Case V116

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 22 July 1988.

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P.M. Roach (Senior Member)

These references relate to the years of income ended 30 June 1980, 1981, 1983 and 1984. The Commissioner had also submitted papers to the Tribunal in relation to the year of income ended 30 June 1982 following a request from the applicant that the Commissioner's decision on an objection relating to that year of assessment be referred for review. However, upon examination of the papers referred, they disclosed that all aspects of the applicant's objection for that year had been previously allowed. Accordingly, that matter was removed from the list of matters awaiting hearing.

2. The references involved two issues. The first issue relates to a claim to deductions in the years ended 30 June 1981, 1983 and 1984 of $21,139, $2,600 and $2,400 by reason of payments made by the applicant in consequence of guarantees given by him. The second relates to a claim by the applicant to deduct legal expenses amounting to the sum of $6,684 incurred in the year of income ended 30 June 1980.

3. The applicant, who appeared for himself, was a solicitor who, at all material times, was engaged in private practice as a solicitor on his own account. From his early years in practice he had sought to develop his practice, concentrating on conveyancing and commercial matters with special attention to company law. He was engaged in writing and teaching in the latter field. In an endeavour to promote goodwill for his practice and thereby gain continuing and indeed increasing support for it from his clients, he was ready to make his services available as a director to companies controlled by his clients. In relation to small companies where he considered that little more would be required of him than formal attendance at a brief annual general meeting he would accept a directorship without fee. In other cases, expected to call for a greater level of activity on his part, he sought advantages not only by way of increased fee-earning opportunities, but also by way of director's fees: modest though they might be. In other instances he accepted directorships on the boards of companies which he had promoted and in which, in some cases, he had a proprietary interest. One company promoted by him was a company limited by guarantee. In most years he received director's fees from that company and, in addition, he benefited through his practice providing office and supporting services to the organisation. In addition, his family trust - of which he was not a beneficiary - rendered other services to that company for reward.

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ATC 739

4. There was yet another relevant attempt to generate work and income for his professional practice. It was instituted following a decision of a major conveyancing client - to establish for itself an ``in-house'' legal department. As many solicitors before him had done, the applicant sought to expand his practice by promoting two companies which he considered would generate substantial professional work for his practice. Two companies were incorporated and he took a substantial beneficial interest in each. One company was to engage in land development and the other in building construction. In the former case the establishment of the company had been preceded by operations conducted in partnership but the conversion to corporate status was effected in order to gain the benefits of limited liability not available in partnership.

5. Despite the special interests of the applicant in company law and his appreciation of the advantages of limited liability, he carried his involvement in several of the companies with which he was associated yet one step further. He accepted joint and several liability with his fellow directors for the bank borrowings of a number of companies. His contingent liabilities included several bank guarantees for sums at times of the order of $10,000; rarely in the order of $50,000; and on one occasion were said to have been in excess of $2,000,000. In all six groups of companies or individual companies not grouped were involved. Guarantees were given in relation to all companies from which director's fees were received The guarantees which gave rise to the claims presently under consideration were all given in relation to the two companies in which he held a proprietary interest and from which he received professional fees, although in neither case did he receive any director's fees as such. His evidence was that he carried out the professional work involved in arranging the bank loans and the execution of security documents for the banks in relation to those guarantees and that he received payment of the amount properly due by way of professional fees for those services. I am not persuaded that he received any additional sum over and above the amount properly due in professional fees in consideration of him assuming the responsibilities of a guarantor.

6. However, it is not to be assumed by reason of the generalities I have expressed or the indications of the quantum of contingent liability that the director's fees which were received were substantial in amount; paid consistently over prolonged periods; or paid by many of those client companies. The evidence establishes that the amounts received as director's fees by the applicant and returned as assessable income were as follows:

 Year
 Ended
30 June     Company A      Company B     Company C     Company D     Company E
              $               $             $             $             $
 1971
 1972        800            1,330
 1973        900              540
 1974        900                            335
 1975        633                                          50            50
 1976
 1977      3,229
 1978        800
 1979
 1980
          

Another company at one time provided the applicant with the use of a motor vehicle.

7. In all, the applicant assumed liability as a guarantor in relation to many companies, fortunately he was only called on to honour those undertakings in two instances. The two exceptions were the companies which had been floated in association with clients to carry out land development and building projects. In each he held a substantial proprietary interest and from each he secured their legal work which generated assessable income for him in his practice. In the case of those companies he had given guarantees not only to bankers but

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ATC 740

also to creditor suppliers. The companies defaulted and the applicant's co-venturers disappeared. He became the sole available guarantor for the companies. As a result, in the years of income ended 30 June 1981, 1983 and 1984 he incurred the outgoings of $21,139, $2,600 and $2,400 now claimed as income tax deductions.

8. In relation to Company A - a company limited by guarantee and the company from which he most consistently received director's fees - he learned of another risk which attends the office of a company director. In the course of discharging his responsibilities he discovered what he considered to be ``irregularities'' on the part of an executive director of the company in the discharge of his responsibilities to the company. The applicant reported his findings to a special meeting of directors and that led to the dismissal of the executive from his offices with the company.

9. However, in the aftermath of those events, the applicant and his fellow directors were sued by the dismissed executive. The cause of action brought was in defamation. Neither the terms of the writ of summons nor of the statement of claim were established in evidence but that is a matter which I do not consider to be of any moment. The applicant and his fellow defendants denied the allegations made against them and in due course the proceedings were settled before the Court without proceeding to trial. That occurred when, by consent, an Order was entered in the records of the Court. The terms of settlement acknowledged, without prejudice, that there was no liability for defamation in the defendants but provided for an ``apology'' and payment of a substantial sum in respect of the plaintiff's costs. Those costs were paid by the company. But the applicant personally suffered a loss of $6,684 as his personal contribution to costs of his defence. He has claimed a deduction in that sum and that claim has been denied him by the Commissioner.

Losses on guarantees

10. I have considered a similar claim in Case V115,
88 ATC 733 a decision handed down this day. Rather than repeat what was there said, I will provide a copy of those reasons for decision to the applicant with this decision. As to the claim of the applicant in the present case, I find no circumstance of fact or law which would lead me to a different conclusion. Accordingly, on these points the applicant's claims will fail.

The costs of litigation

11. In assuming office as a director of the company, the applicant became responsible to act in the best interests of that company. The responsibilities he assumed were onerous, comprehensive and personal. In the belief that he was acting to the high standard required of directors he played a part in the dismissal from office of the chairman of directors. By doing so he ran the risk of being held accountable for any wrongdoing on his part. Having performed his duty as he saw it he had the experience of being alleged to be in breach of duties he owed as a matter of law to the dismissed director. With others, he was alleged to have defamed the former director. He denied the allegations. But having been named as a defendant in proceedings before the Supreme Court of New South Wales he was put to expense in defending himself. The expenses so incurred were as directly related to the performance of his duties as a director, and thereby his income-earning activities, as are the expenses incurred by divisions of the media which incur expense in dealing with allegations that they have defamed others.

12. No finding was ever made that the applicant had defamed the former director. But that is not material. Expenses borne in successfully defending defamation proceedings are as much allowable as would be the expenses of unsuccessfully defending the same proceedings. I find no basis at all for distinguishing as not applicable in this reference the principles expressed by the High Court of Australia in
Herald & Weekly Times Ltd. v. F.C. of T. (1932) 48 C.L.R. 113. In particular I find that there is no substantive or relevant distinction in the circumstances that the applicant was not carrying on business as a director; or that publication, which is something critical to liability in defamation, was not of the essence of his responsibilities as a director, but rather only a natural manifestation of the performance of his duties. Further, I find no foundation at all for holding that the alleged defamation was something ``private'' in character in the sense contemplated by sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act''). It was quite distinct from the circumstances considered in

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ATC 741

Case U102,
87 ATC 621. This applicant was not seeking relief by way of compensation for damage to his reputation. Nor was he defending himself against a claim that he had defamed the plaintiff otherwise than by reason of his conduct in the performance of his duties. The defamation alleged was wholly founded in communications within the board of directors and to the members of the company. Accordingly I would allow the deduction claimed.

13. The orders of the Tribunal will be that the decision of the Commissioner upon the objection for the year of income ended 30 June 1980 will be varied so as to reduce taxable income by $6,684 but the decisions in relation to the years of income ended 30 June 1981, 1983 and 1984 shall be affirmed.