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basis on which it could be said that they were ‘received’ within the meaning of the Act. The court rejected this argument, stating the following:*
‘An illegal contract is not without all legal consequences; it can, indeed, have scal consequences. The sole question as between scheme and scus is whether the amounts paid to the scheme in the tax years in issue came within the literal meaning of the Act. Unquestionably they did. They were accepted by the operators of the scheme with the intention of retaining them for their own bene t. Notwithstanding that in law they were immediately repayable, they constituted receipts within the meaning of the Act.’
The principle to be drawn from the above cases is that the receipt of stolen money comprises gross income and is thus taxable. While the MP Finance case dealt with money fraudulently received under an illegal contract, its principles are considered to apply equally to the theft of money through robbery, burglary or other criminal means. The key issue is whether the thief intended to bene t from the stolen funds. If so, the requisite ingredients for a receipt have been met and there is no justi cation for the view taken in G’s case above that a thief ‘takes’ rather than ‘receives’. The issue is not whether the victim intended to part with the money but rather whether the thief intended to bene t from it.
5.1.2 Not of a capital nature
The question has been raised whether stolen monies derived from a one-off opportunistic and fortuitous theft could be of a capital nature, as opposed to a considered and well-planned illegal business operation which is of a revenue nature.† The case of CIR v Pick ’n Pay Employee Share Purchase Trust‡ is authority for the principle that the receipts or accruals bear the imprint of revenue if they are not fortuitous but designedly sought for and worked for. An opportunistic theft can hardly be described as ‘fortuitous’. It is designedly sought and requires intent, planning and execution. It is therefore considered improbable that an amount derived from a once-off theft can be of a capital nature.
5.1.3 Timing and determination of the amount received
Stolen moneys must be included in gross income in the year of receipt.§ Generally speaking, when a person has perpetrated an act of embezzlement, theft or fraud there is likely to be fraud, misrepresentation or non-disclosure from an income tax perspective meaning that there is no limitation on the period in which SARS may issue an assessment.¶ SARS is not obliged to wait for a criminal conviction before an assessment of stolen money can be raised on a thief. However, it is necessary for SARS to determine an ‘amount’ for the purposes of the de nition of ‘gross income’.** The method applied to determine the amount will depend on the facts of the particular case but could include reconciling the growth in the taxpayer’s net assets with the taxpayer’s declared income and expenses or, more directly, tracing the stolen money to the taxpayer’s bank account.
5.2 Deductibility of repayments of stolen money
In the event that a thief refunds all or a portion of the stolen money, the question which arises is whether having been taxed on the receipt the thief will be entitled to a deduction for the stolen money refunded. The relevant sections for consideration are section 11(a) read with section 23(g). Both sections require the taxpayer to conduct a trade and any deduction is limited to the extent an amount is expended for the purposes of that trade. The stealing of money cannot be described as a trade and accordingly the thief will not qualify for a deduction under section 11(a) read with section 23(g). In Grif ths (Inspector of Taxes) v J P Harrison(Watford) Ltd Lord Denning made the following obiter remarks:††
‘[T]ake a gang of burglars. Are they engaged in trade or an adventure in the nature of trade? They have an organisation. They spend money on equipment. They acquire goods by their efforts. They sell the goods. They make a pro t. What detail is lacking in their adventure? You may say it lacks legality, but it has been held that legality is not an essential characteristic of a trade. You cannot point to any detail that it lacks. But still it is not a trade, nor an adventure in the nature of trade. And how does it help to ask the question: If it is not a trade, what is it? It is burglary and that is all there is to say about it.’
Certain elements of a trade, for example, the intention to make a pro t, repeated activities, planning and organisation, may be present but the thief’s activities lack the key commercial character of a trade when it comes to sourcing the relevant goods (in this case, the stolen funds). The stolen moneys are not obtained through normal commercial means and are not received as a reward for the provision of any goods or services. The act of embezzlement, fraud or theft is not a trade. Under section 23(o) a thief will also not be able to secure a deduction for any nes or penalties incurred as a result of an illegal activity or for any corrupt payments.‡‡
6. Conclusion
Expenditure and losses incurred by a taxpayer in carrying on a trade as a result of embezzlement, fraud or theft of money and any legal and forensic expenditure incurred in investigating the crime will qualify as a deduction in determining taxable income provided it meets the requirements of section 11(a) or in the case of legal expenses, section 11(c). An important factor in determining the deductibility of the expense or loss will be whether the risk of its incurral was a
* At SATC 145. Footnotes have been suppressed.
† George Goldswain ‘Illegal Activities’ (2008) 22 Tax Planning 143
‡ 1992 (4) SA 39 (A), 54 SATC 271 at 280.
§ Amounts must be included in gross income on the earlier of receipt or accrual. However, stolen moneys do not
accrue to a thief and therefore the date of receipt is relevant.
¶ Section 99(2) of the TA Act.
** In CIR v Butcher Bros (Pty) Ltd 1945 AD 301, 13 SATC 21 at 39 Feetham JA stated that it was essential for the
Commissioner in order to support his assessment to show that some amount had been received by or accrued to the taxpayer.
†† 1963 AC 1 at 20.
‡‡ See Interpretation Note No. 54 dated 26 February 2010 ‘Deductions – Corrupt Activities, Fines and Penalties’.
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