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.