An analysis of the taxability of illegal activities in South Africa

Abstract

The South African Income Tax Act (58 of 1962) does not specifically deal with the tax treatment of receipts resulting from illegal activities. Expenditure resulting from illegal activities is also only partly dealt with in terms of Section 23(o) of the Income Tax Act. This has resulted in uncertainty pertaining to the normal income tax treatment of illegal activities within a South African context. In response to this, the South African Revenue Service has issued a draft interpretation note dealing with the tax consequences of embezzlement and theft of money for both the victim as well as the offender during 2013. This draft interpretation note also deals with the normal tax consequences of illegal receipt in the hands of the thief. In an attempt to evaluate this draft interpretation note to clarify the tax consequences of illegal activities in South Africa, the meaning of illegal receipts is firstly determined. Subsequently the concept of „illegal receipts‟ is measured against the definition of „gross income‟ contained in Section 1 of the Income Tax Act. Expenditure relating to illegal activities is also analysed and measured against the general deduction formula contained in Section 11(a) of the Income Tax Act. Relevant principles established from general case law applicable to the definition of gross income as well as the general deduction formula is analysed to determine its applicability within the context of illegal receipts and expenditure. Also, principles established through case law, both nationally and internationally, specifically applicable to the taxation of illegal activities were analysed to establish guidelines that could be applied to clarify the taxability of illegal activities within a South African context.