Question:
Could you please advise whether payments by a business as a result of a scam are tax deductible?
My client is a farming partnership and receives invoices by email.
Several of the invoices were intercepted by scammers advising of a change of banking details on the invoices.
The changed invoices were then received by my client and paid into the changed bank accounts.
After a month or two, my client received phone calls from the suppliers querying why the accounts had not been paid and only then realised that the payments went to scammers.
My client then paid the amount again to the suppliers. My question is – is the payments to the scammer’s tax deductible? My research indicates that it may be deductible over 5 years under Sec 40 -880 (2) of the ITAA 1997.
Answer
There needs to be a clear distinction drawn between investors and those in business.
Clearly, your client is conducting a business.
If the source of the funds that the payments were made from were assessable income, then we believe the amounts will be deductible under the general provisions.
A loss is deductible under the general provisions if it was incurred in gaining or producing assessable income or was incurred in carrying on a business for the purpose of producing such income.
The loss cannot be capital or of a capital nature (section 8-1 of the ITAA 1997).
We also direct you section 25.45 of ITAA 1997 but suggest this relates more to losses due to fraud by employees and/or agents.