Private ruling: Deductions - Lost funds
Published: 15 December 2025
Ruling period: Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Are you entitled to claim a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997)for the lost funds? | A1: No.

Relevant facts and circumstances: You were the victim of a phishing scam attack which resulted in funds stolen from your business bank accounts which are used to pay creditors, complete business activity statements (BAS), remit pay as you go withholding (PAYGW) and payroll. The transfers were facilitated by the involuntary disclosure of authorisation codes obtained by the scammer fraudulently claiming he was a member of the bank's fraud squad advising some unknown person was attempting to process unauthorised transactions on your bank account. The person performed security checks by asking security questions that are usually asked in every phone call. The person wished to confirm previous transactions of your bank account. The person read previous transactions out and these were confirmed these to be correct. The incident was reported to the bank in person at a local branch, shortly after the scam call occurring. The staff at the branch advised that fraudulent withdrawals had occurred across your bank accounts. It was requested the bank accounts be frozen and those transactions not to be processed. The banks fraud squad was contacted who advised they would investigate the incident, and that you would not receive a further update or response from the bank for approximately four to six weeks. You went to a police station to report the crime, however instead asked to report online to the Australian Cyber Security Centre. You received deposits from the bank referenced as 'recovery of scam funds'. The bank confirmed that your business bank accounts had been the victim of a phishing scam involving remote access leading to a loss of funds from your business accounts. The bank provided an update to you that stated your total recovery amount returned, and that the investigation is ongoing. The police service informed you that a crime report had been created. The bank informed you that they have recovered a portion of the funds stolen. After further requests for the recovery of the remaining funds, the bank made you an offer for the reimbursement of the stolen funds. You accepted this offer. The bank confirmed your acceptance of the offer of resolution by email, stating that they have made the payment, and that the fraud investigation is now closed. Of the lost funds, a percentage has been reimbursed by the bank to you. The remaining lost funds have not been recovered or reimbursed.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 8-1

Reasons for decision: Summary: 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 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). A loss caused by theft, stealing, etc is not deductible under section 8-1 of the ITAA 1997 unless the loss caused by the relevant criminal action represents that kind of casualty, mischance or misfortune which is a natural or recognised incident of a particular trade or business ( Commissioner of Taxation (NSW) v. Ash (1938) 5 ATD 76; 61 CLR 263). In Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 ( Charles Moore Case) the High Court suggested that three questions determine the deductibility of losses caused by dishonesty under section 8-1 of the ITAA 1997: (i) Is the 'occasion of the loss' found in the income-earning activities or business operations of the taxpayer? (ii) Is the nature of character of the loss of that 'kind of casualty, mischances or misfortune which is a natural or recognised incident' of the income-earning activities or business operations? (iii) Is the loss one of capital, or a private, domestic or capital nature? In the Charles Moore Case , the previous day's takings of the taxpayer's department store were stolen at gunpoint from two employees while on their way to the bank. It was business practice every morning for the two employees to take the previous days takings to the bank and pay them into the credit of the taxpayer. The High Court allowed a deduction for the loss on the grounds that the act of banking takings was an integral part of the taxpayer's business activities, and the risk of robbery was inherent to the act of banking. | Detailed Reasoning - Application to your circumstances: In your caseyou received a scam call and disclosed authorisation codes. You also confirmed previous transactions you processed earlier that day in the call. You attended a local branch of the bank who confirmed fraudulent transactions had taken place. The bank lodged an investigation and only part of the funds were recovered. A careful analysis of the character of the outgoing indicates that it is not an expense incurred in earning your assessable income. The relevant nexus does not exist between the outgoing or loss and the assessable income of your business and the actions that led to the funds being lost were not an integral part of the business activities. The outgoing or loss occurred as a result of actions that occurred after you earned your assessable income. As this amount was not incurred in the course of earning your assessable income, you are not entitled to claim a deduction for it under section 8-1 of the ITAA 1997.