Income from illegal activities: losses and outgoings

The income tax law allows deductions against your assessable income for losses and outgoings incurred in carrying on a business. Generally, deductions will be allowed if there is a sufficient link between the loss or outgoing and the business income where the amount is not of a private or capital nature.

However, if your business activities are illegal – that is, you have been convicted of an indictable offence in respect of them – you cannot claim a deduction for a loss or outgoing to the extent it was incurred in the furtherance of – or directly relating to – those activities.

Similarly, such losses and outgoings do not form part of the cost base or reduced cost base of a capital gains tax asset. You will not be able to claim a capital loss or reduced capital gain as a result of such expenditure.

This applies to expenditure incurred on or after 30 April 2005.

Indictable offences are offences that are punishable by imprisonment for at least one year and include offences such as drug trafficking, tax evasion, extortion, illegal gambling, people smuggling, forgery, and piracy.

Not all indictable offences will have taxation ramifications. Only illegal activity that directly relates to the earning of taxable income will be affected by this legislative change.

This legislation only applies to offences against an Australian law – that is, any Commonwealth, State or Territory law.

If you are conducting a lawful business, but are convicted of an illegal offence while carrying on the business, only the expenditure that is incurred directly, or in the furtherance of, the illegal activity will be denied.

Expenditure that is incurred in undertaking the underlying lawful activity, and that would have been incurred regardless of the illegal activity, will continue to be deductible. This is because the expenditure cannot be said to further or be directly related to the illegal activity.

We may amend an assessment – at any time within four years – after the taxpayer is convicted of a relevant offence.

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    Last modified: 05 Oct 2016QC 18612