Commissioner of Taxation v La Rosa

BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. The cross-appeal be dismissed. 3. Counsel be heard as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

BETWEEN: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

REASONS FOR JUDGMENT 1 The applicant ("the Commissioner") appeals from part of a decision of the Administrative Appeals Tribunal ("the Tribunal") made on 31 July 2000 in which it was decided the Commissioner's objection decision under review for the year of income ended 30 June 1995 should be varied by remitting the matter to the Commissioner to issue an amended assessment to reduce the taxable income by $224,793 to $222,161. The respondent ("the taxpayer") cross-appeals from that part of the same decision which decided that the Commissioner's objection decision be confirmed by including a sum of $270,000, being the estimated value of the contents of a safety box, as income; not allowing a deduction in that amount; including a sum of $224,793 as income; and by not reducing the taxpayer's income to nil. The Tribunal decision 2 The circumstances before the Tribunal were that the taxpayer had failed to lodge income tax returns for the seven years of income ended 30 June 1990 to 1996 inclusive. The Commissioner issued notices of assessment pursuant to s 167 of the Income Tax Assessment Act 1936 (Cth) ("the ITAA") in relation to each of those years. The taxpayer objected to the assessments on the basis the taxable incomes had been overstated. 3 The notices of assessment for the years ended 30 June 1990 to 1992 inclusive were based on an estimate of taxable income arrived at by the Commissioner by a process of averaging the two immediately preceding years, being years of income for which income tax returns were lodged. The notices of assessment for the years ended 30 June 1993, 1994, 1995 and 1996 were based on "T accounts". As the Tribunal's reasons recounted, the T account amount of "funds from unexplained sources" for each year of income is adjusted to include any assessable income amounts derived which were identified during the process of compiling the T accounts. The resultant amount is the Commissioner's estimate of taxable income assessed pursuant to s 167 of the ITAA. 4 The taxpayer challenged the method of estimating his taxable income for the first three years under review (which are not the subject of this appeal). He did not challenge the principle of the T account approach. However, he did challenge aspects of the calculations leading to the taxable incomes in those years and, relevantly for the purposes of this appeal, the year ended 30 June 1995. He also submitted to the Tribunal that as he had forfeited property to the value of $264,610 under the Proceeds of Crime Act 1987 (Cth), he should not be assessed for income tax to that extent. 5 The Tribunal stated that in any review of an objection decision the onus of proof rests on the taxpayer: s 14ZZK(b)(i) of the Taxation Administration Act 1953 (Cth). It said it was not sufficient for the discharge of the onus for the taxpayer merely to show there may be errors in the Commissioner's calculations of the taxable incomes. Rather, the taxpayer must show that the amount of the assessment is excessive in the sense of it being greater than the actual taxable income which he or she claims to have derived in any given year of income. Furthermore, the Commissioner is not required to mount an impregnable case in support of the assessment made pursuant to s 167 of the ITAA: George v Federal Commissioner of Taxation (1952) 86 CLR 183 at 204; Federal Commissioner of Taxation v Clarke (1927) 40 CLR 246 at 251; and Galea v Federal Commissioner of Taxation (1990) 21 ATR 1108 at 1116 - 7. It is sufficient for the Commissioner to have made reasonable inquiries to found a basis for the assessment: Briggs v Deputy Federal Commissioner of Taxation (WA) 87 ATC 4278 at 4294 - 4295. 6 The Tribunal was satisfied the Commissioner had acted reasonably in arriving at the amount of taxable incomes assessed for each of the years in question. It summarised the Commissioner's reasons for that view as follows: " · The taxpayer did not lodge income tax returns for any of the 7 years of income to which the objection decisions under review relate. · The Australian Federal Police arrested the taxpayer in November 1995. · The taxpayer was taken into custody on 5 November 1995, later; having pleaded guilty to the offences mentioned above, he was jailed on 26 April 1996. He was still in custody at the time of the hearing of this matter. · The [Commissioner] was provided with a copy of a report compiled by Mr Kim Griffiths, Financial Analyst, Commonwealth Director of Public Prosecutions, September 1996. This report included, among other relevant information, T accounts for the years ended 30 June 1993, 1994 and 1995 and for the period 1 July 1994 to 31 October 1995. · As a result of its own inquiries, the [Commissioner] made adjustments to each of the T accounts referred to above. … · The [Commissioner's] own inquiries to assist it in being satisfied about the reasonableness of the T accounts and the basis for the above adjustments included: o Obtaining ABS statistical information about the level of household expenditure by State and Territories and Capital Cities. It used this information to estimate the living expenses. o Vouching bank transactions during the 1993 to 1996 years of income and summarising these into categories, firstly by each bank account and then overall by year. o By reference to witness statements provided by the Australian Federal Police, summarising cash expenditure by categories for each year." 7 The Tribunal noted that the taxpayer gave evidence about his activities and earnings for the years of income in question. He was not represented before the Tribunal. The Tribunal was of the opinion that the taxpayer's evidence could not be relied upon as on a number of occasions he seemed to change his evidence when he thought that by doing so it would assist his case. The Tribunal treated with scepticism a claim by the taxpayer that until 1994 when he began dealing in drugs his drug purchases were for his own use. It referred to his record of convictions in respect of drugs and related matters. It noted that the taxpayer, whilst not categorically denying he was involved in drug dealing, claimed that he was set up by, and dealing on behalf of, the Australian Federal Police (sometimes referred to in evidence as the National Crime Authority) (by agents Messrs Brewer and Coombes) as agent provocateur. However, in the Court of Criminal Appeal, in the Supreme Court of Western Australia, Pidgeon J, with whom Malcolm CJ and Kennedy J agreed, had found there was no suggestion of an official advance of money to conduct a controlled operation to apprehend offenders. The Tribunal said no independent evidence had been presented which would enable any contrary conclusion to be reached and it adopted the conclusions of the Court of Criminal Appeal: La Rosa (1989) 105 A Crim R 362. 8 In relation to the taxpayer's objections to the last four years of assessment, including relevantly the year ended 30 June 1995, the Tribunal had before it various T documents and exhibits. In addition it had the oral evidence of the taxpayer which it summarised in its reasons. However, it found that the taxpayer was uncooperative and aggressive in cross-examination. In light of the need for corroboration of his evidence the Tribunal called the taxpayer's daughter and son-in-law ("the Mahoneys") and the taxpayer's spouse to give evidence. The Tribunal recorded its impressions of those witnesses in relation to the taxpayer's assertion that a stolen sum of $220,000 belonged to his daughter and son-in-law. It will be necessary later to turn to the particulars of that evidence. 9 The following were the principal matters decided by the Tribunal: (1) Taxability of profits of illegal business: 10 The Tribunal found that the taxpayer profited from drug dealing at least in the last four years of income and relevantly including the year ended 30 June 1995. It held that was sufficient for the proceeds from the sale of such drugs to be treated as assessable income pursuant to s 25(1) of the ITAA. (2) Assessibility of allegedly stolen monies: 11 In relation to the sum of $220,000, allegedly stolen in May 1995, the Tribunal found the monies belonged to the taxpayer and that he had not discharged his onus of proof to establish they were not proceeds from drug dealing. It considered the sum was correctly included among "other payments" in the T account for the year ended 30 June 1995 having the effect of increasing the otherwise "total funds expended". (3) Deductibility of monies stolen from illegal business: 12 In relation to the claim that the money was stolen the question arose as to whether there should be an offsetting allowable deduction for the loss. The Tribunal found there should be such a deduction in the year ended 30 June 1995. Its reasoning follows. 13 The Tribunal referred to subs 51(1) of the ITAA as allowing deductions of losses or outgoings incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income, except to the extent that the loss or outgoings is of capital or of a capital nature. It found that the money stolen was clearly a loss. Furthermore, it was a loss arising during activities directly connected with the carrying on of the illicit drug dealing business, the proceeds from which were assessable income pursuant to s 25(1) of the ITAA. 14 The Tribunal rejected a suggestion that any deduction would be available pursuant to s 71 as resulting from larceny (theft) perpetrated by a person employed by the taxpayer. It held that clearly that condition was not present because the evidence was that unknown persons stole the amount. 15 In the opinion of the Tribunal the amount stolen was accumulated proceeds from drug dealing. The monies had been received as income and accumulated for use in the business. It relied on Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344. That was a case where deductibility was allowed in respect of a sum of money stolen at pistol point whilst being taken from the taxpayer's retail store to the nearby bank for depositing. The Tribunal considered it was not to the point here that the drug dealing business was illegal. Rather, it considered that what mattered was the connection of the robbery with the drug purchase operation and hence with the direct connection with the gaining or production of the taxpayer's assessable income. The Tribunal followed the reasoning in Charles Moore in holding that the amount stolen was not a loss of capital or of a capital nature. Furthermore, it did not consider the loss could be characterised as one incurred in the course of securing a future supply of drugs (an enduring benefit) which would be of a capital nature because the evidence was it was lost during operations to acquire trading stock. Accordingly, the Tribunal allowed the deduction pursuant to s 51(1). (4) Assessibility of a sum in safety deposit box: 16 It also found there was sufficient evidence to be satisfied there was a further sum of at least $220,000 accumulated in a safety deposit box on behalf of the taxpayer and removed therefrom soon after his arrest in November 1995. It was satisfied the sum was an accumulation of drug dealing proceeds over time. In the absence of evidence to the contrary, it was reasonable to adopt the Commissioner's approach and treat the amount as cash on hand as at 31 October 1995 even though it had not be recovered. Therefore, it was open to the Tribunal to include both this $220,000 and the sum of $30,000 previously stored in the safety deposit box as "cash on hand" in the compilation of the T account for the period from 1 July 1995 to 31 October 1995. Consequently, no adjustment was required to the Commissioner's assessment of the taxpayer's taxable income for the year of income ended 30 June 1996. (5) Offset of forfeited proceeds of crime: 17 Before the Tribunal the taxpayer submitted that money and real and personal property valued at $264,610 forfeited pursuant to a declaration by the Supreme Court of Western Australia under the Proceeds of Crimes Act 1987 (Cth) should be excised from his taxable income. His submissions was that both to forfeit the property and to assess it for tax was charging twice for the same amount. 18 The Tribunal understood this submission to be open to two alternate interpretations. The first was that the seizure is a payment to the Commonwealth equal to the value of the property seized and therefore, in effect, should be taken to be a discharge in part of any income tax liability arising from the disputed assessments. The Tribunal considered no such notion of discharge was applicable because the seizure was in the nature of a penalty having the character of a fine or imprisonment and was not a payment, voluntary or otherwise, in discharge of any liability, nor did it establish any rights. 19 Secondly, the Tribunal understood the submission to mean that the seizure, because of its clear connection with the crime of drug dealing giving rise to the disputed assessments, should result in a tax deduction, equal to the value of the property seized, from the assessed income from drug dealing activities. The Tribunal considered the first obstacle to this was that the "payment" if there was one occurred after the end of the years of income in which the assessed income was derived. The court order under the Proceeds of Crimes Act made on 30 October 1996 bore no temporal connection to the business activities giving rise to the income derived. The forfeiture was too late to have any relevant nexus with the assessed incomes derivation. There was, therefore, insufficient nexus between the occasion of the derivation of the income that may have been used to accumulate or purchase the property forfeited and the occasion of the loss. Unlike the loss of the money stolen, this loss was neither relevant nor incidental to the day to day activities previously carried on in the drug dealing business: see s 51(1) of the ITAA. It did not consider the deduction was excluded by s 51(4) as the forfeiture or seizure was not an amount "to be paid by the [taxpayer]". The Tribunal therefore concluded on this aspect that no reduction in taxable income arose as a consequence of the seizure of the property referred to. 20 The Tribunal therefore varied the objection decision under review in respect of the year of income ended 30 June 1995 by remitting the matter to the Commissioner to issue amended assessments reducing the taxable income by $224,793 to $222,161 and subject to adjustments to additional tax assessments. Whether evidence to support finding funds were stolen Ground of appeal 21 The first ground of appeal is that there was no evidence or insufficient evidence to support the Tribunal finding that the funds of the taxpayer were stolen from him in the course of purchasing prohibited drugs (and not recovered). Commissioner's contentions 22 The findings of fact made by the Tribunal in relation to this matter were: (a) the sum of $220,000 was stolen during an intended drug purchase. (b) the intended drug purchase was directly connected with carrying on the taxpayer's illicit drug dealing business. (c) the sum of $220,000 belonged to the taxpayer and was proceeds from drug dealing accumulated for use in the illicit drug dealing business. (d) the sum of $220,000 was buried in the taxpayer's backyard and dug up for a drug deal in May 1995. The submission for the Commissioner is that there was no material or insufficient material before the Tribunal to support its findings that the taxpayer's money of $220,000 was stolen from him during an intended drug purchase directly connected with carrying on his illicit drug dealing business. Further, it is submitted such findings were logically inconsistent with other evidence before the Tribunal and other findings of the Tribunal. 23 The case for the Commissioner then directed attention to the evidence before the Tribunal. Firstly it was said that in the taxpayer's grounds of objection and in supporting correspondence he denied receipt of the cash stolen. In referring to unsworn statements of Mr and Mrs Mahoney, he referred to their hearsay statement and said it was just a good story. Secondly, in the supporting affidavit he also denied he had ever received the sum. 24 Thirdly, in an affidavit filed in the proceedings in the Court of Criminal Appeal, the taxpayer had deposed that officers of the National Crime Authority ("NCA") had arranged the money in two bags to enable him to act as an agent provocateur. It was that money in relation to which he was set up and robbed. 25 Fourthly, there were statements by Mr and Mrs Mahoney made on 4 and 8 June 1996 respectively. Mrs Mahoney's statement was that around the beginning of May 1995 the taxpayer asked her to get together a substantial sum of money, telling her he needed to get $220,000 cash for a deal he was involved in. She gave him all the money she had been keeping for him at the house but she did not recall exactly how much money she had given him. She also stated she had been told by the taxpayer he had been robbed of the sum of $220,000. Mr Mahoney stated the taxpayer had told him he had a "deal going down" and wanted to know how much money he had. Consequently, Mr Mahoney dug up the money from his backyard and counted it. He did not recall the exact amount but to the best of his recollection there was about $220,000. After counting the money he reburied it. He also stated that on 19 May 1995 the taxpayer had told him he needed $220,000 for a "deal" and that to the best of his recollection the taxpayer told him he had buried money in the front yard of his house near the garage. While there was evidence from Mr Mahoney that might support an inference that an attempted drug deal and theft occurred, there was no probative evidence that $220,000 of the taxpayer's money was involved in those events. 26 Fifthly, the Tribunal reached an unfavourable opinion of the taxpayer's credibility generally. It said it reached that view because on a number of occasions he seemed to change his evidence when he thought that by doing so it would assist his case. As has been seen, the Tribunal rejected the taxpayer's claim that he was set up by, and dealing on behalf of, the NCA as an agent provocateur. 27 Sixthly, the Tribunal preferred the evidence of Mr Mahoney in regard to the origin of the allegedly stolen sum of about $220,000. It found no evidence in support of the taxpayer's claims that the various sums he attributed to having been sourced from Mr and Mrs Mahoney (his daughter and son-in-law) in fact came from them. Rather, the Tribunal found they came from cash available to the taxpayer alone. 28 The position therefore, it is said, is that there was no evidence other than that which came from the taxpayer (either directly or indirectly through his statement to others) as to the source of the money in his physical possession on the night (not necessarily the money held in the backyard by the Mahoneys); the use intended for the money on the night; and the theft of the money on the night. Given the Tribunal's findings as to the taxpayer's credibility it is submitted it was not open to it to rely upon or draw inferences from hearsay as to what the taxpayer had said. It is submitted the finding which the Tribunal should have made at law was that on the relevant material before it there was no evidence or insufficient evidence that on the alleged night in May 1995, $220,000 of the taxpayer's money had been in his physical possession and had been stolen from him during an intended drug deal directly connected with carrying on the taxpayer's illicit drug dealing business. Consequently, it is submitted the Tribunal was required to find that there was no established factual basis upon which it could apply s 51(1) of the ITAA to allow a deduction for the alleged loss. Accordingly, the taxpayer could not discharge the onus of proof that his assessment for the income year ended 30 June 1995 was excessive to the extent of $220,000. Contentions for taxpayer 29 Firstly, it is said for the taxpayer that the Tribunal was entitled to rely on the unsworn statements of Mr and Mrs Mahoney as these were relied upon by the Commissioner to support the assessments and disallow the objection, nor was this aspect of their evidence the subject of a challenge before the Tribunal. 30 Secondly, reliance is placed on the evidence in the affidavit by the taxpayer before the Court of Criminal Appeal. The matters were put to him in cross-examination before the Tribunal but there was no challenge to the transaction or theft-taking place, only to his claims regarding ownership of the funds. The taxpayer sought to call corroborating evidence from the alleged owners of the money (the officers of the NCA) but was dissuaded from doing so by the Tribunal. 31 Thirdly for the taxpayer it is said it is not correct that the evidence of Mr and Mrs Mahoney was each based on information from the taxpayer. Her evidence included her observations of the movements of the parties and the physical state of the taxpayer at the end of the night. His evidence included a description of his part in the transaction, being given a weapon, observation of the taxpayer's physical state and going with the taxpayer to seek the alleged thief at a later date. None of these matters are hearsay from the taxpayer and all are items of evidence that could reasonably support an inference that a robbery took place. 32 Furthermore, neither the evidence of Mr or Mrs Mahoney was challenged in the Tribunal with respect to the robbery or the events of the night in question. That was an opportunity for the Commissioner to correct the unsworn nature of their statements. However, questions were confined to the issue of the ownership of the money. 33 Next, it is submitted the statements by the taxpayer that the money was not his are to be understood as consistent with his attempt throughout to say the money belonged to officers of National Crime Authority or Australian Federal Police. This was disbelieved by the Tribunal. It is not appropriate for this Court, it is submitted, to reverse the Tribunal's finding on credibility. 34 Additionally, reliance is placed on the fact that the T accounts included the sum of $220,000 on the basis of the Mahoneys' evidence so that it always was the Commissioner's case that sum should be brought to account. The additional point is made that if there is no evidence, the sum should not have been included in the T account. 35 In relation to the credibility finding adverse to the taxpayer, it is pointed out for him that the Tribunal based that finding on the taxpayer changing his story to suit himself "in the hearing". However, the statements relevant to the present issue come from outside the hearing. Furthermore, the Tribunal was not bound by the rules of evidence and was entitled to rely on hearsay evidence: s 33 Administrative Appeals Tribunal Act 1975 (Cth). 36 Finally, it is submitted that because there is clear independent evidence of a theft it is not material whether or not the evidence establishes the exact amount that was involved because the amount that was stolen is the amount that both goes into the T accounts and is to be taken out again. Requirements at law for ground to be made out 37 According to the Australian authorities a lack of logical reasoning does not necessarily constitute an error of law. If the particular inference is reasonably open, that is, if there exists some basis for the inference, there is no basis for judicial review (see Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 per Mason CJ at 356 with whom Brennan, Toohey and Gaudron JJ agreed on this point; cf Minister for Immigration and Multicultural Affairs v Epeabaka (1998) 84 FCR 411 at 422. 38 Therefore a finding of fact will be reviewable on the ground that there is no probative evidence to support it and an inference will be reviewable on the ground that it was not reasonably open on the facts, which amounts to the same thing (Bond per Mason CJ at 359-360). 39 In addition to referring to the above two mentioned authorities counsel for the Commissioner drew attention to two decisions in the taxation context. The first was Federal Commissioner of Taxation v McCabe (1990) 26 FCR 431 where at 442 Davies J said, in the context of the application of s 44 of the Administrative Appeals Tribunal Act 1975 (Cth), that Mason CJ's comments in Bond were a warning not to blur the distinction between unreasonableness or perverseness on the one hand and want of logic on the other. He added that a strong case is necessary to upset a factual finding. In Collis v Commissioner of Taxation 96 ATC 4831 at 4846 - 4847 the observations of Mason CJ in Bond at 355 - 356 were applied by Jenkinson J. 40 Counsel for the taxpayer did not submit that there was illogicality in the decision of the Tribunal, rather there was no basis for the inference it drew. Reasoning on this ground 41 In my view the case for the taxpayer on this point makes apparent that the case for the Commissioner on the point is not of the strong character (cf McCabe at 442) necessary to upset a factual finding. This is not a case where the weight of evidence is all one way against the finding (cf McCabe at 442 again). There was evidence of theft and of the quantum of money involved. None of this was put in issue before the Tribunal in a way relevant to resolution of this ground. There was therefore some evidence upon which the findings of the Tribunal can be seen as reasonably open (cf Bond at 355). I therefore consider the ground of appeal does not succeed. 42 I do not consider that it is correct that the Tribunal's findings in relation to the taxpayer's credibility generally has the consequence that there was no evidence before the Tribunal on which it could base its findings. That is, I consider there was evidence other than that which came from the taxpayer. Mr Mahoney said in his statement that the taxpayer had told him he needed $220,000 for the drug deal and had instructed his wife to dig it up. He also told Mr Mahoney he had buried money in the front yard of his house (and it was this his wife did not wish to have to dig up). He then gave evidence relative to the attempted drug deal and theft, the inferences from which are not challenged by the submissions for the Commissioner. He continued by stating the theft had related to "the money", a reference back to the money previously identified. Mrs Mahoney's statement said she had given the taxpayer all the money she had been keeping for him, and although she could not say the exact amount, it was in response to his request for $220,000. Mr Mahoney said in his statement that when he had dug up the money from the backyard it was to the best of his recollection about $220,000. The written submissions for the Commissioner accept that the sum so dug up is the amount here in issue. In examination in chief the taxpayer put to Mr Mahoney the question of who owned the $220,000 stolen and he replied it was the taxpayer's. There was no cross-examination of Mr Mahoney on this issue. Once the Tribunal disbelieved the taxpayer's claim that the sum of $220,000 stolen was money supplied by Messrs Brewer and Coombes, there was evidence from which it could reasonably conclude the sum belonged to the taxpayer and was in the order of the amount so identified. 43 I therefore do not consider this ground of appeal succeeds. Eligibility of stolen funds for deduction Ground of appeal 44 The Commissioner's amended notice of appeal then seeks to challenge the allowance by the Tribunal of the deduction of the stolen funds. The ground alleges the Tribunal erred in law in finding the sum was an outgoing incurred in gaining or producing the taxpayer's assessable income or was necessarily incurred in carrying on a business for the purpose of gaining or producing such income. Relevant statutory provisions 45 Subsection 51(1) in well known words provides that "all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income". Subsection 51(4) provides: "51(4)A deduction is not allowable under subsection (1) in respect of: (a) an amount, however described, payable, or expressed to be payable, by way of penalty under a law of the Commonwealth, a State, a Territory or a foreign country; or (b) an amount ordered by a court, upon the conviction of a person for an offence against a law of the Commonwealth, a State, a Territory or a foreign country, to be paid by the person." 46 "Assessable income" is defined by s 6(1) of the ITAA for income years prior to 1997/1998 as all amounts which under the provisions of the ITAA are included in the assessable income. Contentions for Commissioner 47 It is submitted that the losses and outgoings encompassed by the terms of s 51(1) are those arising out of "legitimate activity" to gain or produce assessable income. That is, it is said that the occasion of the alleged loss is properly explained by the taxpayer's exercise of his choice to personally engage in criminal activity and not by any legitimate activity to gain or produce assessable income. The loss allegedly occurred while the taxpayer was attempting to engage in criminal activity and it is submitted that a motive of that kind does not turn a criminal act into an income-producing act. 48 The contentions for the Commissioner urge the Court to find support for these views in decisions showing a reluctance to allow deductions under s 51(1) for fines and penalties, to which reference will be made below. 49 It is also submitted that as the taxpayer said he intended to purchase $220,000 worth of prohibited drugs on the night but instead the "deal" turned out to be a set up by other criminals who intended and succeeded in robbing him of his money, there was no legal and commercial transaction on that occasion from which the loss was "incurred" in the gaining or producing of assessable income. It is submitted there was not, therefore, the required sufficient connection between the alleged theft and the production of assessable income for the purposes of s 51(1): cf Charles Moore at 350 - 351. 50 In using the word "legitimate" in these submissions counsel for the Commissioner said it was intended to have a broader meaning than "lawful" because it would encompass occurrences such as a breach of statute which would not be seen as reprehensible. Contentions for taxpayer 51 Firstly it is said for the taxpayer that it is significant s 51(1) of the ITAA provides for a deduction for "all" losses and outgoings. The intent is an inclusive one and relates to the gaining or producing of "assessable income". 52 It is denied that the cases on fines and penalties are indicative of a broader principle which could deny deduction here. 53 It is said that the cases demonstrate three different situations namely:

• A legal business where the outgoing is the result of an illegal activity.
• An illegal business where the outgoing is of a legal nature.
• An illegal business where the outgoing is of an illegal nature. It is said to follow from Charles Moore and Gold Band Services Ltd v Inland Revenue Commissioner (NZ) (1961) NZLR 467thatillegality of the loss does not prevent deductibility by its nature. Accordingly, a denial of the loss must arise only from the illegality of the business activity. It is submitted there is no basis to distinguish between legal and illegal outgoings. The ITAA, it is said, provides no foundation for this distinction. There is no basis for reading words into it which are not there. Cases on fines and penalties 54 The foundation for the approach to non-deductibility of fines and penalties derives from two English cases, Commissioners of Inland Revenue v Warnes & Company, Limited [1919] 2 KB 444, a decision of Rowlet J and Commissioners of Inland Revenue v Von Glehn & Company, Limited [1920] 2 KB 553. (This latter decision attracted the criticism of the House of Lords in Minister of Finance v Smith [1927] AC 193 at 198, but only in respect of dicta by Scrutton LJ that income tax acts are necessarily restricted in their application to law for businesses only). These authorities and subsequent Australian and New Zealand authorities were fully explored by the Full Court in Madad Pty Ltd v Commissioner of Taxation (1984) 4 FCR 420. They also received close examination by Ormiston J in Mayne Nickless Ltd v Commissioner of Taxation [1984] VR 863. I rely on those descriptions of the authorities which relieve me from the task of repeating the detail of them here. 55 The rationale of the authorities was identified by Gavan Duffy CJ and Dixon J in The Herald & Weekly Times Limited v The Federal Commissioner of Taxation (1932) 48 CLR 113 at 120 as being that: "the penalty is imposed as a punishment of the offender considered as a responsible person owing obedience to the law. Its nature severs it from the expenses of trading. It is inflicted on the offender as a personal deterrent, and it is not incurred by him in his character of trader." In Federal Commissioner of Taxation v Snowden & Willson Proprietary Limited (1958) 99 CLR 431 at 437 (where the deductibility of monies expended by a company on advertising in the press to counter the effect of press reports concerning allegations against it and legal costs in respect of a royal commission were in issue) Dixon J said: "There is no analogy here to cases in which fines or penalties are incurred. There the character of the expenditure and the reasons why the law imposes a fine or penalty separate the expenditure from the conduct of the business. It is not to the point that the conduct penalised found its motive in business considerations. Nothing of the kind can be said of the expenditure now under consideration…" Fullagar J, with whom Williams J concurred, was of the same view and expressed approval of the explanation given by Gavan Duffy CJ and Dixon J in Herald & Weekly Times. 56 The rationale of the penalty cases received further consideration by members of the Full Court in Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183. There it was contended that expenditure in connection with breaches of the law was in a separate category from other expenditure incurred in carrying on a business and that the weight of judicial authority denies a deduction to a taxpayer who incurs expenditure with respect to a breach of the criminal law. Reliance was placed on the aforementioned authorities. Brennan J said in relation to that at 199: "In the High Court, the majority of the judgments confines the operation of the English cases to the payment of penalties imposed as a punishment upon the taxpayer." Deane and Fisher JJ said at 214 - 215: "It is somewhat difficult to understand how it can be maintained, as an unqualified proposition, that the nature of a penalty severs it from the expenses of trading. Recurrent penalties for parking infringements incurred by a deliveryman and per diem penalties for unlawfully using premises for business or commercial purposes in contravention of zoning requirements are not, for example, logically severed from the expenses of trading. The same can be said of fines imposed for actually engaging in some unlawful activities, such as illegal bookmaking or soliciting, for the purpose of earning assessable income. If, when the matter directly arises for decision in the Australian courts, it is to be held that all fines and penalties are to be denied deductibility under the Act, it would seem preferable that it be on the basis of some perceived overriding consideration of public policy which precludes deductibility." 57 In Mayne Nickless,Ormiston J was prepared to follow the line of authority that it was the nature of the penalty and the character of the expenditure which takes such outgoings outside the expenses of trading, although he did so significantly because he did not consider it appropriate to depart from observations of so many judges of the High Court: at 878 - 879. 58 It follows that I should understand that the rule reflected in the English cases in relation to penalties is not open to wider analogy and indeed may not find ongoing support in Australian law if it arose directly for decision. I do not consider, therefore, that law is available for me to analogise from, in relation to the taxpayer's claim for a deduction of the stolen sum of $220,000. Concept of legitimacy 59 Woven into the submissions for the Commissioner in relation to this contention of non-deductibility of the stolen funds is the concept of legitimacy. I can find no basis in law for that concept. As put to the Court it involves vague and ill-defined limits because it is intended to encompass some matters that are not lawful but which are not excessively unlawful. To adopt the use of legitimacy would seem to introduce a measure of subjectivism which would give rise to uncertainty in the application in the law. More fundamentally, the contentions for it do not disclose any foundation either in case law or in the wording of the ITAA upon which such a concept could be approached. In my view it is essential to adhere to application of the words of the ITAA in s 51(1). Authorities on deductibility 60 In Charles Moore the High Court, in allowing deductibility of the monies stolen on the way to the bank as a loss incurred in gaining or producing assessable income, said (at 350) that: "Properly understood the place which the banking of money takes in a merchandising business brings the operation within the principle [of the subsection]. It is an essential, or at all events highly expedient, part of the conduct of the business, a necessary or recognised incident or concomitant, and is relevant as well as incidental to the end in view, the gaining of the assessable income. The "occasion of the loss" in the present case was the course pursued in banking the money." 61 In Gold Band Services a deduction was allowed in respect of cash monies robbed in the operation of a service station, being part of weekend takings. Haslam J held that the instance was indistinguishable from Charles Moore's case because the occasion for the loss was the operation of its business "in the normal way". The facts showed that a dishonest removal of such funds was a "reasonably incidental risk" to the production of assessable income in that locality at that time. 62 If the argument touching on "legitimacy" is intended to be directed to the manner of the operation of the business and to suggest that the occasion of the loss was not a necessary part of the conduct of the business I do not consider that the argument has been made properly in those terms nor is it supported by the facts. The findings of the Tribunal are that the occasion of the loss occurred during an intended drug purchase and was directly connected with the carrying on of the taxpayer's illicit drug dealing business. The inference from those findings is that occasion for the loss was the operation of that (illegal) business in a way normal to it. 63 For these reasons I do not consider that this ground of appeal as pressed can succeed. Whether deductibility contrary to public policy Ground of appeal 64 The grounds of appeal then contend that in applying s 51(1) of the ITAA to allow the taxpayer the deduction for the stolen monies in connection with the transaction which was criminal and conducted in the course of criminal activity was contrary to public policy. It is further contended that the provisions providing for deductibility are intended to provide concessions for legitimate business activity, not for criminal activity. For the deduction to be allowed, it is contended in the grounds, provides an incentive and not a deterrent or additional penalty against criminal activity. 65 In relation to these grounds of appeal it is convenient to address the contentions for the Commissioner and the taxpayer under the sub-headings which follow. Whether public policy can limit deductibility pursuant to s 51(1) 66 I accept the submission for the Commissioner that there is recognition in Australian taxation law that s 51(1) may be limited by public policy considerations. That much was suggested by Deane and Fisher JJ in Magna Alloys at 215 in the passage previously quoted. However, their Honours went on to say in that particular case that there were no considerations of public policy providing support for the Commissioner's submissions urging non-deductibility of legal costs incurred in the defence of directors, employees or agents on criminal charges arising out of activities on the taxpayer's behalf. Their Honours found there were sound arguments to support the view that, in the absence of any question of inducement to criminal activity, an outgoing designed to achieve the result that a citizen charged with a criminal offence has proper and adequate legal representation was positively in the public interest. 67 In Mayne Nickless Ormiston J held that fines and penalties for various motoring offences upon employees and independent contractors and paid by the taxpayer, while falling within s 51(1), could not be allowed as deductions because to do so would be against the policy of the law because that would frustrate the legislative intent in that the punishment imposed would be, or would be seen to be, diminished or lightened. In reaching that view, Ormiston J said (at 883): "It follows in my opinion that the policy of the law should support the enforcement of the criminal law whether that be the historical common law of crime or the widening array of regulatory offences, and should strive to see that punishments for breaches of the law are not defeated or frustrated by direct or indirect means. About this there could be little argument." 68 This latter passage was cited by the Full Court in Madad at 426. United States authorities 69 Although the immediately preceding authorities arguably provide some support for contentions for the Commissioner on this present point, reliance was nevertheless placed upon three authorities from the United States. To some extent the arguments for the Commissioner were shaped in terms of the dicta in those cases. The first case was Burrows BLDG. Material Co v Commissioner for Internal Revenue 47F(2d) 178 (1931). There it was held that fines and costs paid by a taxpayer for violation of laws relating to price fixing are not deductible as ordinary and necessary expenses. Reliance was there placed inter alia on the authorities in Von Glehn and Warnes. The court regarded the disallowance as properly resting on a refusal to sanction expenditures of the character there in issue on grounds of public policy (at 180). 70 The second was Tank Truck Rentals, Inc v Commissioner of Internal Revenue 356 US 30 (1958). There, fines imposed on, and paid by the owners of Tank Trucks (and their drivers, who were reimbursed by the owners) for violation of state maximum weight laws were held to be not deductible by the truck owners as "ordinary and necessary" business expenses. The opinion of the court made reference to the policy of several States being "evidenced" by penal statutes enacted to protect their highways from damage and to ensure the safety of all persons using them. The court said it would not presume that the Congress, in allowing deductions for income tax purposes, intended to encourage a business enterprise to violate declared policy of a State. It went on to say that the test of non-deductibility always is "the severity and immediacy of the frustration" resulting from the allowance of the deduction. It considered the frustration of State policy was most complete and direct when the expenditure for which deduction is sought is itself prohibited by a statute. In the case of a penalty, being expenditure not itself an illegal act, it was only slightly less remote. 71 Thirdly, reference was made to Commissioner of Internal Revenue v Tellier 383 US 687 (1966). There, the Supreme Court held that deduction of expenses for legal fees incurred by a securities dealer in defending his prosecution for violations of the Securities Act 1933 involved no offence to public policy because he was exercising his constitutional right to employ counsel to defend criminal charges. The court said that "only where the allowance of a deduction would 'frustrate sharply defined national or state policies prescribing particular types of conduct' have we upheld its disallowance". Further, it said that the policies frustrated must be national or state policies evidenced by some governmental declaration of them. It affirmed the test of non-deductibility was the severity and immediacy of the frustration resulting from allowance of the deduction. 72 The relevance of American authorities was discussed by Ormiston J in Mayne Nickless at 885 - 887. He considered, in particular, the decision in Tank Truck and in Tellier as well as the further decision of Hoover Motor Express Co v United States 356 US 38 (1958). Ormiston J concluded after that review that the views there expressed and the manner in which the principles were applied seemed to him to express a proper basis for the policy of the law in disallowing deductions such as those there claimed. While he accepted the cases were not strictly authoritative, he nevertheless considered they expressed in large measure the reasons why it is against the public interest in Australia to allow such deductions, whether for penalties imposed on the taxpayer or its employees or contractors. The focus of his consideration as indeed of the American authorities was on issues relating to fines and penalties and not with a broader category of expense, a fact relied upon for the taxpayer. I have regard to the American authorities in the same light as Ormiston J did and with their circumstances in mind. 73 It should be added that the contentions for the Commissioner rely on the description given by the Supreme Court of the United States in Tank Truck at 35 of the necessity for "severity and immediacy of the frustration" in order to allow for the application of public policy against what would otherwise be an allowable deduction. By that approach the Commissioner seeks to counter contentions for the taxpayer that the Commissioner seeks to rewrite s 51(1) in some wide expansive way. How is public policy identified? 74 In Mayne Nickless at 879 - 884 Ormiston J explored the question of what was the public policy applicable to the allowance of deductions under the ITAA. He found himself "much oppressed by the question of what is public policy". He was convinced that the principle of public policy invoked before him was not identical to that applied in relation to invalidity of contracts, although it may spring from the same roots. He considered that what was called in aid may have been described as "the public interest" or at least the general policy of the law. He said the problem was whether the contravention of one statute, or a number of statutes, should have any consequence in considering the proper application of another statute (in this case the ITAA). He considered there was not any general question of morality which must be ascertained, but what is in fact a consequence of the clear and admitted breach of a number of statutes or regulations. He then moved on to reach his view, previously quoted, that the policy of the law should support the enforcement of the criminal law. He saw the policy of the law as denying the right to claim deductions on the ground that they would frustrate the legislative intent that punishment imposed would be, or would be seen to be, diminished or lightened. 75 In reaching that view, Ormiston J did so on the basis (stated at 881) that what was in issue before him was the effect or consequences of a payment of a fine or penalty for contravention of a statute or regulation. (Here, what is in issue is the effect or consequences of the provision of money by the taxpayer for the purpose of entering into an intended drug purchase). 76 The analysis by Ormiston J in Mayne Nickless of public policy in the above terms was the only such analysis relied on in argument before this Court. Relevant public policy here 77 In oral submissions the taxpayer submitted that public policy as described by Ormiston J in Mayne Nickless ought not to be seen as a touch-stone readily available to the courts, nor a rule that can be readily identified. Further, it was said that in seeking to establish whether a public policy issue arises in respect of a specific case, that authority shows that the particular application of an alleged ground of public policy must first be identified. I accept those submissions. 78 For the Commissioner it is submitted that the enactment by Parliament of s 51(4) of the ITAA reflects public policy that penal statutes are not to be frustrated by the allowance to offenders of deductions for fines and penalties pursuant to s 51(1). Subsection 51(4) was inserted into the ITAA in 1984. It provides a statutory base for not allowing a deduction under s 51(1) in respect of an amount payable by way of penalty under a Commonwealth, State, Territory or foreign country law or an amount ordered by a court, upon conviction for an offence against a law of any of those entities, to be paid by the person. 79 For the taxpayer it is submitted that the introduction of s 51(4) shows that where there is a public policy requirement it can and should be reflected by a statutory amendment. Consequently, Parliament should be taken as having completely rejected the operation of the public policy principle in relation to s 51(1) to the extent of the scope of the matters in s 51(4). 80 In my opinion the introduction of s 51(4) is illustrative of the fact that Parliament may exclude an allowable deduction by legislative amendment. It does not provide a foundation for a more general inference that Parliament intended by that enactment to exclude the application of public policy principles if they are applicable otherwise at law.

81 The principal submission for the Commissioner on the nature of the relevant public policy is that it is apparent from statutes that serious criminal activity is clearly and sharply defined as unacceptable in the public interest. This is a reference to State and Federal statutes prohibiting the possession and selling of prohibited drugs. In this respect reference is made to The Crimes (Traffic in Narcotic Drugs) Act 1990 (Cth) and provisions in s 6 and s 15C and the Customs Act 1901 (Cth) and provisions in s 233B. Additionally, reliance is placed on the Misuse of Drugs Act 1981 (WA), s 6 and s 33.

82 There can be no doubt that these enactments reflect public policy "for each of those statutes and regulations is a formal expression or declaration of the public will": Mayne Nickless at 881 per Ormiston J. The policy of the law should support the enforcement of those criminal laws.

Effect or consequences of deductibility 83 The question then arises whether the allowance of the claimed deduction would have the effect of not supporting the public policy so ascertained. The question is whether the legislative intent of deterring crime would be frustrated by the allowance of the right to claim the deduction. 84 In my opinion the allowance of the deduction is an encouragement towards and a reward for engagement in illegal conduct. But is it a frustration of the state policy reflected in the criminal law (to use the language of Tellier)? 85 For the Commissioner it is submitted that frustration arises because the deduction would reduce the cost to an offender of engaging in the activity proscribed by the abovementioned statutes and would not provide an economic disincentive to engage in such activity. Further, it is said it cannot have been intended that s 51(1) of the ITAA was to provide an incentive to turn criminal activities into businesses or income producing operations that are directly flagrant of existing criminal laws. 86 Accordingly, it is said for the Commissioner that the public policy principle that must inform the interpretation of s 51(1) does not allow for the deduction of a loss or outgoing incurred whilst engaging in serious criminal behaviour (in this case by purchasing or attempting to purchase a trafficable supply of prohibited drugs) where that deduction will frustrate the public policy set down in other statutes, unless s 51(1) expressly permits or allows for such an outcome, which it does not. It is submitted that the language of s 51(1) and the context and role of it within the ITAA as the general overarching provision to allow deductions in gaining or producing assessable income, permits a public policy principle to be applied in determining whether outgoings that might otherwise meet the requirements of s 51(1) qualify for a deduction. I agree with the submission for the Commissioner that there is nothing in s 51(1) from which it could be implied that Parliament had turned its mind to the deductibility of the losses and outgoings of a drug dealer purchasing prohibited drugs and permitted a tax deduction for such expenditure or that it had intended to act so as to reduce the deterrent effect of the abovementioned statutes and provide a positive encouragement to such criminal activity in violation of the statutes. No advantage from wrongdoing 87 For the Commissioner further support is sought by reliance on the general policy of the law that the courts will not allow a person to benefit from his own wrongdoing: Mayne Nickless at 882 and authorities there cited. Included in those is Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 at 429 where Mason J said there was much to be said for the view that once a statutory penalty had been provided for an offence the rule of the common law in determining the legal consequence of commission of the offence was thereby diminished. However, Ormiston J in Mayne Nickless at 883 accepted that his Honour did not appear to depart from the view that the main considerations from which the primary rule arose could be seen "in the reluctance of the courts to be instrumental in offering an inducement to crime or removing a restraint to crime": Yango at 429. 88 For the taxpayer it is submitted that the common law principle has no application here in any event because there is no suggestion that the monies, the subject of the claimed deduction, were stolen to create an income tax deduction. I accept that submission. Principles for interpretation of penal provisions 89 On behalf of the taxpayer reliance is placed on the approach traditionally taken by courts to the interpretation of penal statutes: Scott v Cawsey (1907) 5 CLR 132 at 154 - 5 per Issacs J; R v Adams (1935) 53 CLR 563 at 567 - 8. More recently Gibbs J stated the approach in Beckwith v R (1976) 12 ALR 333 at 339 as: "The rule formerly accepted, that statutes creating offences are to be strictly construed, has lost much of its importance in modern times. In determining the meaning of a penal statute the ordinary rules of construction must be applied, but if the language of the statute remains ambiguous or doubtful the ambiguity or doubt may be resolved in favour of the subject by refusing to extend the category of criminal offences … The rule is perhaps one of last resort." 90 Likewise, in relation to the interpretation of taxing or fiscal provisions reliance is placed on the principle that "the courts are as much concerned in the interpretation of revenue statutes as in the case of other statutes to ascertain the legislative intention from the terms of the instrument viewed as a whole": Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 at 323 per Mason and Wilson JJ. Additionally, "if the terms of the [fiscal] Act plainly impose the tax they should be given effect, equally if they do not reveal a clear intention to do so the liability should not be inferred from ambiguous words": Western Australian Trustee Executor & Agency Co Ltd v Commissioner of State Taxation of Western Australia (1980) 147 CLR 119 at 126 per Gibbs J. 91 Against the background of these approaches it is contended for the taxpayer that the ITAA contains substantial and extensive provisions which are capable of denying deductibility in certain circumstances, for example, under Pt IVA in respect of evasion or avoidance of tax. This shows, it is submitted, there is no reticence on the part of Parliament to deny deductibility where it sees fit. 92 The application of any public policy test, it is submitted, would run counter to these approaches. It would have the effect of imposing an additional penalty in the case of illegal activities in the absence of Parliamentary sanction for that approach. The Federal argument 93 In Smith's case at 197, their Lordships referred to the intention of the Dominion Parliament to tax on the same principle throughout the whole of Canada, rather than to make the incidence of taxation depend on the varying and divergent laws of the particular Provinces. In reliance on that it is submitted for the taxpayer that if activities are to be taxed consistently throughout Australia under the ITAA, deductibility cannot depend upon legality as that may vary from State to State. 94 In my view that is not a contention which can assist the taxpayer here for the reason that there is adequate Commonwealth legislation relied upon to establish the illegal character of the taxpayer's business. There is, therefore, no necessity to rely upon State laws to establish the character of the activity. Reasoning 95 Ormiston J in Mayne Nickless applied public policy to disallow deductibility of fines and penalties and so prevent frustration of the legislative intent to punish and so avoid the diminishment or lightening of that punishment. Fines and penalties are an expression of legislative intent. Counsel for the Commissioner accepts that here the loss or outgoing is not of that character: it is not itself something prohibited by Statute. Nor is it something which will frustrate enforcement of the criminal law. 96 There is an apparent contradiction between the law allowing deductibility on the one hand and imposing severe controls on the other. That may be a reason for Parliament to preclude deductibility. But is it a circumstance in which the law can invoke public policy as a limitation? 97 Once the circumstances in issue are removed from frustration of a legislatively defined penalty, the scope for intervention lacks clear boundaries of principle. The allowance of a deduction for monies expended on a criminal business, in circumstances where the income of that business is taxable, is consistent in principle and with the ITAA. Present authority supporting the imposition of a public policy limitation does not extend beyond instances of fines and penalties. No basis of principle is readily apparent to extend that basis. Courts should not do so in the absence of such apparent principle because to do so would arguably attract the aura of the function of legislation. There is no basis for doing so where there is no frustration of criminal enforcement. Such encouragement to criminal activity as a deduction may provide is not a frustration to criminal enforcement: it is arguably an anomaly to which Parliament should give attention. 98 In my view the public policy argument made for the Commissioner cannot succeed. Whether sum in safety deposit box wrongly assessed 99 The first ground of the cross-appeal is that the Tribunal erred in law in including the sum of $250,000 held in the safety deposit box as income of the taxpayer where there was no evidence or insufficient evidence to support such a finding as to either ownership or quantum. 100 The sum of $250,000 is said to be constituted by the sum of $220,000 assessed by the Commissioner as the amount in the safety deposit box together with the sum of $30,000 being part of the taxpayer's funds previously held in a Bank West safety deposit box and seized from Carlo Fragomeni. The adjustment to include these amounts as income was in respect of the year of income ended 30 June 1996. 101 The evidence as to the existence of the safety deposit box and the money in it came from the taxpayer's daughter, Lisa Mahoney and her husband Michael from whom there were 1996 witness statements in evidence before the Tribunal and oral evidence, including cross-examination. Additionally, three unsworn statements from Carlo Fragomeni and three bank officers were also in evidence. 102 In her witness statement, Lisa Mahoney made statements capable of providing a sufficiency of evidence in respect of the findings challenged by this ground. However, when she came to be cross-examined she claimed to have been traumatised and under stress when she made the statement and had no clear recollection of the events referred to in it. 103 When the Tribunal came to consider the same issues it called the taxpayer's daughter and son-in-law (the Mahoneys) and the taxpayer's former spouse to give evidence. The Tribunal formed the view that Michael Mahoney's evidence was more reliable than Lisa Mahoney's. It accepted that evidence was a reiteration of his witness statement, which he had recently reread. It found the evidence of the taxpayer's former spouse to be unreliable. 104 In cross-examination Michael Mahoney said that the money that was in the box was, in accordance with his witness statement, over $200,000, although he could not be certain on the amount. His witness statement was also in evidence before the Tribunal. There he had stated that he had counted the money the first time before the safety deposit box had been organised and to the best of his recollection there was about $220,000. On the second occasion the money was in the safety deposit box and he counted $230,000. He expressed his opinion that when Carlo Fragomeni later withdrew the money from the safety deposit box it was in the amount of $250,000. There was evidence that Carlo Fragomeni had given $30,000 to the police. 105 There is clearly evidence which would sustain the findings under challenge under this ground. Counsel for the taxpayer sought initially to impugn that evidence on the basis that Michael Mahoney was an accomplice and that the evidence of an accomplice should be corroborated. However, she had no answer to the point that before the Tribunal the rules of evidence had no application: Administrative Appeals Tribunal Act 1975 (Cth), s 33. Michael Mahoney's oral evidence was given to the Tribunal and not in connection with a criminal investigation. This argument was raised again later as a ground in its own right. 106 In my opinion this ground is not made out. Failure to find whether the money in the safety deposit box was stolen 107 The second ground arising in the cross-appeal is that the Tribunal failed to take into account evidence on the issue of whether the money alleged to have been removed from the safety deposit box was stolen and to make a finding thereon. 108 The Tribunal in its reasons concluded as follows relevant to this ground of appeal: "In the Tribunal's opinion there is sufficient evidence (supra) before it to be satisfied that there was a sum of at least $220,000 accumulated in a safe deposit box on behalf of the taxpayer and removed therefrom soon after his arrest in November 1995. The Tribunal is satisfied on the evidence that that sum was an accumulation of drug dealing proceeds over time. It cannot be broken down to income derived in any one or more years of income. In the absence of any evidence to the contrary, it is reasonable to adopt the respondent's approach and treat the amount as cash on hand as at 31 October 1995, even though it has not been recovered. The evidence suggests that $30,000 of the money previously stored in the safe deposit box was recovered by the police from the person who allegedly removed it from the safe deposit box. The evidence of the taxpayer's daughter is that the amount in the box was between $250,000 and $300,000. The Tribunal has already expressed the view that it prefers her evidence and that of her spouse instead of that of the taxpayer. So, in the opinion of the Tribunal, to include both the $220,000 and the $30,000 in "cash on hand" was open to the respondent in compiling its T account for the period from 1 July 1995 to 31 October 1995. No adjustment in this respect should be made to the respondent's assessment of the taxpayer's taxable income for the year of income ended 30 June 1996." 109 In relation to the money in the safety deposit box the taxpayer did not advance before the Tribunal any claim that such money was stolen and a deduction allowable. Nor did it form a ground in his notice of objection. For that reason such claim was not the subject of any consideration or finding by the Tribunal. Accordingly, it cannot be the subject of an appeal under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) on the basis there has been an error of law: cf Federal Commissioner of Taxation v Raptis (1989) 89 ATC 4994 at 4999 and Federal Commissioner of Taxation v Glennan (1999) 90 FCR 538 at 556 - 558. 110 Furthermore, the evidence before the Tribunal was open to the inference that the contents of the safety deposit box were removed by the taxpayer's agent with authority: see the witness statement of Mr Fragomeni. The issue did not arise on the evidence and it was not part of the Tribunal's duty to make the case for the taxpayer. This ground is not made out. Error from inclusion of amounts earned from illegal activities as income 111 The cross-appeal then contends that the Tribunal erred in law in including any amounts earned from illegal activities as income under s 25(1) or any other provision of the ITAA. 112 Section 25(1) brings in as assessable income the gross income derived by a taxpayer from all sources. The term "income" is not a defined term. It takes its meaning from the ordinary concepts and usages of mankind in relation to what forms income except where there are statutory indication to the contrary: Scott v Commissioner of Taxation (1935) 35 SR (NSW) 215. 113 Counsel for the Commissioner accepted there was no Australian case which could be cited as authority to the effect that the proceeds of illegal activity are taxable income. Smith's case decided in relation to the Dominion Act in Canada that profits declared illicit by a particular Province were not by that reason excluded from coming from within the words employed in the statute making them assessable. Their Lordships there expressly stated (at 198) that they were not to be taken to assent to any suggestion that the income tax acts were necessarily restricted in their application to lawful businesses only. Smith's case was accepted as authority that income from illicit sources may be regarded as taxable in Madad's case at 426. In the light of that I do not think the proposition has been doubted. 114 The evidence before the Tribunal disclosed receipts from the taxpayer's successful sales of prohibited drugs over the relevant period. It was open to the Tribunal to find, as it did, that the taxpayer was carrying on an illicit business of trading in drugs from which he derived income assessable pursuant to s 25(1). 115 In my opinion the Tribunal's finding cannot be said to have been in error so that this ground of the cross-appeal is not made out. Denial of procedural fairness 116 The next ground of the cross-appeal maintains the Tribunal erred in law and in hearing the matter and giving a decision where the unrepresented taxpayer was denied procedural fairness and natural justice in a number of respects, which are now addressed. (a) Complexity, imprisonment, legal assistance and access to records 117 The contentions for the taxpayer under this heading commenced with reference to the fact that he was arrested in November 1995 and has remained in custody since. Following his plea of guilty to importing narcotic goods and drug trafficking offences, he was sentenced in November 1996 to twelve years imprisonment. The income tax audit of his affairs followed the receipt of information by the Australian Taxation Office ("ATO") from the Commonwealth Department of Public Prosecutions acting pursuant to s 6(1)(fa) of the Director of Public Prosecutions Act 1983 (Cth). It is submitted that there was not therefore an income tax investigation into the affairs of the taxpayer while he was out of jail and able to consult his records and seek advice. Reliance is also placed on the contention that a lot of the records of the taxpayer were held as part of the criminal investigation. 118 Before the Tribunal evidence was given by Mr Jabbour a federal agent attached to the Australian Federal Police who was involved in the investigation of the taxpayer. He testified that during the investigation certain records of the taxpayer were seized from various premises. Subsequently, the taxpayer's solicitor had made application to the court under the Crimes Act 1914 (Cth) for access to documents obtained from various banks together with financial documentation predominantly from Bank West comprising deposit slips, cheques, withdrawal vouchers, statements of accounts. These were provided to the taxpayer's solicitor. He testified that the balance of the documentation was returned to the taxpayer's estranged wife. On the basis of this evidence it was contended for the taxpayer that he was unable to respond properly to the Tribunal. 119 In support of this reference was made by counsel for the taxpayer to several statements made by him during the course of the hearing in which he said he did not have records available. Furthermore, he said that even if they were available, he did not understand them in the absence of having an accountant or legal representation. The taxpayer said he had not seen the records returned to his wife. Furthermore, his solicitor had declined to accept instructions in relation to non-criminal matters. The taxpayer also said that he did not hold the records that had been returned to his solicitor. On other occasions before the Tribunal the taxpayer emphasised he did not know where he stood as far as the law was concerned in the absence of assistance. 120 In support of the ground counsel for the taxpayer contended that the principle in Dietrich v The Crown (1992) 177 CLR 292 should apply in the context of the hearing before the Tribunal. Dietrich decided that the common law of Australia does not recognise the right of an accused person to be provided with counsel at the public expense but the courts have power to stay criminal proceedings that will result in an unfair trial. In Nguyen v Minister for Immigration & Multicultural Affairs [2000] FCA 1265 the Full Court of the Federal Court held that the Dietrich principle had no application in the circumstances of a decision of a tribunal in deportation proceedings: see pars 17 and 18 of Nguyen. There the court referred to the decision in New South Wales v Canellis (1994) 181 CLR 309 where the limited scope of the Dietrich principle was recognised, Mason CJ, Dawson, Toohey and McHugh JJ stating it was concerned with the right to a fair trial of a party to criminal proceedings (at 328). The Full Court in Nguyen considered it was clear the High Court did not favour the extension of the Dietrich principle into the field of administrative review. 121 For the taxpayer it is contended that the Commissioner was required to discharge the burden of proof under the Taxation Administration Act. Consequently, given the issues there could not be a fair hearing if he did not have legal assistance, so it was submitted. It was sought to distinguish the decision in Nguyen on the basis that it addressed a deportation order and should be confined to that matter. Here, it was said, the Commissioner had sought summary judgment based on assessments issued so that there was not any immediate urgency such as existed in Nguyen. 122 I agree with the submission for the Commissioner that there is no requirement of procedural fairness that the taxpayer have legal or other representation at the Tribunal hearing. The authorities referred to above are against it. The case for the taxpayer relies on an extension of the Dietrich principle which is only open to be made by the ultimate court itself. It is insufficient in the terms of that principle that the statutory requirements under the Taxation Administration Act and the onus on the taxpayer of proving that the assessments were excessive are not enough to import such procedural fairness requirement on the Tribunal: see also Stuart v Federal Commissioner of Taxation (1996) 34 ATR 112. 123 Furthermore, there was no evidence adduced before this Court as to how the taxpayer's imprisonment frustrated and impeded the prosecution of his case before the Tribunal. Under s 62 of the Prisons Act 1981 (WA) a prisoner may be visited by a legal practitioner for a bona fide purpose. Under ss 67 and 68 of that Act a prisoner is entitled to send and receive letters and parcels subject to the contents or any part of the contents not jeopardising the good order and security of the prison or containing a threat to a person or property. The evidence was that the taxpayer's records had been returned to his solicitor and to his wife. If he was encountering difficulty in accessing documents from his estranged wife, he could have requested the Tribunal to issue a summons to produce the records. The fact that the taxpayer had to organise preparation of a hearing around prison requirements is not of itself enough to establish frustration and impediment: cf Rich v Groningen (1997) 95 A Crim R 272. 124 This sub-ground is therefore not made out. (b) Not adjourning to allow resolution of Corruption Commission Inquiry (c) Not calling critical witnesses to verify the taxpayer's evidence (d) Advising taxpayer witnesses not necessary (e) Not ruling on the independent material marked MFI (g) Not correcting the taxpayer's misunderstanding on the MFI material 125 These sub-grounds all go to the issue of the provision of funds by Messrs Brewer and Coombes to the taxpayer. The submissions in support of these grounds were developed by counsel for the taxpayer as follows. The matters relate to the question of the evidence of Messrs Brewer and Coombes whom the taxpayer alleged had provided him with the sum of $220,000. The taxpayer put into evidence an affidavit and two other items which were marked for identification. Before the Tribunal counsel for the taxpayer referred to the difficulty of bringing Messrs Brewer and Coombes before the Tribunal because that may cut across inquiries being made by the Corruption Commission. Subsequently the Tribunal found there was no such ongoing inquiry. Furthermore, it considered the taxpayer's affidavit and disbelieved it. However, it gave no opportunity to the taxpayer to respond to the Tribunal in relation to that matter, nor did it bring into evidence the matters marked as MFI. 126 The affidavit in which the taxpayer set out alleged circumstances in relation to Messrs Brewer and Coombes were sworn on 18 May 1998 and filed in the Supreme Court of Western Australia in support of an application for extension of time within which to appeal. The central evidence in it has already been referred to in relation to the alleged stealing of the sum of $220,000 set out above. 127 In its reasons the Tribunal stated that "the evidence before the Tribunal is that the Court of Criminal Appeal has dismissed the taxpayer's application in regard to his acting as agent and there is no evidence of any on-going, imminent or likely Anti-Crime [sic] Commission inquiry or investigation which may bring about any other result". It considered that the case history of the matter, since its initiating application in 1997, and the forbearance of both the Commissioner and the Tribunal to ensure that the taxpayer had every reasonable opportunity to present his case without prejudice, supported a conclusion that natural justice had been afforded to him. 128 During the course of the hearing before the Tribunal the taxpayer sought to have Messrs Brewer and Coombes called to give evidence. The Tribunal said it was for him to call these witnesses. He requested the Tribunal to issue a summons to that effect because he said the evidence of those two persons went to the validity of his affidavit to the Anti-Corruption Commission and which he had sworn before the Tribunal was true. 129 Counsel for the Commissioner did not object to the admission of the taxpayer's affidavit before the Tribunal. However, it was considered it was the only material before the Tribunal that reversed the onus back onto the Commissioner. The Commissioner was in the difficult position that he could not do anything about the content of the affidavit because it was presently said to be the subject of an Anti-Corruption Commission inquiry. Counsel therefore requested that if the Tribunal was going to give such weight to the affidavit as was going to reverse that onus then the Commissioner be given the opportunity to be heard on it. That was accepted by the Tribunal. 130 The Tribunal, after admitting the affidavit of the taxpayer, said "the other two" (being the MFI affidavits of Messrs Brewer and Coombes) did not add anything. No summons issued to either Mr Brewer or Mr Coombes. The result was that the Tribunal was left to assess the credibility of the Commissioner's admitted affidavit uninformed by the evidence of Messrs Brewer and Coombes. 131 Before the Tribunal the taxpayer was asked why the calling of Messrs Brewer (and Coombes) would assist his case. He said it would establish "that it was their money, not mine". That is to be understood in context of par 155 of his affidavit before the Court of Criminal Appeal where he testified that he would need cash of $220,000 and Mr Brewer said they had arranged the money in two bags. 132 The submission made by counsel for the taxpayer was that if his evidence in relation to these matters was at risk of not being accepted he should have had an opportunity to question Messrs Brewer and Coombes, or at least been put on notice that an adverse finding was pending and given the opportunity to bring anything to the attention of the Tribunal. It is said, therefore, that the taxpayer lost the opportunity to raise and deal with the issue of whether he was acting as an agent so that the application of s 254 of the ITAA could be considered. 133 The above matters arose pursuant to par (b) of this ground of the cross-appeal. Under par (c) it is contended for the taxpayer that two additional critical witnesses were not called. The first was Mr Washbrook. He was a person who the taxpayer considered "could judge the full amount of the money" in the safety deposit box. As the Tribunal pointed out, this was in a context where the taxpayer's case was that whatever was in the cash box was nothing to do with him. In that context the Tribunal did not consider the evidence of Mr Washbrook was going to take matters any further as there was no evidence against the taxpayer on that point at that stage. In the event the taxpayer was not believed that the amount in the safety deposit box was not his. 134 The second witness not called upon which reliance is placed under this sub-ground is Mr Fragomeni. Before the Tribunal the taxpayer stated the reason he wanted to call Mr Fragomeni was to confirm or deny that he had ever spoken to him in November, December or January and told him to burn the money. The Tribunal denied that was what Mr Fragomeni was asserting in his affidavit. It is contended it would have been relevant to the taxpayer's case to show who instructed Mr Fragomeni to go to the bank and get the money out. The Tribunal rejected Mr Fragomeni being called as a witness. 135 The remaining sub-grounds (d), (e) and (g) are interrelated. They have been covered in dealing with the material concerning sub-ground (b). 136 The case for the taxpayer also relies on statements by him in closing suggesting that his understanding was that the statements of Messrs Brewer and Coombes were in evidence rather than marked for identification. 137 The purport of the contentions for the taxpayer on these sub-grounds was that if the Tribunal had dealt with the MFI material as the taxpayer advocates; called Messrs Brewer and Coombes or awaited the outcome of the ACC inquiry and had then found all that material corroborative of the taxpayer's deposition at par 155 of his affidavit of 18 May 1998 to the Court of Criminal Appeal, there would have been a two-fold effect on the taxpayer's case. The first would have been that the $220,000 the taxpayer said was used for his drug deal and was stolen would have been excluded from his taxable income. The second was that the adverse credibility finding made against him would have been lightened if not reversed. 138 In the course of its reasons (par 8) the Tribunal stated its opinion was that the taxpayer's evidence could not be relied upon "as on a number of occasions he seemed to change his evidence when he thought that by doing so it would assist his case". That statement was followed by particularisation. If the evidence of Messrs Brewer and Coombes had been received and had confirmed what the taxpayer said about the $220,000, it would not have overcome the generally held opinion of the Tribunal on credibility. The foundation of the Tribunal's general credibility finding is of such width that it is more probable than not that it could not have been overcome by a favourable finding based on the evidence of Messrs Brewer and Coombes. That is, the probabilities are that the evidence would not have made any difference in that respect. 139 When the Tribunal adopted the conclusion of the Court of Criminal Appeal that there was no suggestion of an official advance of money to conduct a controlled operation to apprehend offenders - La Rosa (1999) 105 A Crim R 362 at 369 - it stated there was no independent evidence which would enable any contrary conclusion to be reached about the taxpayer's activity involving members of the police force. That remark suggests that the Tribunal did not consider receiving evidence from Messrs Brewer and Coombes would be probative as the proposed witnesses were not independent. 140 Even if there had been procedural error by the Tribunal in not proceeding in the manner the taxpayer now advocates, the truth of the statement made by the taxpayer about the $220,000 in his affidavit does not effect the taxpayer's interest. This is because, firstly, the $220,000 was never assessed by the Commissioner. Consequently, the question of the application of s 254 of the ITAA did not arise. Neither the Tribunal nor the Court of Criminal Appeal had accepted that the taxpayer was dealing in drugs as an agent. In the second place, the deduction allowed by the Tribunal for the $220,000 stolen was allowed on the basis of a factual finding that the money dug up from the Mahoney's backyard was the money used for the drug deal and stolen. 141 For the Commissioner it was also submitted there were three separate sums of $220,000 which have arisen for consideration in the circumstances of the case. The first was the amount buried in the Mahoney's backyard which was found by the Tribunal to have been stolen during the drug deal in May 1995. The second was that accumulated after May 1995 and delivered into the safety deposit box from whence it was removed by Mr Fragomeni and its whereabouts now being unknown. The third was said to be the sum of the two amounts referred to at par 155 of the taxpayer's affidavit to being provided by Messrs Brewer and Coombes and buried in the taxpayer's front yard. The first two amounts were included in the T accounts. It was submitted the third amount was not so included. This submission took the taxpayer (and the court) by surprise. There is nothing in the transcript to suggest the third possibility. Nor was it put to the taxpayer before the Tribunal. In my view it is untenable in those circumstances. 142 For these reasons I do not consider any of sub-grounds (b) - (e) or (g) of the cross appeal are made out. Error in giving weight to evidence of accomplices 143 This returns to the issue of accomplice evidence. It is submitted by counsel for the taxpayer that the rule that the evidence of accomplices should be treated with caution is of such significance that it should apply so as to require independent corroboration of the evidence of Mr and Mrs Mahoney. I have already reached the view that even if it were established that the Mahoneys were accomplices, the rule of evidence relating to accomplices does not bind the Tribunal. It is provided in the Administrative Appeals Tribunal Act, s 33(1)(c) that the Tribunal is permitted to take account of and admit evidence inadmissible under the rules of evidence. No authority is identified to assist the argument for the taxpayer in overcoming this difficulty. 144 The ground is not made out. Conclusion 145 For these reasons I consider neither the appeal nor cross appeal succeed. I certify that the preceding one hundred and forty-five (145) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice RD Nicholson.

Solicitor for the Applicant: Australian Government Solicitor

Date of Hearing: 25, 26, 27 February 2002

Date of Judgment: 21 August 2002