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22 Sep 10 Decision Impact Statement - David Lean

The ATO has published a Decision Impact Statement in relation to the Full Federal Court decision in Lean v FCT [2010] FCAFC 1; 2010 ATC 20-159; 75 ATR 213. The case concerned whether misappropriated money was included as assessable income; and whether the act of applying money towards expenses or investment was sufficient to break the necessary connection between the money included in the taxpayer's assessable income and a subsequent misappropriation.

The Full Federal Court (Emmett, Edmonds and Perram JJ) dismissed the taxpayer's appeal from the decision of Stone J, who had held that a taxpayer was not entitled to a deduction under s 25-45 ITAA 1997 for half the amount of $4,630,314, misappropriated by a person who represented himself as a securities trader and investment fund manager in Hong Kong. The taxpayer had sought the deduction on the basis that the relevant half of the misappropriated money was sourced out of the taxpayer's share of assessable profits derived by him on the sale, in unrelated transactions, of US shares.

The ATO view of the decision, as set out in the Decision Impact Statement, is as follows:

"The decision concerned a deduction for a loss by theft, stealing, embezzlement, larceny, defalcation or misappropriation under s 25-45. It considered where the provision could be applied and where it could not. This case rejected an argument that tracing alone was sufficient to bring losses arising from the subsequent spending of funds into the operation of the provision on the basis that it was included in the taxpayer's assessable income.

It should be noted that s 116-60 of the Income Tax Assessment Act 1997 applies to amounts misappropriated in the 2007-08 income years and later income years. This provision allows for modifications to the capital proceeds of a CGT event in circumstances where an employee or agent misappropriates all or part of the capital proceeds."


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