NO.038

INCOME TAX DEDUCTIONS TO BE DENIED FOR ILLEGAL ACTIVITIES

Today, the Treasurer announced the Government’s response

to the Full Federal Court decision in the La Rosa case.

In Commissioner of Taxation v La Rosa [2003] FCAFC 125

the court held that the taxpayer, a convicted drug dealer, was entitled to a

deduction for a loss incurred in earning his income as a drug dealer. The income

earned by the taxpayer from his illegal activities had been subject to tax and

he had sought a deduction for monies stolen from him in the course of conducting

those activities. The Commissioner of Taxation sought special leave to appeal

the Full Federal Court’s decision, but on 27 October 2004 the High Court

refused the application, exhausting the appeal process.

It should be noted that Mr La Rosa was imprisoned for a number

of years and proceeds of crime legislation was also applied to confiscate the

proceeds of his illegal activities.

At the time of the High Court’s decision, I said that I

was not satisfied with that outcome and that I would seek to introduce legislation

to change that law.

The income tax law will be amended to deny deductions for losses

and outgoings to the extent that they are incurred in the furtherance of, or

directly in relation to, activities in respect of which the taxpayer has been

convicted of an indictable offence. Similarly, the capital gains tax provisions

will be amended so that losses and outgoings incurred in relation to illegal

activities in respect of which the taxpayer was convicted of an indictable offence

do not form part of the cost base or reduced cost base for capital gains purposes.

This will ensure that no capital loss or reduced capital gain can arise from

such expenditure. Indictable offences are offences that are punishable by imprisonment

for at least one year.

Deductions will be denied for all expenditure where the activities

are wholly illegal such as drug dealing or people smuggling. There may be cases

where the taxpayer is undertaking a lawful business but is convicted of an illegal

activity while carrying out that business. In these cases, deductions will only

be denied where the expenditure directly relates to entering into and carrying

out the actual illegal activity. However, a deduction will continue to be allowed

for the expenditure if it would have been incurred in any case, regardless of

the illegal activity.

The amendments will apply to expenditure incurred after today.

The amendments will not replace or diminish the power conferred

by Commonwealth, state and territory legislation to enable the proceeds of criminal

activity to be confiscated. Broadly, proceeds of crime legislation can capture

proceeds that have been derived from the committing of an indictable offence.

The Proceeds of Crime Act 2002, which came into force

on 1 January 2003, strengthens the provisions enabling freezing and confiscation

of proceeds of crime previously available under the Proceeds of Crime Act

1987. Freezing and forfeiture of assets are now not only conviction based

but are also available for unlawfully acquired property without a conviction

first being obtained where a court is satisfied, to the civil standard, that

a crime has been committed.

MELBOURNE

29 April 2005

Contact: David Alexander

03 9650 0244