“Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes,” Benjamin Franklin, 1789.
In 1996, Francesco Dominico “Frank” La Rosa was sentenced to 12 years in prison for importing heroin and possessing heroin and amphetamines with intent to distribute. He also forfeited property to the value of $264,610 under the Proceeds of Crime Act, 1987. As a result of La Rosa’s convictions, it came to the attention of the Australian Taxation Office (ATO) that he had failed to lodge tax returns for the seven financial years from 1989–90 to 1995–96.
The ATO subsequently issued notices of assessment for those years, based on the information provided by the Commonwealth Director of Public Prosecutions about La Rosa’s activities. His assessed taxable income included both legally and illegally obtained income, as Australian taxation law did not distinguish between the two. His assessed income for the 1994–95 period included a sum of $220,000 cash that had been stolen from him during a botched drug deal. The money “was accumulated from drug dealings and had been buried in the taxpayer’s backyard”.
La Rosa appealed the inclusion of the $220,000 in his assessable income. Appearing pro se, he argued that the money had been provided to him by the Australian Federal Police as part of his role in a sting operation and was thus not income. The Commissioner of Taxation rejected his argument, which La Rosa raised again on appeal to the Administrative Appeals Tribunal (AAT). The AAT reaffirmed the earlier conclusion that the money should be treated as assessable income, dismissing any police involvement. However, acting “as a matter of procedural fairness as the taxpayer had little tax knowledge and was representing himself”, the tribunal concluded that the stolen money met the general deduction provisions in the Income Tax Assessment Act 1936 (ITAA36), and this could be deducted from La Rosa’s taxable income.
The ATO appealed to the Federal Court, wherein 2002 Judge Robert Nicholson upheld the AAT’s ruling. The Federal Court ruling brought the case to the attention of the public, provoking “an immediate public and political storm”. The ATO was subsequently granted leave to appeal to the Federal Court.
The ATO sought leave to appeal to the High Court, the final court of appeal in the Australian legal system. In October 2004, the High Court announced that it had refused the appeal. In April 2005, Treasurer Peter Costello announced that the federal government would amend the Australian tax law to deny deductions “incurred in the furtherance of, or directly in relation to, activities in respect of which the taxpayer has been convicted of an indictable offense”. It did so by adding sections 26-54 to the Income Tax Assessment Act 1997.
In summary, La Rosa was deemed to have produced assessable income from the result of crimes committed however was also able to claim a deduction of illegal activities as the ATO has previously not made a distinction between legal and illegal activities. This loophole has now been changed and monies derived from criminal activities is still assessable income however no matching deduction is allowed as a deduction for illegal activities.