The taxation of illegal income : an international comparison

Abstract: The question of whether income generated from illegal activities should be subject to tax, may raise eyebrows. Some countries may take the view that taxpayers should be taxed on their income regardless of whether the income is tainted with illegality whilst others might be of the opinion that taxing illegal earnings is unethical, due to the fact that the tax flowing to government is sourced from income generated from illegal activities. South African and Australian tax residents are obligated to declare their worldwide earnings, including earnings derived from illegal sources, in their annual tax return submission to the revenue authorities. This study provides an in-depth literature review of the South African and Australian tax system in order to: firstly, address the taxation of illegal earnings and the deductibility of expenditure incurred in the production of illegal earnings, and secondly, to discuss the tools and abilities of the SARS and the Australian Tax office to trace and identify illegal income, and thirdly, to provide a comparison between South Africa and Australia in order to determine whether South Africa is in line with global norms. From the research findings, it can be concluded that South Africa will tax illegal earnings should it fall in the definition of Gross Income, as defined in section 1 of the ITA. On the same note, Australia will also tax illegal income should it constitute assessable income as defined in section 4-15(1) of the Assessment Act. The findings further indicate a parallel between how South Africa and Australia deal with the deductibility of legal and illegal expenditure. Both countries have incorporated a general deduction formula into their income tax legislation. The findings also analyses the various tools and processes available to tax authorities, to identify taxpayers who exploit the tax system. Unfortunately, even with tools in place, instances exist where tax authorities only become aware of illegal income that has been generated once the taxpayer is caught out. However, both countries are leading by example through tools and technology that have been implemented in a process to identify illegal income that has been omitted from annual tax returns. An excellent example is the success of project Wickenby. This initiative is definitely something that South Africa can learn from and work towards for future implementation in South Africa.M.Com