Is a payment which was incorrectly paid to an unknown person instead of you assessable income under section 6-5 or 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?
No. This ruling applies for the following period : Year ended DD MM 20XX The scheme commenced on: DD MM 20XX
You were a shareholder in a company. A liquidator was appointed as an external administrator of the company. A distribution was payable to you. The liquidator had advised that bank account details would be confirmed by phone prior to payment. You provided your bank account details to the liquidator. Your email account was hacked by an unknown person who sent an email, purportedly from yourself, to the liquidator stating that the amount was to be paid to a different bank account. Another email was sent from the unknown person to the liquidator with their bank account details. You sent additional emails to the liquidator seeking confirmation of your bank account details. You discovered that the distribution had been paid to a different bank account instead of your bank account. You contacted the liquidator and they advised that they had notified their professional indemnity insurer of the incident. You notified the police who are currently investigating the matter. You entered into a Deed of Settlement and Release with the liquidator company.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 subsection 6-5(2) Income Tax Assessment Act 1997 section 6-10 Income Tax Assessment Act 1997 subsection 6-10(3) Income Tax Assessment Act 1997 subsection 6-10(4) Income Tax Assessment Act 1936 subsection 47(1)
Assessable income provisions The rules for assessable income are set out under section 6-5 of the ITAA 1997. Your assessable income includes income according to ordinary concepts, which is called ordinary income. Dividends paid by a company to a shareholder constitute ordinary income. For Australian residents, subsection 6-5(2) of the ITAA 1997 provides that your assessable income includes the ordinary income you derived directly or indirectly from all sources during the year. Your assessable income also includes statutory income in accordance with section 6-10 of the ITAA 1997. Statutory income is an amount included in assessable income by a statutory provision. Under subsection 6-10(4) of the ITAA 1997, your assessable income includes your statutory income from all sources. The provision for income distributed by a liquidator is subsection 47(1) of the ITAA 1936. A distribution to shareholders of a company by a liquidator winding up the company, other than income which has been properly applied to replace a loss of paid-up share capital, shall be deemed to be dividends paid to the shareholders by the company out of the profits derived by it.
Where an item of income is assessable as both ordinary income and under a statutory provision, the most appropriate provision applies. This is confirmed in Explanatory Memorandum to the Income Tax Assessment Bill 1996 (Explanatory Memorandum), which confirms that the statutory provision will prevail. Income that has not been received If an amount would be statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct under subsection 6-10(3) of the ITAA 1997. Similar language is used in subsection 6-5(4) of the ITAA 1997 for the purposes of ordinary income. The Explanatory Memorandum provides further clarification on the meaning of these provisions. It provides that:
A generally accepted principle of tax accounting is that an amount accountable on a receipts basis can be your income, even if it has not been actually received, as soon as it is applied or dealt with in any way on your behalf or as you direct. In other words, an amount is treated as received as soon as the taxpayer gets benefit from it. This rule applies to both statutory income and ordinary income for amounts accounted for on a receipts basis. In Vlank v Federal Commissioner of Taxation [2016] HCA 4 ( Vlank v FCoT ), French CJ, Kiefel, Gageler, Keane, Gordon JJ provided at [79]: The object of s 6-5(4) [and s 6-10(3)] is to prevent a taxpayer escaping the imposition of tax where, although income has not actually been paid to him or her, his or her resources have actually been increased "by the accrual of the income and its transformation into some form of capital wealth or its utilization for some purpose" ( Brent v Federal Commissioner of Taxation (1971) 125 CLR 418 at 430; [1971] HCA 48 quoting Permanent Trustee Company of New South Wales Ltd v Federal Commissioner of Taxation (1940) 2 AITR 109 at 110-111). Accounting methods
The appropriate accounting method for determining when income is derived is discussed in Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings (TR 98/1). This ruling only applies to ordinary income derived under subsections 6-5(2) and 6-5(3) of the ITAA 1997. The receipts method, also known as the 'cash received' basis or 'cash' basis, is discussed in paragraph 8 of TR 98/1. Under this method, your income is derived when it is received by you, either actually or constructively. The earnings method, also known as the 'accruals' method or 'cash and credit' method, is discussed in paragraph 9 of TR 98/1. Under this method, income is derived when it is earned by you. The point of derivation occurs when a 'recoverable debt' is created, giving rise to legal entitlement to payment. You must adopt the most appropriate method when accounting for your income during the income year in accordance with paragraph 17 of TR 98/1. Whether a particular method is appropriate is a conclusion to be made from all the circumstances relevant to you and the item of income.
As a general rule, the receipts method is appropriate to determine income derived from investments under paragraph 18 of TR 98/1. This includes dividends in accordance with paragraph 13 of TR 98/1. Paragraph 30 of TR 98/1 states that only one method of accounting is appropriate to any one item of income; there is no choice available. You should continue to adopt the method you use to account for items of income for consistency under paragraph 31 of TR 98/1. For statutory income, the language used in the relevant provision indicates which accounting method is appropriate. Application to your circumstance Your relevant circumstances and the item of income must be considered to determine the appropriate accounting method under TR 98/1. Item of income The dividend is both ordinary income under section 6-5 of the ITAA 1997 and statutory income under section 6-10 of the ITAA 1997. Although the statutory provisions prevail, we have assessed the dividend as both ordinary income and statutory income in this ruling to avoid any doubt about the appropriate accounting method to apply.
Subsections 6-5(4) and 6-10(3) of the ITAA 1997 state that if the amount would be ordinary or statutory income apart from the fact that you have not received it, it becomes income as soon as it is applied or dealt with on your behalf. The Explanatory Memorandum clarifies that the amount is treated as received as soon as you get a benefit from it. The case of Vlank v FCoT further adds that the object of this provision is to include income as being assessable in situations where your resources have increased by the income, either through its transformation into capital wealth or its utilisation otherwise. In your case, you were to receive a distribution from the liquidator appointed to a company that you were a shareholder of. The distribution included a dividend component. The distribution was paid to an unknown person by the liquidator and was never received by you. You have not received any benefit from the payment, nor was it paid to the unknown person under your direction. Accounting method
TR 98/1 provides that the receipts method is appropriate for investment income, which includes dividends. Subsection 47(1) of the ITAA 1936 also uses the word 'paid' which suggests that the appropriate accounting method for this item of income is the receipts method. The most appropriate accounting method to apply for the dividend is therefore the receipts method. This is regardless of whether the income is considered to be only ordinary income or only statuary income. As the distribution was paid to the incorrect person, you have not actually or constructively received the payment in any capacity. You have therefore not 'derived' nor been 'paid' the distribution in accordance with the language used in the relevant legislative provisions. In applying the receipts method, the dividend is not assessable income to you in the relevant income year.