1 of the ITAA 1997, is the loss incurred by the Trust deductible under section 25-40 of the ITAA 1997? Answer Not necessary to answer. Question 3 If the loss is not deductible under either section 8-1 or 25-40 of the ITAA 1997, is the loss a capital loss which will be available for set off against capital gains derived by the Trust in the future? Answer Not necessary to answer. Question 4 If the loss is neither deductible under section 8-1 or section 25-40 of the ITAA 1997, nor a capital loss, will the expense be regarded as an addition to the cost base of the Property? Answer Not necessary to answer. This ruling applies for the following period : Income tax year ending 30 June 2023 The scheme commenced on: 1 July 2022
1. The Trust is a family owned entity which holds land and buildings including the Property. 2. The Trust derives rental income from letting the Property. 3. A property management company managed the property for the ruling period. 4. In June 20XX, an electrical upgrade was required due to an obsolete switchboard. The Trust engaged a consulting company, Company B, to manage the project which assisted in engaging an electrical contractor, Company Y. 5. The arrangement for claim and payment was done via an email chain as follows: • Company Y would produce a progress payment claim • Company B would review the progress payment claim and approve based on work performed • Company Y would then produce an invoice for payment to the equivalent of the progress payment claim amount approved. • The invoice was then forwarded onto the Trust • The Trust would pay the invoice directly into Company Y's bank account via the Trust's bank account.
6. On XXNovember 20XX, a progress payment claim email was received by the Trust from the project officer of Company B confirming works had been completed and payment was to be made. The email had the invoice attached. This payment was not actioned immediately as the Trust's account payables person was not at work that day (they only worked two days a week). 7. On XX November 20XX, a new email was received by the Trust from the project officer addressed to the same parties with the same attachments and subject matter stating that the bank details previously provided are no longer in use and that the new attached invoice stated the correct payment details. 8. The Trust disregarded the original invoice and paid the new invoice based on the account details provided. At the time, the Trust had no reason to suspect anything was amiss as the payment process represented the normal course of business for the Trust and its service providers. 9. The payments were made of $XXXX on XX November 20XX, $XXXX on XX November 20XX and $XXXX on XX November 20XX. 10. On XX November 20XX, Company B informed the Trust that Company Y had not received the payments.
11. On XX November 20XX, the Trust reported the incident to the Bank's Fraud department. 12. The Bank confirmed the funds had left the Trust's bank account and had been diverted to another bank account. None of the funds have been recovered by the Bank. 13. On XX November 20XX, the Trust reported the incident to the Australia Cyber Security Centre. 14. The Trust also reported the theft of money to its insurer but has been informed that its policy doesn't cover these types of losses. 15. The Trust subsequently paid the amounts to Company Y; $XXXX on XX November 20XX; $XXXX on XX November 20XX and $XXXX on XX December 20XX. 16. On XX October 20XX, the Trust received an email from local police advising that the investigation is still ongoing and no charges have been laid as yet.
Section 8-1 of the Income Tax Assessment Act 1997
Issue 1 Question 1 Summary The loss relating to the stolen funds is incurred in gaining or producing assessable income of the Trust and is therefore deductible under the first positive limb of section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Detailed reasoning The general deduction provision in section 8-1 of the Income Tax Assessment Act 1997 (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, or a provision prevents you from deducting it. 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
(1940) 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 recognised 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.
In terms of the negative limbs of section 8-1 of the ITAA 1997, the loss was not incurred in producing exempt or non-assessable non-exempt 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. Application to your circumstances 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 Trust has suffered a loss while attempting to pay an invoice for works performed by a service provider for their income producing asset. The loss therefore satisfies the testing under the positive limbs of section 8-1 of the ITAA 1997.
The loss arose because of a fraud perpetrated upon the Trust 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 for the electrical upgrade 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 electrical upgrade. Further it does not relate to anything else that is part of the profit yielding structure of the Trust. 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 Not necessary to answer. Question 3 Not necessary to answer. Question 4 Not necessary to answer.