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ATO Interpretative Decision

ATO ID 2003/1029 (Withdrawn)

Income Tax
Deduction : losses from misappropriation of money by an investment broker

Attention This ATO ID is withdrawn as it is a straight interpretation of the law, a reference to these types of deductions has been included on the ' Other operating expenses' for businesses page (QC33867).
Attention This document has changed over time. View its history.
FOI status: may be released
Status of this decision: Decision withdrawn 6 April 2018

CautionCAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.


Issue

Is the taxpayer, an investor, entitled to a deduction under section 25-45 of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of money which had been misappropriated by their investment broker?

Decision

No. The taxpayer, an investor, is not entitled to a deduction under section 25-45 of the ITAA 1997 in respect of money which had been misappropriated by their investment broker as the money had not been included in the taxpayer's assessable income.

Facts

The taxpayer is a share investor whose activities do not amount to the business of share trading.

The taxpayer engaged a broker to act for them in the purchase of certain shares.

A sum of money, drawn from the taxpayer's private line of credit, was transmitted to the broker in order that a parcel of shares in a particular company be acquired on the taxpayer's behalf.

The taxpayer's practice was to deposit their employment income into this line of credit facility and to use that facility in a manner similar to a normal bank account.

The shares were never purchased on the taxpayer's behalf and the broker could not be contacted or brought to account for its failure to carry out its obligations to the taxpayer. The loss of the transmitted money, discovered in the income year, was irrecoverable.

Reasons for Decision

Under section 25-45 of the ITAA 1997 a deduction is available for certain losses in respect of money. Each of the following conditions must be satisfied for the deduction to be allowed under this section:

·
 the loss must have been discovered by the taxpayer in the income year and
·
 the loss must have been caused by theft, stealing, embezzlement, larceny, defalcation or misappropriation by the taxpayer's employee or agent ( other than an individual employed solely for private purposes) and
·
 the money lost must have been included in the taxpayer's assessable income for the income year or an earlier income year.

In the circumstances here the taxpayer cannot satisfy the requirement that the money lost had been included in their assessable income for the income year or an earlier income year.

This requirement was discussed in EHL Burgess Pty Ltd v. Federal Commissioner of Taxation 88 ATC 5417; (1988) 19 ATR 1407 ( EHL Burgess ), where it was made clear that:

   ...income which has been or is to be included in the assessable income of a taxpayer, but has been dealt with in such a way that it has become mingled generally in the finances of the taxpayer and can no longer be traced or identified as income of that description cannot be the subject of a s71 deduction [the predecessor to section 25-45 of the ITAA 1997].

It was further explained in EHL Burgess that where the loss occurs after the derivation of the income, the lost money's identity as 'assessable income' must not have been 'obliterated'.

Whether or not the taxpayer had at some point returned as assessable income the employment income they deposited into their line of credit facility, it is considered that the character of that money was irretrievably altered because of its assimilation into the taxpayer's general finances. The money's identity was no longer that of 'assessable income' but rather was simply part of the current balance of funds available to, or owed by, the taxpayer under their line of credit. The specific sum of money paid to the broker for the shares cannot be identified as an amount which had been returned by the taxpayer as assessable income.

Further, once the taxpayer applied the funds to investment, the necessary connection between money included in the taxpayer's assessable income and a subsequent misappropriation was broken. In applying the money the taxpayer received the benefit of it and therefore the money that was misappropriated was not capable of being characterised as the money that had been included in the taxpayer's assessable income: Lean v. Federal Commissioner of Taxation (2010) 181 FCR 589; [2010] FCAFC 1; 2010 ATC 20 159; (2010) 75 ATR 213; [2010] ALMD 6052 at paragraph 20.

Given this, it is not necessary to consider whether the other requirements of section 25-45 of the ITAA 1997 had been satisfied. The taxpayer is not entitled to a deduction under section 25-45 of the ITAA 1997 for the loss of money misappropriated by their broker as the amount lost cannot be said to have been included in the taxpayer's assessable income for the income year or an earlier income year.

Amendment History

Date of Amendment Part Comment
7 March 2016 Reasons for Decision Citation corrected.
Include paragraph referencing the decision in Lean v. Federal Commissioner of Taxation 2010 ATC 20 159.

Date of decision: 6 November 2003

Year of income:Year ended 30 June 2001

Legislative references:
Income Tax Assessment Act 1997
   section 25-45

Case references:
EHL Burgess Pty Ltd v. Federal Commissioner of Taxation
   88 ATC 5417
   (1988) 19 ATR 1407

Lean v. Federal Commissioner of Taxation
   (2010) 181 FCR 589
   [2010] FCAFC 1
   2010 ATC 20-159
   (2010) 75 ATR 213
   [2010] ALMD 6052

Business line: Individuals

Date of publication: 21 November 2003

ISSN: 1445-2782

ATO ID 2003/1029 (Withdrawn) history   Top  
   Date   Version 
    6 November 2003   Original statement   
    7 March 2016   Updated statement   
 You are here ®   6 April 2018   Withdrawn   


 


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