Successful Appeal by the ATO – proving deductibility can prove difficult!

However stolen receipts are usually considered assessable taxable income

Lean v FC of T (Administrative Appeals Tribunal, 20 June 2008). That decision involved a taxpayer who, in chasing ‘unprecedented earnings of 20 to 40 per cent a month,’ transferred A$4.65 million to a purported Hong Kong-based international share trader. Not surprisingly those monies were stolen.

The tribunal allowed a deduction for that loss. I felt that the decision was surprising. The tax law only allows a deduction for stolen money if that money was stolen by an employee and had been included in the taxpayer’s assessable income.

The established view was that a direct connection was required between the money which had been stolen and that which had been included in the assessable income. Once that direct connection had been broken, for example, because the money had been banked, a tax deduction for stolen money was no longer available.

The ATO successfully appealed against that decision to the Australian Federal Court on 14 May 2009. The Federal Court said that the tribunal was wrong, it was wrong in ignoring the need for such a direct relationship.

As a consequence I was too hopeful when I suggested last August that the tax law might not be as restrictive in allowing deductions for stolen money as was often thought. Rather the Federal Court decision shows that getting a deduction for stolen money will be as difficult as ever.