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.