Tax implications
Scenario:
A friend of mine is the CFO of E Corp Pty ltd (E Corp). During the 2014/15 income year, she misappropriated $360,000 worth of company funds.
In the 2016/17 income year, as a result of the audit, she was indicted and convicted in December 2016. She was issued a court restitution order to repay $300,000 to E Corp. She was also fined $120,000.
In January 2017, she needed additional funds to repay the money. She appeared on a current affairs television show to discuss her crime and was paid $50,000.
What are the tax outcomes for her in relation to the income and the expenses arising from her illegal activities?
Explanation:
Income derived from illegal or ultra vires transactions conducted in a systematic, regular and organized way with a view to a profit can constitute business income. Accordingly, this income, although from illegal activities, is subject to the same tax provisions as any other business income. Your friend is required to include the additional $360,000 as taxable income for the 2014/15 income year and pay any shortfall interest amounts and penalties associated.
Losses or outgoing necessarily incurred in carrying on illegal or ultra vires business will be deductible, according to ITAA97 s8-1. However, amounts obtained from an illegal activity that is subsequently repaid or recovered, for whatever reason, will not be allowable deductions. Such payments represent a repayment of income as opposed to an outgoing incurred in deriving that income.
On this basis, your friend is not permitted to deduct the restitution amount of $300,000 in the 2016/17 income year. However, since the amount directly related to assessable income of $360,000 previously recognized in the 2014/15 income year, the $300,000 is permitted to reduce the $360,000 from the 2014/15 income year is reduced to $60,000 - any shortfall interest charge is also reduced.
Further, fines and penalties payable are specifically not allowable deductions (ITAA97 s 26-5). Accordingly, she is not permitted to deduct the $120,000 fines in the 2016/17 income year.
She would also be required to include the $50,000 from the television interview in her assessable income for the 2016/17 income year as the appearance was part of her “business activities” and there was a view to a profit from the interview.