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Commissioner of Taxation v Wood

[2023] FCA 574
115 ATR 34

(Judgment by: Stewart J)

Commissioner of Taxation
v.Wood

Court:
Federal Court

Judge:
Stewart J

Legislative References:
Administrative Appeals Tribunal Act 1975 - 44(1)
Income Tax Assessment Act 1997 - 8-1

Case References:
AusNet Transmission Group Pty Ltd v FCT - [2015] HCA 25; 255 CLR 439
Clough v Federal Commissioner of Taxation - [2021] FCAFC 197; 114 ATR 1
Commissioner of Taxation v Day - [2008] HCA 53; 236 CLR 163
Commissioner of Taxation v Rowe - [1995] FCA 834; 60 FCR 99
Estate Mortgage Fighting Fund Trust v FCT - [2000] FCA 981; 102 FCR 15
FCT v Payne - [2001] HCA 3; 202 CLR 93
Federal Commissioner of Taxation v Snowden & Willson Pty Ltd - [1958] HCA 23; 99 CLR 431
Fletcher v FCT - [1991] HCA 42; 173 CLR 1
Hallstroms Pty Ltd v FCT - [1946] HCA 34; 72 CLR 634
Herald & Weekly Times Ltd v Commissioner of Taxation - [1932] HCA 56; 48 CLR 113
Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation - [1980] FCA 180; 33 ALR 213
Putnin v Commissioner of Taxation - [1991] FCA 12; 27 FCR 508
Ronpibon Tin NL and Tongkah Compound NL v FCT - [1949] HCA 15; 78 CLR 47
Shokker v Commissioner of Taxation - [1999] FCA 600; 92 FCR 54
Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation - [1938] HCA 73; 61 CLR 337

Hearing date: 26 May 2023
Judgment date: 2 June 2023

Sydney

Judgment by:
Stewart J

Introduction

1 This is an appeal on a question of law from a decision of the Administrative Appeals Tribunal under s 44(1) of the Administrative Appeals Tribunal Act 1975 (Cth). As to be expected in such an appeal, the facts are not in dispute. The issue at stake is whether a payment made to settle litigation qualifies as a general deduction from assessable income under s 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA97). There is no dispute that that question, involving as it does the characterisation of the outgoing, is a question of law.

The facts

2 From 1998 to 2011, the respondent, the taxpayer, was employed by a company that was owned by him and his wife. The company was Carina Finance & Investments Pty Ltd. Relevantly, the respondent provided consultancy services to Alleasing Pty Ltd for which the latter paid fees to Carina and Carina in turn paid a salary to the respondent. The respondent thereby gained assessable income on which he paid income tax.

3 The consultancy arrangement was governed by an agreement – different ones from time to time – to which Alleasing, Carina and the respondent were parties. The agreement provided that the consultancy services to be provided by Carina would be performed "through" the respondent. A component of the consultancy fees to be paid to Carina was on an incentive basis. That most recently included the receipt by Carina of ordinary and preference shares in Alleasing's holding company, Headleasing Holdco Pty Ltd.

4 When the arrangement came to an end, Carina, the respondent, Alleasing and Headleasing concluded a deed referred to as a Separation Deed. Under the Separation Deed, Alleasing was obliged to pay Carina all fees then outstanding under the consultancy arrangement and Headleasing was obliged to buy back its shares held by Carina.

5 After the separation, the respondent took up new employment with an unrelated company.

6 Thereafter, Alleasing and Headleasing became aware of facts that caused them to allege that the respondent had negotiated a number of unauthorised transactions when performing the consultancy services for Alleasing in 2006 or 2007. Alleasing and Headleasing commenced proceedings against the respondent and Carina in which they sought damages of some $2.4 million. The claims included that the respondent had engaged in misleading or deceptive conduct in contravention of a statutory provision, that the respondent had breached fiduciary obligations to Alleasing and that the respondent had breached the consultancy agreement. The claims were based on allegations that Carina and/or the respondent in providing the consultancy services had concluded a number of agreements on behalf of Alleasing with a third party that were unauthorised by Alleasing and were not reported to Alleasing.

7 The respondent and Carina disputed the allegations and defended the proceeding. They also filed a cross claim against Alleasing and Headleasing which included a claim for performance of the share buy-back which was the subject of the Separation Deed and a claim for statutory leave entitlements based on the contention that the respondent was an employee of Alleasing during the consultancy arrangement. About $400,000 was claimed, of which a little more than half related to the leave entitlements claim, ie, to the respondent's claim.

8 Separately from the proceeding, the respondent also threatened a defamation claim against Alleasing on the basis that one of its officers had made defamatory statements about him to his new employer concerning the allegations about unauthorised transactions.

9 In April 2013, Carina went into liquidation and the proceeding against it was stayed.

10 On 6 December 2013, the remaining parties settled the proceeding in a Settlement Deed on the basis that the respondent pay Alleasing $200,000, the proceeding be dismissed with no order as to costs, and the parties mutually release each other. The settlement was expressed to be "without admission of liability".

11 On the same day, the respondent and Alleasing entered into a Deed of Release concerning the threatened defamation proceeding. The terms included that Alleasing not publish or republish certain allegations concerning the respondent's conduct and character and that Alleasing pay the respondent $180,000 with mutual releases.

12 On 29 January 2014, the respondent and Alleasing concluded an Acknowledgement of Settlement which provided for the set-off of the amounts payable under the Settlement Deed and the Deed of Release, resulting in an obligation on the respondent to pay Alleasing $20,000 which was paid by way of bank cheque on that day.

The dispute

13 The respondent claimed as a deduction in the 2014 tax year the payment of $200,000 to settle the proceeding (the Settlement Sum). The Commissioner of Taxation disallowed the deduction. The respondent objected to the Commissioner's notice of assessment on the basis that the Settlement Sum had a "Nexus to deriving Assessable Income" and that it was of a "Revenue Nature". The Commissioner disallowed the respondent's objection as a consequence of which the respondent brought a review in the Tribunal.

14 It is common ground that the Tribunal correctly identified the issues as:

(1)
Whether the Settlement Sum was incurred by the respondent in the course of gaining or producing assessable income as contemplated by s 8-1(1)(a) of the ITAA97; and
(2)
Whether, if the Settlement Sum is within s 8-1(1) of the ITAA97, it is an outgoing of capital or of a capital nature or of a private or domestic nature so that it is precluded from being a deductible expense under s 8-1(2)(a) or (b) of the ITAA97.

15 The Tribunal also dealt with whether certain legal expenses incurred by the respondent were deductible, but those are not the subject of appeal.

The statutory provisions

16 The relevant section of the ITAA97 is in the following terms: 8-1 General deductions

(1)
You can deduct from your assessable income any loss or outgoing to the extent that:

(a)
it is incurred in gaining or producing your assessable income; or
(b)
it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.
(2)
However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)
it is a loss or outgoing of capital, or of a capital nature; or
(b)
it is a loss or outgoing of a private or domestic nature; or
...
 

For a summary list of provisions about deductions, see section 12-5.

17 Section 8-1(1) is often referred to as containing the positive limbs of the inquiry as to whether a payment qualifies as a general deduction from assessable income, and s 8-1(2) is referred to as containing the negative limbs.

The Tribunal's decision

18 The Tribunal held that s 8-1(1)(a) of the ITAA97 operated to allow the respondent a deduction in respect of the Settlement Sum. The reasoning of the Tribunal was along the following lines:

(1)
The Settlement Sum "had its origins in the course of [the respondent's] performance of work for [Carina] for which he was paid by [Carina]": [58].
(2)
From a "practical business point of view" the Settlement Sum bore the essential character of a payment related directly to the activities that the respondent performed in the work that he did for Alleasing, which work produced assessable income for him by reason of his position with Carina: [58].
(3)
The outgoing was incurred in the course of the activities engaged in by the respondent which had as their object the gaining of assessable income for himself and the payment was therefore incidental and relevant to his gaining or producing assessable income: [59].
(4)
The essential character in a practical business sense of the Settlement Sum was that it was a payment that arose from the respondent's performance of his work with Carina in 2006 or 2007 which was in the course of his gaining or producing assessable income by way of the remuneration paid to him by Carina: [61].

19 The Tribunal found it unnecessary to consider the respondent's submission that the Settlement Sum should be considered as having the necessary relationship with the gaining or production of assessable income which lay in his desire to protect his existing employment from termination. The Tribunal nevertheless made the finding that "[t]here was no evidence that would suggest that [the new employer] had any right to terminate the [respondent's] employment as a result of anything that might be found to have been done by [him] in his employment with [Carina] or his activities in negotiating deals for [Alleasing]." (At [62].)

20 On the question of whether the deduction should nevertheless be disallowed under s 8-1(2)(a) or (b), the Tribunal reasoned that as neither party had made any submissions that directed attention to the issue, it did not need to address it. It is common ground that that is an error as the parties had directed submissions to that issue.

21 The Tribunal nevertheless held (at [68]) that the Settlement Sum does not have the feature of a capital payment in the sense that it was not made from the standpoint of producing some longer-term benefit that might endure. It was said that the Settlement Sum did not involve the acquisition of any tangible asset, but rather arose out of the activities of the respondent in gaining assessable income and that the discharge of the liability that arose out of those activities cannot sensibly be characterised as capital in nature. It was also held that the payment was not domestic or personal in nature, but rather that it was commercial in nature having its origins in the respondent's work activities from which he generated assessable income.

22 The result in the Tribunal was therefore that the Settlement Sum was allowed as a general deduction under s 8-1 of the ITAA97.

The appeal

23 The Commissioner appeals against the Tribunal's decision and identifies the following questions of law:

(1)
Whether the Tribunal misconstrued and misapplied s 8-1(1)(a) of the ITAA97 to the facts as found by the Tribunal. In particular, whether the Tribunal erroneously characterised the Settlement Sum as being an amount incurred in gaining or producing the assessable income of the respondent in the income year ended 30 June 2014.
(2)
In the alternative, whether the Tribunal mischaracterised the Settlement Sum as not being an outgoing of capital or of a capital nature and misapplied s 8-1(2) of the ITAA97.

24 Although the Commissioner initially included in the appeal the contention that if the Settlement Sum were deductible under s 8-1(1)(a) then it was to be made not deductible under s 8-1(2)(b) as being of a private or domestic nature, that contention was expressly withdrawn on the hearing of the appeal. The issues on appeal are therefore confined to:

(1)
Whether the Settlement Sum is deductible under s 8-1(1)(a) as being a loss or outgoing incurred in gaining or producing the respondent's assessable income; and
(2)
If so, whether the Settlement Sum cannot be deducted under s 8-1(2)(a) as being a loss or outgoing of capital, or of a capital nature.

Incurred in gaining or producing assessable income – s 8-1(1)(a)

25 The Commissioner submits that the Tribunal mischaracterised the Settlement Sum, in particular in the following ways:

(1)
With regard to the relevant connection between the outgoing and assessable income, the Tribunal overlooked the direct cause of the outgoing whilst searching for a more tenuous connection, but that causality is in any event insufficient to establish that the outgoing was incurred in the course of gaining or producing actual or expected income.
(2)
The Tribunal, in substance, conflated the gaining of assessable income in 2006 or 2007 with the gaining of assessable income in the year ended 30 June 2014. Although that is permissible with reference to the "carrying on of a business" under s 8-1(1)(b), that is not applicable here because it was Carina and not the respondent that carried on a business.
(3)
The Tribunal adopted a "practical business point of view" in characterising the Settlement Sum for the purposes of s 8-1(1)(a), which is applicable in distinguishing between capital and revenue and to the question of carrying on a business under s 8-1(1)(b), but not to gaining or producing assessable income under s 8-1(1)(a).

26 It is convenient to begin by considering the relevant authorities.

27 The most recent High Court authority on s 8-1(1)(a) is Commissioner of Taxation v Day [2008] HCA 53; 236 CLR 163. A Customs officer was charged under the Public Service Act 1922 (Cth) with failure to fulfil his duty as an officer. He incurred expenses in obtaining legal advice and representation in connection with the charges. The Commissioner disallowed a deduction of those legal expenses from his assessable income. A majority of the High Court (Gummow, Hayne, Heydon and Kiefel JJ) held that the expenses were properly allowable as deductions under s 8-1(1)(a). The following statements of principle can be extracted from the Court's reasoning:

(1)
The terms of the provision refer to a relationship between expenditure incurred and what is productive of assessable income, which is to say the connection necessary for deductibility: [21].
(2)
The words "incurred in gaining or producing ... assessable income", appearing in the section, mean incurred "in the course of gaining or producing" income: [21].
(3)
It is necessary to read "losses and outgoings ... incurred in gaining or producing the assessable income" as incurred "in the course of" gaining or producing that income; outgoings may have an effect in gaining income, but losses cannot, as they simply reduce income: [21].
(4)
An outgoing may be referable to a year of income other than that in which it was incurred: [21].
(5)
The words "in the course of" do not require a direct connection between expenditure in question and an activity itself productive of income: [21]
(6)
The expression "incurred in gaining or producing the assessable income" should be given a very wide application, but requires more than a causal connection between expenditure and the derivation of income – something closer and more immediate: [22]. No narrow approach should be taken to what is productive of a salary-earner's income, whether it be described as employment or by reference to a bundle of tasks to be performed and duties to be observed: [33].
(7)
A way of stating the question is: "is the occasion of the outgoing found in whatever is productive of actual or expected income?": [30].
(8)
Essential to the inquiry is the determination of what it is that is productive of assessable income, and seeking to delineate between proper conduct and that which is proscribed is not useful to answering that inquiry: [31]-[32].

28 The most recent Full Court authority on s 8-1(1)(a) is Clough v Federal Commissioner of Taxation [2021] FCAFC 197; 114 ATR 1 (Clough FC). Although the facts of Clough FC are far removed from the present case, some additional principles with regard to the application of the section are helpfully identified in the judgment of Thawley J (Kenny and Davies JJ agreeing):

(1)
The question is one of characterisation of the expenditure: Clough FC at [48], citing Fletcher v FCT [1991] HCA 42; 173 CLR 1 at 17.
(2)
The "occasion of the loss or outgoing" is to be found after an examination of all relevant circumstances giving rise to the outgoing in which it is relevant to ask what the outgoing is calculated to effect from a practical or business point of view: Clough FC at [50], citing Estate Mortgage Fighting Fund Trust v FCT [2000] FCA 981; 102 FCR 15 at [19] per Hill J referring to Hallstroms Pty Ltd v FCT [1946] HCA 34; 72 CLR 634 at 648.
(3)
The "occasion of the loss or outgoing" is not necessarily temporally restricted to the immediate causes for the payment, although contemporaneous events will be directly relevant and of significant, and on occasion decisive, weight. Questions of causation (including for example whether a payment would have been made were it not for the existence of a particular circumstance) and purpose are relevant, but the ultimate object is one of characterisation having regard to all of the relevant circumstances, noting that the word "purpose" is not used in s 8-1(1)(a). (Clough FC at [51], citing Fletcher at 17 and FCT v Payne [2001] HCA 3; 202 CLR 93 at [9].)

29 It is paramount to bear two things in mind. The first is that it is the words of the provision in question that must in the end be construed and applied, and not the words or phrases drawn from the judgments as if they were themselves the statutory wording. The second is that each of the cases ultimately turns on its own facts in which the characterisation of the outgoing in question is based. That said, it is instructive to have regard to other cases where the outgoings arise from the taxpayer's response to allegations or claims made against them. Typically those outgoings are settlement payments and legal expenses.

30 There are many judgments that deal with whether legal expenses that are incurred in defending proceedings, or representing the taxpayer in an inquiry, related to the taxpayer's employment or business are deductible under the relevant section, but there are very few dealing with whether a payment made in settlement of such a proceeding is deductible. Indeed, the parties have identified only one, namely Herald & Weekly Times Ltd v Commissioner of Taxation [1932] HCA 56; 48 CLR 113. The Commissioner has also identified some decisions of the Tribunal which go the other way to the Tribunal in the present case, but they serve only to illustrate the apparent dearth of superior court authority on the point.

31 In Herald & Weekly Times, the taxpayer was the publisher of a newspaper from which it derived much of its assessable income. In the course of doing so, it was exposed to claims for defamation, some of which had settled upon terms which included a payment by way of compensation, others of which it defended successfully or unsuccessfully, and most of which involved it in legal costs. The High Court split 4-2 in favour of allowing those outgoings as a deduction.

32 The relevant provision, s 23(1) of the Income Tax Assessment Act 1922 (Cth), provided that there shall be deducted "all losses and outgoings ... actually incurred in gaining or producing the assessable income." Subsequent cases have treated that provision (and its successor, s 51(1) of the Income Tax Assessment Act 1936 (Cth)) as having in substance the same meaning and effect as the present provision, s 8-1(1)(a): Day at [21].

33 Gavan Duffy CJ and Dixon J (at 118) reasoned that the thing which produced the assessable income was the thing which exposed the taxpayer "to the liability or claim" discharged by the expenditure. Although the taxpayer paying the sums was not actuated by any desire to produce income, in the case of damages or compensation it was to satisfy "a claim or liability" to which it had become subject. It was held that the expenditure flowed "as a necessary or a natural consequence" from the inclusion of "the alleged defamatory matter" in the newspaper and its publication. Rich J (at 121) and McTiernan J (at 127) reasoned that publication was at once the source of income and the cause of liability. None of the judgments of the majority drew any distinction between payments made to discharge liabilities that had been determined by judgment and those made to discharge liabilities that were founded in the settlement of claims (thereby avoiding judgment) or the legal expenses incurred in defending claims.

34 I turn now to consider the cases that deal with legal expenses arising from the postulated circumstances. Day is of course the leading example, because it is from the High Court and it is the most recent, but there are many others. I will take them in chronological order.

35 In Federal Commissioner of Taxation v Snowden & Willson Pty Ltd [1958] HCA 23; 99 CLR 431, expenses of advertising to counter adverse press reports, and legal costs before a Royal Commission, incurred by a company the subject of allegations as to its business practices were held to be deductible. The relevant provision has s 8-1(1)(b) (and not s 8-1(1)(a)) as its present equivalent, namely that losses and outgoings to the extent to which they are necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income are deductible. Dixon CJ (at 437) reasoned that what is meant by the qualification "necessarily" is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business. His Honour held that the company could do nothing else but defend itself if it was to sustain its business and continue carrying it on in anything like the same volume or according to the same plan, which was enough to bring the expenses within the provision.

36 Fullagar J, with whom Williams J agreed, was to similar effect (at 444): "The relation between the expenditure and the carrying on of the business is clear. The expenditure was incidental to the carrying on of the business. It was incurred in carrying on the business, and it was necessarily incurred because the exigencies of the business imperatively demanded that it should be incurred."

37 In Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation [1980] FCA 180; 33 ALR 213, the taxpayer paid the legal costs incurred in defending it and several of its directors and agents against charges of criminal conspiracy relating to the marketing methods adopted to sell its products. It was held that the legal costs were deductible. It was reasoned by Brennan J (at 225) that the conduct of the directors and employees which was impugned was conduct by which a part of the taxpayer's business was carried on, and allegations reflecting on the integrity of those conducting the business reflected on the taxpayer and its reputation; the allegations attacked the taxpayer's business methods such that its interests and those of the accused were inseparable. Deane and Fisher JJ (at 235-236) reasoned that the outgoings arose out of the actions of the taxpayer's directors and agents in those respective capacities; they were performed on behalf of the taxpayer in the course of carrying on the taxpayer's income-earning business and were plainly directed towards earning assessable income for the taxpayer. Reliance was also placed (at 237) on the fact that the taxpayer's own reputation was under public attack. In all the circumstances, the outgoings were sufficiently closely connected with the gaining or producing of assessable income.

38 In Putnin v Commissioner of Taxation [1991] FCA 12; 27 FCR 508, the taxpayer, an accountant, sought to deduct the costs of his defence to a criminal charge arising out of his administration of an insolvent estate. The Court (Burchett, French and Lee JJ) allowed the deduction. The Tribunal's reasoning in not allowing the deduction because the outgoings did not arise out of the business of the taxpayer's present partnership but were of a previous business conducted by the taxpayer was rejected (at 510). It was reasoned that that approach not only overlooks the taxpayer's continuing position as a sole practitioner outside the partnership, but that the practice of the same profession continued. With reference to dicta in Magna Alloys, it was reasoned that the payments made in respect of the taxpayer's defence were relevantly involuntary; the purpose of the outgoing was found in the pursuit of the taxpayer's business and were necessarily incurred in the carrying on of that business for the purpose of gaining or producing assessable income (at 512-513).

39 In Commissioner of Taxation v Rowe [1995] FCA 834; 60 FCR 99, the taxpayer was employed as a shire engineer. He incurred legal costs defending himself in an inquiry arising from complaints of misconduct made against him. The question arose as to whether those legal costs were deductible. Beaumont J reasoned that as the inquiry was centrally concerned with day-to-day aspects of the taxpayer's employment, the costs were incurred by him in gaining assessable income (at 109C). Burchett J reasoned that the expenses were incurred by the taxpayer in defending himself from dismissal from his employment, and also in defending the manner of his performance of his duties; the activities which produced the assessable income were what exposed the taxpayer to the liability discharged by the expenditure (at 113E-F). Drummond J reasoned that the incurring of the costs contributed to his success in defending himself from dismissal from his employment and they were thus incurred to preserve his entitlement to receive, in return for his services, assessable income (at 115-116).

40 In Shokker v Commissioner of Taxation [1999] FCA 600; 92 FCR 54, legal expenses were incurred by the taxpayer in conducting two judicial review applications challenging administrative decisions of his employer related to its acquisition and use of certain information about him which the employer had obtained in the course of conducting income tax audits. The employer used that information when it decided to suspend the taxpayer from his employment as a fairly senior officer in the Australian Taxation Office (at [34]). Ultimately the Court (French, Drummond and Carr JJ) found that the Tribunal had erred in its reasoning in disallowing the deduction, but remitted the matter to the Tribunal for further fact-finding. The Court therefore did not itself deal with whether or not the expenses were deductible (at [31] and [43]).

41 Drummond J, with whom French and Carr JJ agreed, identified relevant principles as including the following:

(1)
Losses or outgoings will be deductible, provided they are incurred in connection with the income-producing operations carried on, whether in the year in which the loss or outgoing is incurred or in a preceding or succeeding year: [20].
(2)
That the connection between the expenditure and the income-producing operations of the taxpayer is only indirect does not preclude deductibility: [24].
(3)
It will be a matter of fact and degree whether in the particular case, a connection that may exist between the occasion of the loss or outgoing and the taxpayer's income-producing operations is too indirect to qualify that loss or outgoing for deductibility under the provision: [25].
(4)
Matters that are relevant to the tax characterisation of the outgoings include whether the charge was instigated by the employer and that it could result in the taxpayer's dismissal, and whether the outgoings could be objectively regarded as serving to assist the taxpayer to defeat the employer's contentions against them: [27] and [30].

42 In my view the Settlement Sum is properly characterised as having been incurred in the course of gaining or producing the respondent's assessable income. The occasion of the liability that was discharged was the work done by the respondent as employee of Carina under the relevant consultancy agreement with Alleasing. As in Herald & Weekly Times, it does not matter that the liability itself was created by the Settlement Deed because the claim that was compromised by that deed arose directly out of the respondent's employment; the respondent's conduct in his employment was at once the source of income and the cause of the risk of liability. In much the same way as legal expenses incurred in contesting allegations (ie, claims) about the conduct of the taxpayer in their employment are regarded as being incurred in gaining income (Putnin, Rowe and Day), the respondent's agreement to pay, and then payment, to bring allegations about his conduct in his employment to an end is similarly characterised – it is a loss or outgoing that reduces his income from his employment. As held in Day, it is not to the point that the allegations, if established, would show that the relevant conduct was outside the scope of his employment. The conduct in question was conduct he engaged in as employee in gaining his assessable income – indeed, the claims included that he was engaged in trade and commerce and that he breached the consultancy agreement under which he was employed. The claims therefore arose directly from his employment.

43 For those reasons, the Settlement Sum was incurred in the course of gaining or producing income and the occasion of the outgoing is to be found in his conduct as employee that was productive of his income. That is to say, the connection between the outgoing and the gaining or production of income is sufficiently close, noting in particular that a direct connection is not required. To answer the question posed in Clough FC, from a practical and business point of view, the outgoing was calculated to bring to an end a litigation risk that had as its source the respondent's employment with Carina and the consultancy agreement with Alleasing. This is a closer and more immediate connection than mere factual causation on a "but for" basis.

44 The Commissioner's submission that the outgoing could not have been incurred in gaining or producing assessable income in 2014 in relation to events in 2006-2007 must be rejected. As mentioned, in Day – which like the present is a s 8-1(1)(a) case – it was held (at [21]) that an outgoing may be referable to a year of income other than that in which it was incurred. The Commissioner's submissions were in search of the outgoing in question itself being productive of income, which directed attention to the 2014 year and thereafter, but that overlooks that a loss that is a reduction in past income can also qualify as a general deduction. None of the authorities place any significance on how much time has passed between the conduct in question that was productive of income and the year in which the loss is felt or the outgoing is incurred.

45 The Commissioner refers to the Tribunal's decision at [24], cl 6.2 of the Settlement Deed and cll 1, 2 and 7 of the Deed of Release in support of the submission that the Settlement Sum was paid, at least in part, to protect the respondent's reputation in the finance industry in order to prevent further disparagement of him. On that basis, the Commissioner submits that the Settlement Sum, properly characterised, was the price paid by the respondent to end the proceeding and protect his reputation; it was a step removed from any activity done by him in the course of producing his assessable income.

46 The difficulty with those submissions is that they elide the difference between the Settlement Sum and releases under the Settlement Deed, on the one hand, and the Deed of Release on the other. It was the latter that was primarily aimed at protecting the respondent's reputation in the future, and to compensate him for any defamation in the past. The former, in contrast, was to bring to an end the litigation in which some $2.4 million was claimed – avoiding the risk of a judgment in that sum, which would have amounted to a very considerable reduction in income gained in the 2006 and 2007 tax years, was necessarily a central purpose in concluding the Settlement Deed.

47 It is also not to the point that at the time of the Settlement Sum the respondent was no longer employed by Carina or through Carina by Alleasing, or, as found by the Tribunal, the respondent's subsequent employment was not threatened by anything that might be found to have been done by him in his employment with Carina or his activities in negotiating deals for Alleasing. The Settlement Sum is a loss or outgoing referable (with a sufficiently close albeit indirect connection) to the respondent's assessable income when he was employed by Carina; whether or not it qualifies as a general deduction does not depend on it being referable to present or future income.

Loss or outgoing of capital, or of a capital nature – s 8-1(2)(a)

48 In Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation [1938] HCA 73; 61 CLR 337, Dixon J (at 359-360) explained that the distinction between expenditure on revenue account and on capital account corresponds with the distinction between the business entity, structure or organisation set up or established for the earning of profit and the process by which such an organisation operates to obtain regular returns by means of regular outlay. His Honour explained that in a trade or pursuit where little or no plant is required, the business structure or entity may be represented by no more than the intangible elements constituting what is commonly called goodwill, ie, widespread or general reputation, habitual patronage by clients or customers and an organised method of serving their needs.

49 His Honour (at 363) identified three matters to be considered in characterising a particular outgoing as being of capital or of a capital nature:

(1)
the character of the advantage sought, and in this its lasting qualities;
(2)
the manner in which it is to be used, relied upon or enjoyed, and in this and under (1) recurrence may play its part; and
(3)
the means adopted to obtain it, ie, by providing a periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provision or payment so as to secure future use or enjoyment.

50 It has also been said that what is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view, rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process: Hallstroms at 648 per Dixon J (dissenting as to the application of principle to the facts); AusNet Transmission Group Pty Ltd v FCT [2015] HCA 25; 255 CLR 439 at [22] per French CJ, Kiefel and Bell JJ and [73] per Gageler J.

51 The Commissioner's case that the Settlement Sum is a loss or outgoing of capital, or of a capital nature, depends on its characterisation as bringing about a benefit of a long-term nature by preserving the respondent's good reputation in the finance industry. The Commissioner submits that the benefit in settling the litigation was to enable the respondent to exploit his good name by continuing to work and earn an income in the finance industry.

52 However, I have already found that the Settlement Sum is to be characterised as bringing to an end the litigation risk arising from the respondent's conduct in his employment years previously, rather than as in the protection of his reputation in the future. Indeed, there is something of a tension in the Commissioner's case in this respect. On the first limb, the Commissioner submits that the Settlement Sum was not incurred to gain or produce assessable income in the future, whereas on the second limb the Commissioner submits that its purpose was to protect his goodwill and reputation in the future.

53 In my view, there is no error by the Tribunal in its conclusions on this question. The Settlement Sum did not involve the acquisition of any tangible asset, but rather arose out of the very activities the respondent performed in gaining assessable income. The discharge of the liability that arose out of those activities cannot sensibly be characterised as a loss or outgoing of capital or of a capital nature – it was not to protect goodwill or widespread or general reputation, or to secure habitual patronage by clients or customers. To characterise it as capital or of a capital nature would, once again, elide the different nature and purposes behind the Settlement Deed and the Deed of Release. They were legitimately directed to different ends.

Disposition

54 In the circumstances, the appeal from the Tribunal to this Court falls to be dismissed. The parties were agreed that there should be no order as to costs.


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