Update on Madoff fraud victim tax relief..

We reported posted an article on the 17th of April about the IRS allowing the victims of the fraud losses to gain certain tax benefits.

Here's the link for those who missed it...

http://austaxation.blogspot.com/2009/04/irs-says-we-can-to-madoff-stanford.html

An update on the situation in the USA...

Despite the US IRS Federal tax ruling, it seems that the state government agencies are refusing to allow the same rules to apply to state income taxes.

Specifically, the California Franchise Tax Board is refusing to co-operate. 

The group of victims affected by this refusal amounts to around 10% of the US$65 billion fraud. They are currently lobbying the state governments for tax relief.

RECAP FROM AUSTRALIAN PERSPECTIVE

We have to keep in mind that the USA runs on a complicated multiple-tiered tax system. In some places, there are federal, state and municipal (what we call "local council") income taxes.

In Australia, we have only a federal level income tax system. This includes the Goods & Services Tax (GST) which was introduced in 2000 to replace the various State and Territory taxes, duties and levies.

From the AusTax team. 

The #1 provider of Australian tax news on twitter.

IRS says "YES, WE CAN...!!" to Madoff & Stanford fraud loss claims - ATO?

The past few months saw news spread like wildfire across the globe about the insanely massive fraudulent Ponzi schemes that were uncovered..!!

Here's two of the biggest ones...!

Bernard Madoff ran a Ponzi Pyramid scheme which stole US$50 billion from investors around the world. 

Allen Stanford also allegedly ran a Ponzi scheme which stole US$8 billion from investors.

Now, that is all very sensational, but back to our world of TAX....

IRS

The IRS (US tax enforcement agency) recently released Revenue Ruling 2009-9 (PDF) which allows investors in these Ponzi schemes to claim their lost funds as a tax deduction..!

The Ruling is extremely generous and allows investors to claim ALL of the monies invested as well as the income declared by the funds less any actual cash withdrawals.

In other words, the defrauded investor can claim the net cash balance owed to them as a tax deduction.

A quick point by point summary by Loeb & Loeb LLP.

ATO

Well, this got us thinking...... 

"If the same thing happened in Australia, would the ATO as nice?"

Well, the quick answer is probably "NO" at this stage...!

The tax legislation does allow a tax deduction for businesses suffering a loss from theft as per s.25-45.

But, this is more for theft during the "normal operations of the business". For example, money being stolen from the safe or in transit to the bank.

See the following supporting ATO IDs...

1. ATO ID 2001/318

2. ATO ID 2001/59

However, the existing case law and ATO rulings seem to indicate that a loss from financial fraud does NOT fall under s.25-45.

Below are examples of cases where some unfortunate souls' attempt to claim the loss were knocked back by the ATO.

Refer to the following: -

1. ATO ID 2003/1029 - Deduction: Loss from misappropriation of money by an investment broker

2. Lean v. FC of T (2008) or great summary by Robert Richards of CPA Australia

So.....!

Loss from THEFT / BURGLARY:  

Loss from FINANCIAL FRAUD:

 

FINAL WORDS

In all honesty, we wouldn't be surprised if the ATO does release a POSITIVE ruling in favour of deductibility of financial fraud losses. 

The financial crisis has influenced our law-making bodies and the government in general to sway to the populist view of doing whatever it takes to "stimulate our economy".

Now, whether or not this is right or wrong is a discussion for another time and place...

But....

The integrity and strength of our legal system relies on its independence from political and economic conditions.

It should be about the interpretation of the law without bias or prejudice. 

Without Fear, Without Favour

NEC TIMES, NEC FAVENS

From the AusTax team. 

The #1 provider of Australian tax news on twitter.

Are directors liable for a company's TAX DEBT?

Corporate structures are created on the assumption of limited liability status. This means that the company is considered a separate legal entity.

So, most of the time, the liabilities of the company is limited to itself and does not extend to shareholders and directors.

Of course, if the directors have engaged in insolvent trading, then they would be liable for the debts of the company. We have had many cases of this in recent times such as HIH.

But, we are talking TAX and specifically TAX DEBT. The tax debt of a company would normally not extend to the directors. 

However, if a payment arrangement has been made with the ATO for the tax debt AND the company breaches the arrangement....

Then, the directors can be personally liable for the tax debt under s.222AOE "Directors Penalty Notice".

FINAL WORDS

The corporate structure has been traditionally held as a great tool for business. However, the privileges of directors have been increasingly eroded thru the years. 

At the same time, the liabilities and responsibilities of directorships have increased steadily. 

So, research the company before you assume the directorship...! It may just have a few hidden traps for the unwary..!

From the AusTax team. 

The #1 provider of Australian tax news on twitter.

ATO ALERT: Data-matching program targeting car sales

Grim news for those caught under this new data-matching program started by the ATO.

The ATO will be reviewing all car sales  over $10,000 that was made in the 2007 / 2008 financial year. Apparently, 1.7 million sales records fall under this category. The information has been provided to the ATO via the motor registries around Australia.

The previous crackdown in 2008 was for "luxury" car sales over $57,000. In that case, a whooping 70% of investigations yielded a tax liability for the ATO. A very good return on investment, indeed..! 

So, no surprise that its now chasing after the "middle-class".

WHO DOES IT AFFECT?

1. Employers who have provided their employees with car benefits. 

Any benefit provided to your employees outside of wages & salaries is subject to the Fringe Benefits Tax (FBT) rules. 

The ATO will be catching out any employers who have not been declaring FBT on car benefits to employees.

2.  Persons who appear to be living beyond their financial means. 

If you declare a taxable income of only $10,000 but buys a car worth $30,000, then that's suss...!

The ATO will be investigating you to see whether or not you have been paid in cash and not declaring it.

3. Persons who buy and sells cars regularly for profit. 

There is a strong distinction between "car enthusiasts" & "car dealers". Its the ol'  hobby vs. business argument. It's commonsense at the end of the day. 

If you are turning over 50 cars a year, you may be classified as a business..!! The ATO will be looking at classifying those profits as undeclared capital gains on sale.

If you fall under any of the above, it might be a good idea to see a tax accountant to suss out potential liabilities, etc.

From the AusTax team. 

The #1 provider of Australian tax news on twitter.