Why you need solid evidence to claim tax losses

Claiming deductions for tax losses might seem like a common tax issue that doesn’t deserve much attention. Seems fairly straightforward – right! Well, not every time.

A recent decision by the Administrative Appeals Tribunal (AAT) has highlighted the need for solid evidence of claims for any tax losses before a deduction can be claimed.

While the AAT is not bound by the rules of evidence, it regularly applies them. Those rules have been developed over many decades and provide a robust foundation for the findings of fact which are necessary, at times pivotal, to the resolution of disputes between parties.  Accordingly, the AAT considers there is very good reason for it to apply those rules.

Evidence is needed in all tax matters and while the taxpayer in this case thought he had provided what was needed, the AAT did not agree. The result was that he lost his claim for $350,000 in losses. The man had claimed a tax deduction for losses incurred in his investment in an NBL basketball team. The Tax Commissioner disallowed the claim.

The taxpayer was an experienced businessman and a resident and supporter of Wollongong and the Illawarra region. He became aware of what he called “financial difficulties” that were being experienced by the company running the local basketball team, the Wollongong Hawks, who played in the National Basketball League (NBL). One of his colleagues asked him to contribute money to the company, and he and a number of other men did so.

The taxpayer invested in the company that ran the basketball team. He invested $110,000 by way of acquiring shares in the company and $240,000 by way of what he described as a loan. The $240,000, contributed in instalments over a period of a little over two years, was originally provided for the purchase of additional shares in the company. However, before the AAT, the taxpayer said that additional shares were not provided, and these sums should be regarded as loans.

In 2009, the company appointed an administrator and during the 2010 income year, it went into liquidation. In his income tax return for the 2010 year, the taxpayer claimed the $350,000 loss as a deduction against his assessable income. The Commissioner disallowed the claim.

The taxpayer claimed the loss on the basis that the contributions were incurred in gaining or producing his assessable income. If that was accepted, the losses would be deductible. The taxpayer claimed he made his investments on the basis that he formed a view that “with my involvement and that of my Colleagues in the Company, we could ‘turn the Club around’. That is we could make it financial[ly] viable and profitable, and as a consequence my investment in the Company would increase in value. My aim was to sell my shares and crystallise this increase in the value.”

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