1 Are you entitled to claim a deduction for funds transferred as a result of a scam under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. Question 2 Are you entitled to claim a deduction for funds transferred as a result of a scam under section 40-880 of the ITAA 1997? Answer No. This ruling applies for the following period : Year ended 30 June 2024 The scheme commenced on: 1 July 2023
You operate a business. You received a call from a person stating they were from the bank's fraud department and there had been suspicious activity on your account. You were advised that new accounts needed to be set up as it was a high level of fraud and they had your access ID and password. They advised you to transfer money from your business bank account to this new account. You followed their advice and transferred sums of money to the new account. You discovered this was a scam and reported it to the Australian Cyber Security Centre and informed the bank.
Income Tax Assessment Act 1997 section 8-1 Income Tax Assessment Act 1997 section 40-880
Question 1 Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except to the extent that they are of a capital, private or domestic nature, or relate to the earning of exempt income. A number of significant court decisions have determined that, for an expense to satisfy the tests in section 8-1 of the ITAA 1997, it must have the essential character of an outgoing incurred in gaining assessable income ( Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478; (1958) 11 ATD 404; (1958) 7 ATR 166) and there must be a nexus between the outgoing and the assessable income so that the outgoing is incidental and relevant to the gaining of assessable income ( Ronpibon Tin N.L.Tongkah Compound N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47; (1949) 8 ATD 431; (1949) 4 AITR 236). For an expense to be incurred in gaining or producing assessable income it is both sufficient and necessary that the occasion of the expense should be found in whatever is productive of assessable income.
As such, it is necessary to determine if there is a sufficient connection between the transfer of funds and the earning of assessable income. This question will generally be answered by a careful analysis of the objective circumstances that gave rise to the transfer. In your case, you transferred money from your bank account following a scam call. A careful analysis of the character of the outgoing indicates that it is not an expense incurred in earning your assessable income. It is an outgoing made by you after you had earned your assessable income. Therefore, the outgoings from the transfer of funds are not deductible under section 8-1 of the ITAA 1997. Question 2 Section 40-880 of the ITAA 1997 provides that: 40-880(1) The object of this section is to make certain business capital expenditure deductible over 5 years if: (a) the expenditure is not otherwise taken into account; and (b) a deduction is not denied by some other provision; and (c) the business is, was or is proposed to be carried on for a taxable purpose.
40-880(2) You can deduct, in equal proportions over a period of 5 income years starting in the year in which you incur it, capital expenditure you incur: (a) in relation to your business; or ... (b) in relation to a business that used to be carried on; or (c) in relation to a business proposed to be carried on; or (d) .. 40-880(2A) However, you can deduct the capital expenditure in the income year in which you incur it if: (a) the expenditure is incurred in relation to a business that is proposed to be carried on; and (b) the expenditure is incurred: (i) in obtaining advice or services relating to the proposed structure, or proposed operation of the business; or (ii) in payment to an Australian government agency of fees, taxes or charges relating to establishing the business or its operating structure; and (c) you are a small business entity for the income year, or both of the following apply: (i) you are not carrying on a business in the income year;
(ii) you are not connected with, or an affiliate of, another entity that carries on a business in the income year and that is not a small business entity for the income year. The operative provision set out in subsection 40-880(2) of the ITAA 1997 requires that the capital expenditure is incurred 'in relation to' your business, a business that used to be carried on, or a business proposed to be carried on. Taxation Ruling TR 2011/6 Income tax: business related capital expenditure - section 40-880 of the Income Tax Assessment Act 1997 core issues (TR 2011/6), sets out the Commissioner's views on the interpretation of the operation and scope of section 40-880 of the ITAA 1997. In considering the meaning of 'in relation to' TR 2011/6 states: 10. The following key concepts apply in relation to the current section 40-880: ... The expenditure must be capital expenditure which is business related. This excludes revenue expenditure and non-business expenditure such as expenditure relating to occupation as an employee or to passive investment. ...
76. The legislation does not define the expression 'in relation to' and so it takes its ordinary meaning. The Macquarie Dictionary, 2005, 4th edition, The Macquarie Library Pty Ltd, NSW, defines 'related' as 'associated; connected'. Accordingly, the expenditure and the business need to be associated or connected for the expenditure to be described as being 'in relation to' the business. Although the phrase 'in relation to' uses wide words of connection, the intended width of the relationship between the two connected subjects must be considered against their legislative context. ... 78. The legislative context of section 40-880 indicates that the closeness of the association or connection must objectively support the conclusion that the expenditure is a business expense of the particular business. ...
79. Whether capital expenditure is truly a business expense turns on the particular facts and circumstances and is a matter of impression and judgement. Determining whether the expenditure has the character of a business expense can be approached by asking what the expenditure is for, in the sense of identifying the need or object that the expenditure serves. If the facts show that the expenditure satisfies the ends of the relevant business then it will have the character of a business expense. In considering the phrase 'in relation to' contained within subsection 40-880(2) of the ITAA 1997, paragraph 2.25 of the Tax Laws Amendment (2006 Measures No. 1) Act 2006 states:
The provision is concerned with expenditure that has the character of a business expense because it is relevantly related to the business. The concept used to establish this character or requisite relationship between the expenditure incurred by the taxpayer and the business carried on (current, past or prospective) is 'in relation to'. The connector 'in relation to' allows the appropriate latitude to enable the deductibility of qualifying capital expenditure incurred before the business commences or after it has ceased. In your case, the transferred funds were not capital expenditure incurred relation to the business. Rather, the payment was merely a transfer of money between accounts. There is no nexus between the transfer of money and the derivation of assessable income. As the transfer of money cannot be characterised as expenditure that serves a need or object of a business it is not incurred in relation to a business, and as such, is not deductible under section 40-880 of the ITAA 1997.