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The AAT has held that moneys misappropriated from clients and deposited into the taxpayer’s bank account were not beneficially derived by the taxpayer and were therefore not assessable income in the taxpayer’s hands.

The AAT also allowed deductions for interest on loans related to investment properties owned by the taxpayer.

The taxpayer worked as an employee in a suburban professional taxation and accounting practice. For at least part of the relevant period he also derived rental income from investment properties.

The deposits to the taxpayer’s bank account comprised cheques originally drawn in favour of the ATO by clients of the accounting practice. They were able to be deposited to the taxpayer’s account because the name of the payee, as shown on the cheque, was improperly altered, from ATO to the taxpayer. The client’s BAS would be altered, without the knowledge of the client, to show a lower liability. The taxpayer would arrange a bank cheque for the lower amount and deliver the bank cheque to his employer. The doctored BAS, together with the bank cheque, would be lodged with the ATO. The clients knew nothing of what was happening. There was some evidence to support assertions that the lower amounts were paid to the ATO. There was no evidence to support the taxpayer’s assertions that the balance was paid to the employer in cash.

The Commissioner took the view that amounts deposited to the taxpayer’s account, less amounts actually paid to the ATO, were assessable income in the taxpayer’s hands.

The AAT held that the money that went into the taxpayer’s bank account was never his. This meant that the taxpayer was not beneficially entitled to the amounts to which he was assessed. To the extent that the deposits were included in his assessable income, they should not have been. The taxpayer therefore had discharged his burden of proving that the assessments were excessive.

The AAT also allowed deductions for interest on loans connected with the taxpayer’s investment properties, as detailed to the Tribunal.

Re The Employed Accountant and FCT [2012] AATA 770 (Deputy President S E Frost, 6 November 2012).

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