The burden of tax on money stolen from businesses

IT IS AN unfortunate reality of doing business today that expenditure and losses may be incurred as a result of money being stolen through theft or fraud. The theft of money from a business has income tax implications for both the victim and the thief. These are outlined by the South African Revenue Service (Sars) in a recently released interpretation note on the income tax treatment of stolen money.

Section 11(a) of the Income Tax Act, 1962 provides for a deduction from a person’s taxable income derived from carrying on any trade. This applies to expenditure and losses incurred in the production of income which are not of a capital nature, and the expenditure and losses must be claimed in the year of assessment in which they are incurred.

Loss suffered through theft or fraud to a business must have been incurred in the production of income. The test that is applied is whether the risk of the loss was an inherent risk to the taxpayer’s business. Whether loss through theft or fraud is an inherent risk to a taxpayer’s business would depend on the general business environment or type of business operation. For example, theft of money by an employee is an ever-present risk to a bank. Burglary or robbery on the other hand is an inherent risk to most businesses and therefore the losses are deductible.

The taxpayer may in certain circumstances claim a deduction for legal advice or forensic services relating to the theft or fraud. When claiming a deduction for losses or expenses owing to theft or fraud, the taxpayer bears the onus of proving such losses or expenses. This could, for example, be in the form of a police case docket number, or a report by a forensic auditor.

A deduction cannot be made under Section 11 (a) if the expense or loss is of a capital nature. However, the loss of an asset through theft or fraud may give rise to a capital loss for capital gains tax purposes.

A thief will be taxed on stolen money if it falls within the thief ’s gross income. For stolen money to be income it must be “received by or accrued to a taxpayer, and not be of a capital nature”.

Stolen money can never be an “accrual” to a thief as he is not unconditionally entitled to it. But the stolen money does constitute a “receipt” and is therefore taxable.

Palmer is a director in the commercial department of Garlicke & Bousfield. For more information, phone him at 031 570 5496, 083 637 1868, or e-mail graeme.palmer@gb.co.za.

NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law.