The court upheld two earlier rulings that Frank La Rosa, a convicted heroin dealer, was entitled to a tax deduction of $220,000 for money stolen from him during a drug deal.

[1] As a result of La Rosa's convictions, it came to the attention of the Australian Taxation Office (ATO) that he had failed to lodge tax returns for the seven financial years from 1989–90 to 1995–96.

The ATO subsequently issued notices of assessment for those years, based on information provided by the Commonwealth Director of Public Prosecutions about La Rosa's activities.

Appearing pro se, he argued that the money had been provided to him by the Australian Federal Police as part of his role in a sting operation, and was thus not income.

[5] The leading judgment in the case was given by Justice Peter Hely, who observed: The purpose of the ITAA is to tax taxable income, not punish wrongdoing.

[12] The cash was stolen from La Rosa "during operations to acquire trading stock" (specifically, a "substantial supply of prohibited drugs").

[13] Because of this, the court upheld the AAT's original decision that the loss had a direct connection with the business operations and therefore fell under the general deduction provisions.

[14] The court rejected this submission on the grounds that a non-literal interpretation of the deduction provisions would be inconsistent with other areas of the ITAA and would cause uncertainty among taxpayers.

[16] In April 2005, Treasurer Peter Costello announced that the federal government would amend Australian tax law to deny deductions "incurred in the furtherance of, or directly in relation to, activities in respect of which the taxpayer has been convicted of an indictable offence".