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The tax costs of stolen money

Friday, 21 November 2014   (0 Comments)
Posted by: Author: Pieter Faber
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Author: Pieter Faber (SAIT Technical)

The 2014 Crime Statistics were released on the 19th of September 2014 and though a year on year decrease in theft and commercial crimes was reported, these crime levels still remain quite high as commercial crimes still remain 46 per cent higher than the 2005 benchmark year. The taxpayer victim of a loss of money through theft, fraud or embezzlement not only suffers financial loss of the money stolen, but also a loss in respect of the costs incurred in investigating the loss, quantifying it and then holding someone accountable for it.

A taxpayer who has suffered such a loss would not be blamed for thinking that such loss and the consequential costs incurred should as a matter of course be tax deductible, but they would be wrong. Like everything in tax, even theft has a ‘test’ (in other words, section 11(a) & 23(g) of the Income Tax Act (‘ITA’) to determine if the loss and consequential costs would entitle the taxpayer to some form of tax relief and another ‘test (revenue loss at 28 per cent and capital loss at 18,67 per cent)  to determine how much. You would also not be blamed for stopping to read right now and just decide to avoid the taxman altogether by not claiming the loss and cost at all in an attempt to avoid future costs and penalties as well as the indignity of trying to convince SARS that you are entitled to the deduction when someone stole from you. However, in hard financial times like these, that is unfortunately not a financial luxury many businesses have. 

The principles for tax relief

The first founding principles on the tax treatment of theft in South Africa seem to stem from the 1922 case of Lockie Bros Ltd v Commissioner for Inland Revenue 1922 TPD 42. Here the court held that the theft by a managing director was not a risk inherent to the taxpayer’s trade due to the seniority of the thief of which there was little expectation of such theft and therefore the amounts were not incurred in the production of income. This test of ‘inherent risk’ or ‘necessary concomitant’ of a taxpayer’s trade has remained the legal measure for determining the tax deduction of stolen money.

The injurious nature of not only the crime perpetrated against the taxpayer but also in having this ‘test for a deduction was amply considered in ITC 686 (1949) where the court, though finding against the taxpayer based on the Lockie Bros case principles, made the following remark:

‘My colleagues agree with me that it seems harsh that such losses should not be allowed to diminish the income of the taxpayer. I need say no more on that point. It is possible the Commissioner prefers that I should draw such points to his attention when they crop up.

(Accountant member) I would like to associate myself with the remarks made by the President and point out that not only does the merchant lose his stock, but he also loses the profit that he would have made on the sale of that stock and in addition he loses the amount of income tax which is assessed on the stock lost.

With regard to cash, where money has been embezzled, I also feel that provision might be made whereby the amount of cash embezzled which is known accurately could be allowed as a deduction for income tax purposes.’

Unfortunately we have seen no legislative measures in this regard for more than 90 years after the Lockie Bros case and 65 years after the above wise words were uttered, notwithstanding the horrendous challenge businesses face from these crimes in the last two decades.  However, SARS on 5 November 2014, released Interpretation Note 80 which deals with their interpretation of the law on the tax consequences of stolen money for both the victim and ironically, for the thief, to provide some form of guidance to taxpayers, though in respect of the thieves we make no comment as they will have enough time to read the whole Note. 

A closer look at the Interpretation Note

The Interpretation Note deals with ‘stolen money’, which includes the theft, fraud and embezzlement of money but does not deal with these commercial crimes in general where something else is stolen. For example, it would have been very helpful in the age of the digital economy to have some guidance on the theft of intellectual property which is already a major commercial loss. 

So what are the principles enunciated in this new Interpretation Note? Firstly it starts of by reconfirming the current law, namely the existence of a ‘positive test’ in the requirements of section 11(a) of the ITA and a ‘negative test’ in section 23(g) of the ITA.

The positive test

The opening disclaimer still remains, this is a facts and circumstances test. On the first two of five requirements it is concluded that stolen money constitutes ‘a loss’ which is ‘actually incurred’. The third test of ‘in the production of income’ is the biggest hurdle and here SARS retain the previous tests laid down of inherent risk, closely connected to or a necessary concomitant of that trade or business of the taxpayer. SARS, however, do now recognise that things have changed since 1922 and that the inherent risk of money being stolen by senior staff is now more likely an inherent risk. This shift in emphasis on ‘inherent risk’ now seems to have rather moved to whether the thief stood in relationship to the taxpayer as proprietor such as a partner, managing director or an employee with similar powers, such as an employed sole shareholder. This change in emphasis is a welcomed as it brings the tax law closer to the commercial reality, however the ‘much of muchness’ of this emphasis change is captured in the last paragraph of that part of the guide which states:

‘In considering whether the loss is a risk which is inherent in a taxpayers business it is necessary to consider the general business environment as well as the industry and type of business in which the taxpayer operates. Taking a wider ok than just the taxpayer’s business allows one to assess whether what occurred was an inherent risk or something in the nature of gross negligence which is unlikely to be an inherent risk.’

We hope thieves are also this pedantic when choosing victims.

In respect of the capital nature of the loss, the conclusion is made that money held as working capital (i.e. payroll money, transactional account, petty cash etcetera) will be a revenue loss (in other words, claimable at 28 per cent) and money held as fixed capital (in other words, money market, fixed deposit etcetera) will be capital in nature and will be a capital loss claimable against any capital gains (in other words, claimable at 18,67 per cent). 

The last requirement is that the loss must be claimed in the year during which it was incurred, namely when the money was stolen. In some instances this may sound easy but in reality where commercial crimes are committed over various years it is not easy determining exactly in which year the specific amount was stolen as the whole modus operandi of commercial crime is to make it difficult to detect and trace. There is also the matter of timing, namely that the taxpayer may only detect the crime after many years, which means that all monies stolen which is detected more than three years after the assessment will not be deductible and for those that are, those assessments would have to be reopened.

Negative test

The note does not really expand on this requirement of ‘in the course of trade’ and merely concludes that in most instances, if the positive test is met, then this test will also be met. The general exclusion remains that private or domestic losses which are not in the course of trade will be excluded.

Other expenses

The conclusion on this is short and sweet, if you qualify to deduct the stolen money as a revenue deduction, then then concomitant expenses such as legal fees (section 11(c) of the ITA) and forensic investigators fees will also be deductible.

Recoupments and insurance

The Note reiterates that amounts of stolen money recovered from the thief for which a tax deduction was claimed must be recouped, though in reality I doubt this happens that often. Where the loss was insured, no deduction is available to the extent of such insured amount.

Onus of proof

The onus to prove not only that the crime was invariably perpetrated but also what amount was stolen is on the aggrieved taxpayer. In respect of the loss event, SARS indicate that they will accept a police docket number, report by a private investigator or forensic auditor and a charge sheet issued by a court as prima facie evidence of the loss event. In respect of the quantum of the loss they make no real comment, wherein lies the problem as that is the most difficult to prove namely how much was stolen and in which year of assessment. This poses a challenge as the loss may be from other incidents or just unexplained differences (yes they do occur in the real world). 


In conclusion, taxpayers would do well to note the main hurdles set out above when submitting the claim in a tax return namely:

-          Setting out the facts and argument why the loss was inherent to the type of trade of the taxpayer;

-          Stating the facts why the amount of money was floating capital;

-          Recording the proof of the crime and loss; and

-          Setting out the facts upon which the quantum of the loss was determined and why that specific amount of loss occurred in that specific tax year.   

The challenges faced by taxpayers in claiming the loss of stolen money is merely highlighted rather than addressed by the Note. The fact that the Note is not even a binding ruling adds insult to injury. The underlying message in the words of the court in ITC 686 cited above remain as true today as in 1949, this is an injurious matter for the legislature and not for SARS and the courts to solve by interpretation. In fact, it would seem that the process and risk to which the taxpayer is subjected to in claiming the tax relief is nearly as injurious as the crime perpetrated against him in the first instance. Until such time as the legislature comes to the taxpayer’s aid, the limitation or not of the injurious nature of this matter will be determined by what SARS do in practice and not what is contained in this Note, for that we at least have some hope. For this vary reason, it is advised to contact a SAIT tax professional to assist you with the tax consequences arising from theft. 



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