Case V44

Members:
RA Balmford SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 24 February 1988.

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R.A. Balmford (Senior Member)

This is an application for review of two decisions of the respondent disallowing objections by the applicant to the inclusion in the respondent's assessment of his taxable income for each of the years ended 30 June 1983 and 1984, of an amount claimed as a deduction in respect of legal expenses.

2. The applicant requested that each of the objections be referred to a Board of Review, and these requests were complied with by the respondent. By virtue of sec. 223(1) of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 and sec. 189(2) of the Income Tax Assessment Act 1936 (``the Assessment Act'') that referral of the decisions on the applicant's objections is deemed to constitute the making by the applicant of applications to the Tribunal for review of the decisions. As the issue was the same in respect of each year of income, both applications were heard together. No oral evidence was called by either party, but a number of documents were before the Tribunal. The applicant was represented by his tax agent, Mr D, and the respondent by an officer of his department. At the request of that officer, the opportunity was given to him to make further written submissions after the hearing, to which Mr D made a written reply.

3. The facts in this matter are not in dispute. The applicant carries on practice as a dentist. In his income tax return for the year ended 30 June 1982 he claimed a deduction in respect of a loss of $11,385 on the operation of certain rental properties, the loss arising principally from the setting off against the income from the properties of interest on moneys borrowed to purchase the properties. An assessment was issued in March 1983 disallowing the deduction, and was accompanied by a questionnaire raising fourteen items.

4. Mr D said that he was aware at the time that the attitude of the Commissioner's office in Victoria to claims of this kind was different from the attitude of offices in other parts of Australia. He advised his client that an objection would, in his view, be upheld. It was known, at the relevant time, that the legislation which became the Taxation (Interest on Overpayments) Act 1983 (``the Interest Act'') (which was assented to on 8 June 1983) was in course of preparation and likely to be enacted shortly. For this reason, Mr D advised his client (in a letter dated 4 March 1983, a copy of which was before the Tribunal) to pay his tax as assessed in full and lodge an objection in respect of the disputed amount, in the express expectation that the objection would be granted, that the client would receive a refund of the disputed amount, and that pursuant to the Interest Act he would in due course receive interest on the amount refunded.

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5. However, at that time, Mr D said, there had been a number of Board of Review decisions turning on defects in objections, and it was generally considered desirable to obtain legal advice on the drafting of objections. At that time, of course, a taxpayer was not permitted to rely on any ground not included in the notice of objection. For this reason, he consulted a firm of solicitors, Messrs G & B, who in turn instructed Mr P of counsel to prepare the notice of objection and the answers to the questionnaire. The total fees and outgoings charged by Messrs G & B in respect of the matter (including counsel's fee of $580) amounted to $989, paid as to $580 in the 1983 tax year and as to $409 in the 1984 tax year, those being the amounts the deductibility of which is in issue in these proceedings.

6. The assessment was duly paid in full on 10 April, the objection lodged on 29 April, and the answers to the questionnaire supplied to the respondent on 2 June, all in 1983. On 30 June 1983 the Treasurer announced that the Government's policy was to allow a deduction in respect of the full amount of interest on money borrowed to purchase rental properties. On 28 September 1983 an amended assessment issued to the applicant and the full amount of $11,385 was allowed as a deduction.

7. On behalf of his client, Mr D applied for a payment of interest pursuant to the Interest Act, and on 1 February 1984 received from the respondent the sum of $945.11, being interest in respect of the period from 10 April to 28 September 1983. That amount was included as assessable income in the applicant's return for the year ended 30 June 1984.

8. It is clear that no claim arises under sec. 69 of the Assessment Act, which provides that expenses incurred in the preparation of taxation returns by a registered tax agent are to be allowable deductions. It can hardly be argued that the expenses in question related to the preparation of a return: and in any case, Mr D informed the Tribunal that he had ascertained from Messrs G & B that the partners in the firm were not registered tax agents.

9. In the applicant's assessment in respect of the year ended 30 June 1983, the respondent allowed a deduction for $50 of the amount in question under sec. 64A of the Assessment Act. No similar allowance was made in respect of the year ended 30 June 1984. At the hearing, the respondent's representative said that the allowance in 1983 had been made on the erroneous assumption that the expenses related to the carrying on of the applicant's dental practice: in 1984 it had been realised that this was not the case.

10. The respondent relied principally on the decision of the House of Lords in
Smith's Potato Estates Ltd. v. Bolland (Inspector of Taxes) (1948) 2 All E.R. 367 in which their Lordships found that legal costs of disputing a taxation assessment were not a disbursement ``wholly and exclusively laid out or expended for the purposes of the trade'' in terms of the relevant legislation, and accordingly were not deductible. Lord Simonds said (at p. 374):

``It is significant that counsel were not able to call to the attention of the House any case in which the appellants' present contention had been put forward. For a long period of years large sums of money have been devoted to the litigation of income tax claims. The most acute minds of the legal and accountancy professions have been at the service of the taxpayers, yet the claim that such money was expended wholly or exclusively for the purposes of the trade appears never to have reached a court of law. The reason is not far to seek. It is that neither the cost of ascertaining taxable profit nor the cost of disputing it with the revenue authorities is money spent to enable the trader to earn profit in his trade. What profit he has earned, he has earned before ever the voice of the taxgatherer is heard. He would have earned no more and no less if there was no such thing as income tax. His profit is no more affected by the exigibility of tax than is a man's temperature altered by the purchase of a thermometer, even though he starts by haggling about the price of it.''

(Emphasis added.)

11. In
Cliffs International, Inc. v. F.C. of T. 85 ATC 4374 Kennedy J. of the Supreme Court of Western Australia applied that decision to a similar claim made under sec. 51 of the Assessment Act. His Honour said (at p. 4397) after noting that there appeared to be no decision of an Australian court directly in point:

``In my opinion, the reasoning in Smith's Potato Estates Ltd. v. Bolland is applicable in the present case. The differences between the United Kingdom and the Australian

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legislation do not require a different answer. Income tax is not a deductible expense, nor, in my view, are the expenses of determining the taxable income upon which it is assessed. They were incurred by Cliffs merely as a taxpayer in ascertaining the extent of its liability as such. I can find no proper basis for distinguishing the professional fees in relation to the objections and the subsequent negotiations from those in relation to the appeals themselves. All the fees appear to me to fall outside the ambit of sec. 51.''

12. However, Mr D submitted that the facts in this case were distinguishable from those in Smith's Potato Estates and Cliffs International, and that the expenditure in question was an allowable deduction by virtue of sec. 51(1) of the Assessment Act. The consideration of that submission requires reference to the relevant provisions of the Assessment Act and the Interest Act.

13. Section 51(1) of the Assessment Act reads, so far as relevant:

``51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable 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.''

14. The key provisions, for present purposes, of the Interest Act as it stood at the relevant time are as follows:

``9(1) Subject to sections 11 and 12, where -

• (a) an amount of relevant tax is paid by a person to the Commissioner (in this sub-section referred to as the `amount paid'); and
• (b) as a result of a decision to which this Act applies, the whole or a part of the amount paid is overpaid by the person and is refunded to the person or applied against any liability of the person to the Commonwealth,

interest calculated in accordance with sub-sections (2) and (3) and section 10 is payable to the person in respect of -

• (c) in a case where the whole of the amount paid is so refunded or applied - the amount paid; or
• (d) in a case where a part of the amount paid is so refunded or applied - the part of the amount paid so refunded or applied.

3(1) In this Act, unless the contrary intention appears -

...

`decision to which this Act applies' means -

• (a) a decision of the Commissioner upon an objection;
• (b) a decision of a Board of Review;
• (c) a decision of a court in relation to -
  • (i) an objection; or
  • (ii) a decision of a Board of Review.

...

`objection' means an objection under -

• (a) Section 185 of the [Assessment Act]
• ...

`relevant tax' means -

• (a) tax within the meaning of section 207 of the [Assessment Act]''

15. Finally, para. 26(jb) of the Assessment Act, which was deemed to come into operation on 14 February 1983, the same date as the Interest Act, reads as follows:

``26 The assessable income of a taxpayer shall include:

• ...
• (jb) the amount of any interest payable to the taxpayer under the [Interest Act] being interest that has been paid to the taxpayer or applied by the Commissioner in discharge or partial discharge of a liability of the taxpayer to the Commonwealth;''

16. On the basis of this legislation, Mr D submitted that the amounts of legal costs the subject of this application for review were outgoings incurred by his client in gaining or producing the assessable income constituted by the sum of $945.11 received from the Commissioner pursuant to the Interest Act, and

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were thus allowable deductions by virtue of sec. 51(1) of the Assessment Act. He pointed out that, by virtue of para. 9(1)(b) of the Interest Act and the definition of ``decision to which this Act applies'' in sec. 3(1) of that Act, it was necessary for his client to lodge an objection in order to enable the making of such a decision. Only if he received a refund, as a result of such a decision, of the disputed amount of tax, could he receive a payment of interest under that Act. He emphasised that, as set out in para. 4 supra, the receipt of interest under the Interest Act had been among the purposes of his client's paying the tax in full and lodging the objection; and that, for the reasons stated in para. 5, a prudent taxpayer would obtain legal advice on the drafting of an objection.

17. I accept the submission of Mr D. The issue does not appear to have been the subject of consideration by any court or Board of Review or by the Tribunal, since the enactment of the Interest Act in 1983. I see no basis on which it could be said that the legal costs in question did not have the essential character of having been incurred in gaining or producing the assessable income constituted by the interest. Nor could it be said that they fell within any of the exceptions to sec. 51(1). The distinction between this case and Smith's Potato Estates is best expressed by paraphrasing the sentences which are emphasised in the passage cited from Lord Simonds in para. 10 supra. In the present case the profit of $945.11 was earned well after the voice of the taxgatherer was heard; and the taxpayer would not have earned this amount if there had been no such thing as income tax.

18. Although the lodging of the objection, in respect of which the costs were incurred, had two purposes, i.e. the obtaining of the refund of tax and the obtaining of the interest, no question of apportionment arises. The obtaining of the refund was, by virtue of para 9(1)(b) of the Interest Act, as essential to the obtaining of the interest as was the lodging of the objection itself. Thus, in the present context, the two purposes cannot be separated, and the whole amount in issue bears the same essential character.

19. The officer who represented the respondent at the hearing, Mr M, submitted that the expense was ``of a private nature'' and thus did not fall within sec. 51(1). Given the relationship between the expense in question and the assessment of tax in respect of income derived from rental properties, that submission cannot be sustained.

20. Mr M also submitted that it was relevant that the legal advice had no effect on the decision on the objection, which resulted from the Commissioner's change of policy. This appeared to be a submission that, assuming that the expense was otherwise deductible on the basis put forward by Mr D, it lost that quality because it did not, in the event, directly result in an increase in the taxpayer's assessable income.

21. Mr M produced no authority for the principle implied in that submission, namely that an expense otherwise falling within the first limb of sec. 51(1) is deductible only if it can be shown to have directly given rise to an increase, which in fact occurred, in the assessable income of the taxpayer. It is only necessary to point out that the subsection expressly provides for the deductibility of losses, to demonstrate that such a principle cannot be sustained. As the High Court said in
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 57:

``In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''

(Emphasis added.)

22. Finally, Mr M sought to refer the Tribunal to the Second Reading Speech and Explanatory Memorandum in respect of the Interest Act, in support of a proposition expressed as follows in his written submission:

``The parliament, in enacting the Taxation (Interest on Overpayments) Act 1983 and section 26(jb) of the Income Tax Assessment Act 1936 (as amended) could not have intended to open the way for deductions for expenditure incurred by taxpayers in relation to contesting of their income tax assessments (as the legal expenses in this case can properly be characterised). Rather, the intention was simply to authorise the Commissioner of Taxation to pay interest by way of compensation where tax is refunded

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as a result of a successful objection or appeal.''

23. That proposition does not establish any ground which would justify reference to those extrinsic materials under sec. 15AB of the Acts Interpretation Act 1901. Further, the statement in the second sentence of that proposition, while no doubt correct, is not inconsistent with the submission of Mr D that outgoings incurred in producing income which is assessable by virtue of para. 26(jb) of the Assessment Act are deductible under sec. 51(1). Had Parliament intended to remove such outgoings from the operation of sec. 51(1) it could have done so. It is not for the Commissioner or for this Tribunal to so remove them. The deductibility of an outgoing found to have been incurred in the gaining or producing of assessable income is not, in the absence of express provision, affected by the purpose of an enactment which provides for the payment to the taxpayer of that income.

24. For the reasons given, the objection decisions under review will be set aside and the objections allowed in full.