Private ruling: Income tax – Deductions - Misappropriation of funds
Date of advice: 3 August 2018
Published: September 2018
Ruling period: For the financial year ended 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you eligible to claim a deduction for the loss of theft by an employee that was discovered during a specified year under section 25-45 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes Having considered your circumstances and the relevant factors, you are eligible to claim a deduction in the year you discovered the theft under section 25-45 of the ITAA 1997.

Relevant facts and circumstances: You are a partnership. The partners’ role is to manage the business and make deliveries to customers. Person A is an employee of the partnership. Person A is employed as a bookkeeper and is responsible for paying accounts on behalf of the partnership and issuing invoices to customers. Person A handled all the data entry which included recording the partnerships financial transactions into the partnerships chosen accounting package. Financial statements and tax returns had only been prepared by the previous accounting firm until the 20XX financial year. This is due to Person A not forwarding the financial information for preceding years to the firm. The partnership was suffering severe cash flow issues. The partnership changed accountants in the 20XX financial year. The current firm reviewed the 20XX financial statements and queried a large loan asset in the balance sheet titled “Loan- Person A”. This had not been raised with the partners and the partners had not reviewed the financial statements themselves believing the accountant would raise with them any issues needing their attention. The “loan” was money Person A had transferred to a private bank account without authority or permission of the partners. It was discovered in the 20XX financial year Person A had stolen a specified amount and in the 20XX financial year had stolen a specified amount. The 20XX partnership return has been lodged which included the money stolen. Legal action has not been taken against Person A by the partners due to various mental and physical health safety concerns. No insurance claim has been made for the theft of money. The money has been spent. Some money has been recovered as a rental property purchased by Person A was sold to recover some funds.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 25-45