S51 Tax

According to S51(1) of ITAA, deductions will be allowed if losses or outgoings incurred in gaining or producing assessable income when carry on a business. Income from illegal activities is not assessable to income tax since this is an indictable offence. These activities are not allowed by law such as drug dealing, misappropriation, and insider trading.   Therefore, repayment or restitution is imposed on the offender. The offender cannot claim a deduction for any loss or outgoing incurred in carry on a business.
In the case of Partridge v. Mallandaine (1886), they considered that ‘if a man were to make a systematic business of receiving stolen goods from the offender, and to do nothing else, and he thereby systematically carried on a business and made a profit of 2000 per year, the Income Tax Commissioners would be good right in assessing him if it were in fact his vocation’. In another saying, repayment is enforced on the offender and is not incurred by the offender in earning the proceeds.
However, there is also an exception case, Minister of Finance (Canada) v. Smith [1927] stated that illegal transaction were considered to be assessable income.
  Other cases where the proceeds from illegal transactions were considered to be assessable income include Minister of Finance (Canada) v. Smith [1927] AC 193 which involved proceeds from bootlegging liquor in Ontario, Lindsay v. IRC (1932) 18 TC 43 where the proceeds in question had been derived from smuggling rye whiskey out of Scotland for sale in the USA and Southern (HM Inspector of Taxes) v. A.B. (1933) 18 TC 59, considering the proceeds of illegal bookmaking operations. |