Just think of all that VAT and employees’ tax associated with home security and insurance.
Apart from the general unhappiness and costs of dealing with theft, fraud or embezzlement, one cannot presume that the losses suffered are tax deductible.
For starters, losses at home are not deductible. But what of business losses?
The problem stems from the common tax predicament that, once income has been received or accrued, the taxpayer cannot simply claim that the income has been lost and thus escape taxation. In short, one cannot undo an accrual or receipt for tax purposes. So the taxpayer has to motivate an expenditure or loss to claim a tax deduction.
Many taxpayers walk away from the pursuit of perpetrators mumbling “debit cost and credit experience” — the unpleasantness and cost of pursuing the perpetrators in court is just not worth it.
But the latest SARS draft interpretation note states that the business seeking to deduct such losses must be able to prove them. So SARS can request police case numbers, reports by accredited private investigators or forensic auditors, or a charge sheet issued by a court.
This means that if a business walks away from the thief, it could be taxed on stolen income. Even if the loss can be quantified, the business is still not home and dry — it must still be able to show that the loss is an inevitable risk of the business.
If the perpetrator is a lower-level employee, that is easy. But should anyone in a managerial position be involved in the loss, the outcome can be substantially different.
There are volumes of court cases on this subject. But most of them are old and do not address the most common problem of businesses today: that staff can gain access to codes to company computer systems and bank accounts.
Many businesses have insufficient internal controls over access codes. And there is no clarity on when a loss suffered through unauthorised access to computer facilities is an inevitable risk associated with the business. Each case must be weighed on its own facts.
At the very least, businesses are advised to comprehensively investigate the cause and quantum of any incident.
Originally published in the Sunday Times: Money & Careers Tax Talk column.