Muhammad is the CEO of Good Business Pty Ltd. During the FY2016, he misappropriated company fund of $200,000. He forged document
and manipulated the accounting records. However, in the FY2018 auditing, the auditor identified the amount was misappropriate from the
company. He was subsequently convicted in December 2018. He was issued a court restitution order to repay $180,000 to the company
and fined $80,000.
What are the tax consequences of the proceeds and expense for Muhammad’s illegal activities?
Income derived from illegal activities conducted in a systematic, regular and organised way with a view to a profit can constitute business
income (Case B32, 70 ATC 153). Therefore, Muhammad is required to include the additional $200,000 as taxable income for FY2016 and
pay any shortfall interest amounts and penalties associated.
According to ITAA97 s 26-54. Expenditure related to illegal activities in respect of which the taxpayer has been convicted of an
indictable offence is denied as deduction. However, the repayment or restitution represents a repayment of income which can reduce the
amount of income derived.
On this basis, the additional assessable income for the FY2016 income year is reduced from $200,000 to $20,000 — any shortfall
interest charge is also reduced.
Further, fines and penalties payable are specifically not allowable deductions (ITAA97 s 26-5). Accordingly, Muhammad is not permitted
to deduct the $80,000 fine.