HEALY v FC of T

Members:
CR Walsh SM

Tribunal:
Administrative Appeals Tribunal, Perth

MEDIA NEUTRAL CITATION: [2013] AATA 281

Decision date: 7 May 2013

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C R Walsh (Senior Member)

INTRODUCTION

1. This review application concerns the deductibility of accounting and legal expenses under ss 8-1 and 25-5 of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ).

2. Specifically, Mr James Gerard Michael Healy ( Gerard Healy ) seeks a review of the Commissioner's objection decision (dated 29 June 2012) which disallowed Gerard Healy's objection (dated 23 March 2012) in respect of deductions claimed by him for accounting and legal expenses (totalling $100,678.28), related to his debt recovery, bankruptcy annulment and proof of debt proceedings, in the years ended 30 June 2009 and 30 June 2010.

BACKGROUND FACTS

3. The relevant background facts are as follows.

Debt Recovery Proceedings

4. Gerard Healy and Mr Colin Richard Box were appointed directors of World Class Service Pty Ltd ( WCS ) on 13 August 2002. Mr Box ceased to be a director of WCS on 27 June 2003 such that Gerard Healy was the sole director of WCS commencing 27 June 2003.

5. On 12 September 2006 WCS was placed into administration, with the appointment of Mr Graeme Trevor Lean ( Mr Lean ) as administrator of WCS.

6. On 23 August 2006 the Commissioner sent Gerard Healy a "Notice of Director's Liability to Pay a Penalty to the Commissioner of Taxation PAYG Withholding Amounts", dated 22 August 2006 ( Director Penalty Notice ).

7. The Director Penalty Notice related to WCS's liability to pay a penalty equal to unpaid PAYG withholding liabilities of WCS (totalling $164,731.96) which allegedly arose during the period 1 July 2004 to 30 November 2005, when Gerard Healy was a director of WCS.

8. The Director Penalty Notice provided, among other things, that the penalty in respect of each of WCS's unpaid PAYG withholding liabilities would be remitted if, within 14 days of the date the Director Penalty Notice being "given to" Gerard Healy, one of the following things happened:

(a) the company's liability in respect of that unpaid amount has been discharged; or

(b) an agreement relating to such liability is in force under section 222ALA of the Income Tax Assessment Act 1936; or

(c) the company is under administration within the meaning of the Corporations Act 2001; or

(d) the company is being wound up.

9. On 1 September 2006 the Commissioner faxed Gerard Healy a copy of the Director Penalty Notice as well as a "Creditor's Statutory Demand for Payment of Debt" (dated 22 August 2006) to WCS for the amount of $293,367.91 ( Statutory Demand ).

10. On 5 September 2006 the Commissioner faxed Gerard Healy's then lawyer, Mr John O'Sullivan, a copy of the Director Penalty Notice, the Statutory Demand and an "Affidavit Accompanying Statutory Demand", dated 22 August 2006.

11. On 4 January 2007 the Commissioner issued Gerard Healy with a "Writ of Summons" in the District Court of Western Australia which provided, among other things, that he was liable to pay the Commissioner a penalty equal to the unpaid PAYG withholding liabilities of WCS (totalling $164,731.96), being the amount to which Gerard Healy was stated as being liable in the Director Penalty Notice ( District Court Debt Recovery Proceedings ).

12. WCS went into voluntary liquidation on 2 March 2007.

13. On 21 March 2007 the Commissioner obtained judgment in the District Court Debt Recovery Proceedings, in default of Gerard Healy's appearance, for the total amount of $165,464.66, being the amount to which Gerard Healy was stated as being liable in the Director Penalty Notice (of $164,731.96), plus additional court costs (of $732.70) ( District Court Judgment ).

Bankruptcy Proceedings

14. The Commissioner subsequently issued Gerard Healy with a "Bankruptcy Notice", pursuant to s 41(2) of the Bankruptcy Act 1966 (Cth), for the total amount of $165,791.05 for his failure to comply with the District Court Judgment ( Bankruptcy Notice ).

15. On 23 July 2007 the Commissioner filed a creditor's petition in the Federal Magistrates Court (No. PEG 147/2007) for Gerard Healy to attend a hearing on 20 August 2007 concerning his failure to comply with the Bankruptcy Notice which was issued as a result of his non-compliance with the District Court Judgment.

16. On 19 November 2007 Registrar Jan (of the Federal Magistrates Court) made a "Sequestration Order" against Gerard Healy's estate (citing 10 July 2007 as the date of his act of bankruptcy) ( Sequestration Order ).

Bankruptcy Annulment & Proof of Debt Proceedings

17. On 9 September 2009 Gerard Healy commenced proceedings in the Federal Magistrates Court (No. PEG 163 of 2009) to have his bankruptcy annulled and to challenge four proofs of debt which had been submitted by Mr Lean as liquidator of WCS and three other companies formerly associated with Mr Healy (comprising Falaren Pty Ltd ( Falaren ), Gemwalk Pty Ltd ( Gemwalk ) and North Wanneroo Gas Pty Ltd ( North Wanneroo )) ( Proceedings ).

18. On 2 November 2010 the Proceedings were transferred from the Federal Magistrates Court to the Federal Court of Australia (Western Australian District Registry), where they became matter (P) WAD 325/2010.

19. On 8 December 2010 Gerard Healy was discharged from his bankruptcy by operation of law.

20. The Proceedings (No. (P) WAD 325/2010) remain ongoing in the Federal Court.

Expenses

21. The following table summarises the accounting and legal expenses allegedly incurred by Gerard Healy in the year ended 30 June 2009 ( 2009 Expenses ).

Year ended 30/6/2009	Date of Invoice	Expense type	Amount
	22/8/2008	Accounting advice (Judge Constable) various accounting reviews and attendance with liquidator of WCS	$4,662.90
	11/9/2008	Accounting advice (Judge Constable) attendance at meetings with liquidator and Counsel, review documents from Royal Cornell	$4,660.70
	15/9/2008	Accounting advice (Royal Cornell)	$330
	1/12/2008	Accounting advice (Maria Hall & Associates) further preparation of financial statements and analysis of Gemwalk	$1,617
	2/12/2008	Accounting advice (Maria Hall & Associates) further preparation of financial statements and analysis of WCS	$3,267
	18/6/2009	Accounting advice (Judge Constable) review of financial statement and analysis of accounts of WCS and Gemwalk prepared by Maria Hall & Associates	$886.60
TOTAL			$15,424.20

22. The following table summarises the accounting and legal expenses allegedly incurred by Gerard Healy in the year ended 30 June 2010 ( 2010 Expenses ).

Year ended 30/6/2010	Date of Invoice	Expense type	Amount
	25/9/2009	Legal advice (De Vita + Dixon and Counsel)	$40,380.22
	16/12/2009	Federal Magistrates Court (fees)	$785
	23/12/2009	Legal advice (De Vita + Dixon and Counsel)	$5,706.80
	11/2/2010	Federal Court (setting down fee)	$1,569
	23/2/2010	Legal advice (De Vita + Dixon and Counsel)	$14,743.30
	13/4/2010	Legal advice (De Vita + Dixon and Counsel)	$9,286.43
	30/4/2010	Legal advice (Peter Lark & Co)	$1,960
	4/6/2010	Legal advice (De Vita + Dixon and Counsel)	$9,107.33
	28/6/2010	Legal advice (Peter Lark & Co)	$1,716
TOTAL			$85,254.08

Private Ruling

23. On 11 March 2011 Gerard Healy lodged an application for a private ruling with the Commissioner concerning the deductibility of the accounting and legal expenses allegedly incurred by him in the years ended 30 June 2008, 30 June 2009, 30 June 2010 and 30 June 2011 in relation to the Proceedings ( Private Ruling Application ).

24. In summary, in his Private Ruling Application Gerard Healy asserted that the relevant expenses were deductible under either the general deduction provision in s 8-1 of the ITAA 1997 or, alternatively, the specific deduction provision in s 25-5 of the ITAA 1997.

25. On 13 May 2011 the Commissioner issued Gerard Healy with a "Notice of Private Ruling" ( Private Ruling ) which was accompanied by "Reasons for decision". In summary, the Commissioner decided the following:

Question 1

Are your legal expenses in relation to the Director Penalty Notice an allowable deduction?

Answer: Yes

Question 2

Are your accounting and legal expenses for defending the bankruptcy action an allowable deduction?

Answer: No

Question 3

Are your accounting and legal expenses for seeking to annul the bankruptcy an allowable deduction?

Answer: No

Question 4

Are your accounting and legal expenses for preparing a private ruling application querying the deductibility of expenses incurred in relation to the Director Penalty Notice, defending the bankruptcy action and the annulment of the bankruptcy, an allowable deduction?

Answer: Yes

26. In the Commissioner's "Reasons for decision", which accompanied his Private Ruling, the Commissioner considered whether the 2009 Expenses and the 2010 Expenses ( Expenses ) were deductible to Gerard Healy under s 8-1 or s 25-5 of the ITAA 1997. In summary, the Commissioner concluded the following:

…….a deduction is not allowed under section 8-1 of the ITAA 1997 for your bankruptcy expenses as they are considered to be too remote from the income earning process. Also, your bankruptcy expenses are considered to be private and capital in nature.

A deduction is not allowable for your bankruptcy expenses under section 25-5 of the ITAA 1997 as the matter is not related to your tax affairs.

A deduction is allowable under section 25-5 of the ITAA 1997 for the cost of preparing your private ruling application querying the deductibility of expenses as this is a cost of managing your tax affairs.

2009 and 2010 Assessments

27. On 8 July 2011 Gerard Healy lodged (individual) income tax returns for the years ended 30 June 2009 and 30 June 2010. In his those tax returns Gerard Healy did not claim a deduction for the Expenses.

28. On 23 January 2012 the Commissioner issued Gerard Healy with Notices of Assessment for the years ended 30 June 2009 and 30 June 2010 ( Assessments ), based on the tax returns lodged by him in respect of those income years.

Objection Decision

29. On 23 March 2012 Gerard Healy objected to the Assessments ( Objection ). The main basis for the Objection was that the Expenses were deductible to Gerard Healy under s 8-1 of the ITAA 1997 and/or s 25-5 of the ITAA 1997.

30. On 24 May 2012 Gerard Healy lodged detailed submissions with the Commissioner in support of his Objection.

31. On 29 June 2012 the Commissioner disallowed Gerard Healy's Objection in so far as it related to the Expenses ( Objection Decision ).

32. The Objection Decision only considered the deductibility of the Expenses under s 8-1 of the ITAA 1997. The Objection Decision did not consider the deductibility of the Expenses under s 25-5 of the ITAA 1997.

Application to the Tribunal

33. On 5 September 2012 Gerard Mr Healy applied to the Tribunal for a review of the Objection Decision.

34. Gerard Healy's stated "Reasons for Application". in his review application (dated 3 September 2012), are as follows:

The amounts of tax assessed by the assessments the subject of the objection for the 2008, 2009 and 2010 income years lodged by or on behalf of the Applicant are excessive and should be reduced to nil, or alternatively to an amount less than the amount of each assessment issued by the Commissioner.

35. It is only the Expenses (which relate to the years ended 30 June 2009 and 30 June 2010, and not the 2008 year) which are at issue before the Tribunal.

JURISDICTION OF TRIBUNAL

36. At the commencement of the hearing of this review application, counsel for Gerard Healy sought an adjournment on the basis that the Tribunal did not have jurisdiction to review the Objection Decision. The reason for this, it was said, was that the Commissioner neglected, in his "Reasons for Decision" (attached to the Objection Decision), to consider whether Gerard Healy was entitled to a deduction for the Expenses under s 25-5 of the ITAA 1997, despite this having been raised as a ground of objection by Mr Healy in the Objections. That is, the Commissioner's "Reasons for Decision" only addressed the deductibility of the Expenses under s 8-1 of the ITAA 1997.

37. According to counsel for Gerard Healy, the Tribunal would be making an error of law, which may be appealed by Gerard Healy to the Federal Court, if it proceeded to hear the review application in such circumstances.

38. Having heard submissions from both parties on the issue of jurisdiction, the Tribunal decided to proceed to hear the review application as listed. In relation to its decision to proceed with hearing the application, the Tribunal noted that Gerard Healy (and his legal advisors, Norton & Smailes) had been aware that the "Reasons for Decision" attached to the Objection Decision did not address the deductibility of the Expenses under s 25-5 of the ITAA 1997 since 29 June 2012, when the Objection Decision was made and yet neither Gerard Healy (nor his legal advisors) had chosen to take any action about it. Instead, Gerard Healy (and his legal advisors and counsel) had chosen, on 3 September 2012 (some 2 months later) to proceed to apply to the Tribunal for a review of the Objection Decision and had then wait until the afternoon of the day before the hearing (being 25 February 2012) to seek an adjournment.

39. The Tribunal also referred to its "Hearing Policy - Listing and Adjournment Practice Direction" of the former President, Justice Garry Downes, (dated 19 April 2005) which states at [9]:

9. An application for an adjournment made less than ten working days prior to the hearing date will not be granted unless there are particular and compelling reasons for the matter to be adjourned. Applications made the day of a hearing, even when advance notice has been given, will not be granted unless there are exceptional circumstances.

40. Counsel for Gerard Healy submitted that "exceptional circumstances" existed in this case as the issue of the deductibility of the Expenses under s 25-5 of the ITAA 1997 was "not properly before the Tribunal". This argument was put by counsel for Gerard Healy despite the fact that the "Applicant's Amended Statement of Facts, Issues and Contentions" (dated 20 December 2012), which were filed with the Tribunal on 20 December 2012, clearly addresses the deductibility of the Expenses under s 25-5 of the ITAA 1997 ( Gerard Healy's SOFIC ). Similarly, the "Respondent's Statement of Facts, Issues and Contentions" (dated 12 February 2013), which was filed with the Tribunal on 12 February 2013, also considers the deductibility of the Expenses under s 25-5 of the ITAA 1997. On this basis, it can be said that the Tribunal has been aware of the issue of the deductibility of the Expenses under s 25-5 of the ITAA 1997 since at least 20 December 2012 when the Gerard Healy's SOFIC was filed with the Tribunal. As such, the Tribunal took the view that there was nothing "exceptional" about Gerard Healy's circumstances that would justify him being granting an adjournment on the morning of the hearing.

41. The Tribunal determined that its jurisdiction was enlivened by the Objection Decision itself, rather than the "Reasons for Decision" attached to that decision. That is, the Tribunal's jurisdiction exists by virtue of the Commissioner's "Notice of Objection Decision", dated 29 June 2012, (comprising 2 pages) which relevantly states:

We have also considered your objection and allowed it in part as discussed in our Reasons for Decision statement which is attached.

42. Under the Taxation Administration Act 1953 (Cth) ( TAA ), a person who is dissatisfied with an "objection decision" may, if the decision is a "reviewable objection decision", apply to the Tribunal for a review of the decision: s 14ZZ of the TAA. The expression "objection decision" is defined in s 14ZY(2) of the TAA as a decision by the Commissioner to allow, wholly or in part, or disallow a taxation objection. A "taxation objection" is an objection against an assessment, determination, notice or decision in circumstances where the objection is governed by Pt IVC of the TAA: s 14ZL(2) of the TAA. A "reviewable objection decision" is defined in s 14ZQ of the TAA as an objection decision that is not an "ineligible income tax remission decision", as defined in s 14ZS of the TAA.

43. In this case, the "Notice of Objection Decision" dated 29 June 2012 (i.e. the Objection Decision) clearly satisfies the requirements of the definition of "objection decision" in s 14ZY(2) of the TAA by stating that the Commissioner has "considered [Gerard Healy's] objection and allowed it in part": see paragraph 39 above. Further, since the Objection Decision here is clearly not an "ineligible income tax remission decision" (as defined in s 14ZS of the TAA), the Objection Decision constitutes a "reviewable objection decision" (as defined in s 14ZQ of the TAA) which may be reviewed by the Tribunal.

44. The Tribunal makes the observation that there is a difference between a "decision" and the reasons for it: see
Austin v Secretary, Department of Family and Community Services (1999) 57 ALD 330 at 337. That is, a distinction can be drawn between the Commissioner's "decision" (being his "Notice of Objection Decision") and his "Reasons for decision", attached to the decision, just as a distinction can be drawn, for example, between a "Notice of Private Ruling" (which constitutes the "decision" on a private ruling) and the "Reasons for decision" attached to that private ruling and a "Decision" of the Tribunal and the Tribunal's "Reasons for Decision", which accompany that decision.

45. Finally, as mentioned at the hearing of this application, the Tribunal is not bound by the grounds on which the decision-maker (in this case the Commissioner) reached his decision (i.e. his "Reasons for decision", attached to the Notice of Objection "decision"): see
Re Grolier Enterprises and Australian Postal Commission (1977) 1 ALD 10 at 13 - 14;
Bramwell v Repatriation Commission (1998) 51 ALD 56 at 63-68 and
Secretary, Department of Employment, Education, Training and Youth Affairs v MacKay (1998) 58 ALD 130 at 133. The Tribunal is required to reach the correct and/or preferable decision and is not constrained by the decision-maker's reasoning:
Re Queensland Mines Ltd and Expert Development Grants Board (1985) 7 ALD 357 at [20]. Further, it has been held that in merits review hearings before the Tribunal the decision-maker is not obliged to rely solely on reasons formerly advanced to support the decision under review: see
Re Jeans and Secretary, Department of Housing and Construction (1979) 2 ALD 337 at 343;
Re Greenham and Minister for Capital Territory (1979) 2 ALD 137 and
Re Parisi and Australia Federal Police (1987) 14 ALD 11 at 15. Consequently, the fact that the Commissioner did not consider the deductibility of the Expenses under s 25-5 of the ITAA 1997 in his "Reasons for decision" (attached to the Objection Decision) does not prevent him from raising that issue before the Tribunal. Further, it does not follow from the Commissioner's failure to consider the deductibility of the Expenses under s 25-5 of the ITAA 1997 in his "Reasons for decision" that the Objection Decision is not, by itself, a "reviewable objection decision" (as defined in 14ZQ of the TAA).

ISSUES

46. The issues for determination by the Tribunal are whether the Expenses are deductible pursuant to:

• (i) s 8-1 of the ITAA 1997 and, more particularly:
  • (a) whether the Expenses were "incurred" by Gerard Healy; and
  • (b) if "yes", whether the Expenses were:
    • • incurred by Gerard Healy "in gaining or producing" his assessable income within the meaning of s 8-1(1)(a) of the ITAA 1997; or
    • • losses or outgoings of:
      • • capital or of a capital nature; or
      • • a private or domestic nature

        for the purposes of s 8-1(2)(a) and (b) of the ITAA 1997.

• (ii) s 25-5 of the ITAA 1997 and, more particularly:
  • (a) whether the Expenses were "incurred" by Gerard Healy; and
  • (b) if "yes", whether the Expenses were incurred by Gerard Healy for complying with an obligation imposed on him by a Commonwealth law, insofar as that obligation relates to the tax affairs of an entity, within the meaning of s 25-5(1)(b) of the ITAA 1997; and
  • (c) if "yes", whether the Expenses were "capital expenditure" for the purposes of s 25-5(4) of the ITAA 1997.

BURDEN OF PROOF

47. Pursuant to s 14ZZK(b)(i) of the TAA, Gerard Healy bears the burden of proving that the Assessments are excessive:
Federal Commissioner of Taxation v Dalco (1990) 168 CLR 164 and
ANZ Savings Bank Ltd v Federal Commissioner of Taxation 94 ATC 4844. The standard of proof is on the balance of probabilities:
Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139 and
Re Kirby and Collector of Customs (1989) 20 ALD 369. The question for determination is whether the Assessments are wrong. This means that Gerard Healy must prove that the Assessments are excessive as well as what the correct assessments ought to be.

48. There is no onus on the Commissioner to show that the Assessments are reasonable or supported by evidence:
Gauci & Ors v Federal Commissioner of Taxation (1975) 135 CLR 81 at 89 per Mason J.

49. If Gerard Healy is unable to establish that the Assessments are excessive, then the Assessments must stand, irrespective of whether there are any facts or circumstances which would, on the face of it, support the Assessments:
McCormack v Federal Commissioner of Taxation 79 ATC 4111; 80 ATC 4179 and
Macmine Pty Ltd v Federal Commissioner of Taxation 79 ATC 4133.

EVIDENCE

Gerard Healy's evidence

50. Gerard Healy filed and served the following three witness statements:

• (i) Witness Statement, dated 7 December 2012 (which was tendered as "Exhibit A1") ( Exhibit A1 );
• (ii) Second Witness Statement, dated 20 December 2012 (which was tendered as "Exhibit A2") ( Exhibit A2 ); and
• (iii) Third Witness Statement, dated 22 February 2013 (which was tendered as "Exhibit A3") ( Exhibit A3 ).

51. Gerard Healy also appeared before the Tribunal and gave oral evidence.

52. Gerard Healy's brother, Mr Patrick Olan Healy ( Patrick Healy ), filed and served the following two witness statements:

• (i) Witness Statement, dated 7 December 2012 (which was tendered as "Exhibit A4") ( Exhibit A4 ); and
• (ii) Second Witness Statement, dated 22 February 2013 (which was tendered as "Exhibit A5") ( Exhibit A5 ).

53. Patrick Healy also appeared before the Tribunal and gave oral evidence.

Commissioner's evidence

54. The Commissioner's evidence comprises:

• (i) a copy of the "Statement of Claim" of Mr Healy in the Federal Magistrates Court bankruptcy proceeding (No. PEG 163 of 2009) (which was tendered as "Exhibit R1") ( Exhibit R1 ); and
• (ii) the "Sub-section 37 (1AB) Statement in Lieu", or the "T Documents", (which was tendered as "Exhibit R2") ( Exhibit R2 ).

RELEVANT LAW & ANALYSIS

Section 8-1 of the ITAA 1997

55. Section 8-1 of the ITAA 1997 sets out general rules for the deductibility of losses or outgoings under the ITAA 1997 (for the income year ended 30 June 1998 and subsequent income years).

56. Section 8-1 of the ITAA 97 provides, in part:

General deductions

• 8-1(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.
• 8-1(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

57. Section 8-1 consists of two positive limbs (in s 8-1(a) and (b)) and four negative limbs (in s 8-1(a) to (d)). The predecessor to s 8-1 of the ITAA 1997, s 51(1) of the Income Tax Assessment 1936 (Cth) ( ITAA 1936 ) (which applied to the income year ended 30 June 1997 and earlier income years), was in substantially similar terms to s 8-1 of the ITAA 1997. As such, case law relating to s 51(1) of the ITAA 1936 is relevant in determining the correct construction of s 8-1 of the ITAA 1997: see
Spriggs v Federal Commissioner of Taxation (2009) 239 CLR 1 at 17 [53] per the High Court of Australia (constituted by French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ).

58. In
Steele v Deputy Commissioner of Taxation (1999) 197 CLR 459 the High Court of Australia (constituted by Gleeson CJ, Gaudron and Gummow JJ) said (at 468 [24]) that:

it only becomes necessary to consider the exceptions [i.e. negative limbs] to s 51(1) [of the ITAA 1936] if has already been concluded, or accepted by hypothesis, that one or other of the positive limbs applies.

59. Only the first positive limb in s 8-1(1)(a) of the ITAA 1997 is relevant to this application since it is common ground that Mr Healy was not "carrying on a business" for the purposes of the second positive limb in s 8-1(1)(b) of the ITAA 1997.

Meaning of "incurred"

60. As a threshold issue, a loss or outgoing must generally have been "incurred" in a particular income year in order to be deductible in that year under s 8-1 of the ITAA 1997. The term "incurred" is not defined in the ITAA 1997 or the ITAA 1936.

61. Over the years the courts have developed a number of guidelines which provide some assistance in determining whether a particular loss or outgoing has been "incurred" in an income year for the purposes of s 8-1 of the ITAA 1997 (and its predecessor s 51(1) of the ITAA 1936). Broadly, a loss or outgoing is "incurred" when the taxpayer owes a present money debt which the taxpayer cannot escape.

62. In
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492 the High Court of Australia (constituted by Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ) stated (at 506), with reference to s 51(1) of the ITAA 1936, that a loss or outgoing will have been "incurred" even though it remains unpaid if the taxpayer is "definitively committed" or has "completely subjected himself" to the liability. However, the High Court observed (at 506) that:

….it is probably going too far to say that the obligation must be indefeasible.

63. Similarly, in
Nilsen Development Laboratories Pty Ltd & Ors v Federal Commissioner of Taxation 81 ATC 4031 Barwick CJ found (at 4035) that a loss or outgoing not representing a pecuniary liability of the year of income will not be "incurred". Further, Gibbs J stated (at 4037):

[W]hat is clearly necessary is that there should be a presently existing liability.

64. In
Coles Myer Finance Ltd v Federal Commissioner of Taxation (1992-93) 176 CLR 640 the majority of the High Court of Australia, relying on the reasons for judgment of Gibbs J in
Nilsen Development (1981) 144 CLR 616 at 623, stated (at 662):

[
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) CLR 492] therefore stands as authority for the proposition that a liability must be presently existing in order to be "incurred" within the meaning of s 51(1).

See also
De Simone & Anor v Federal Commissioner of Taxation 2009 ATC 20-101 wherein the Federal Court stated (at [8]):

An outgoing is incurred for the purposes of s 8-1 at least where the taxpayer is subject to an immediate obligation to pay the sum referred to ….

65. The principle that an outgoing is not "incurred" until a liability to pay the amount existed was more recently adopted by the Federal Court in
Federal Commissioner of Taxation v Malouf 2009 ATC 20-099 and later in
Sanctuary Lakes Pty Ltd v Federal Commissioner of Taxation 2012 ATC 10-255.

Agency relationship

66. In Exhibit A1, Gerard Healy states:

4. During the course of 2006, and at other times, I have suffered from ill health, as a result of which I have had difficulty managing my affairs. My brother Patrick Olan Healy has been assisting me since about October 2006 by acting as my agent in dealing with many legal and accounting issues on my behalf.

67. In Exhibit A3, Gerard Healy states:

Background to Agency Relationship

• 13. In or about August 2006, I became concerned about my ability to handle my affairs. I decided that it would be best to give Patrick a power of attorney over my affairs.
• 14. I engaged Mossensons Lawyers to prepare an Enduring Power of Attorney in favour of Patrick ('the EPA '). I recall that Patrick and I signed the EPA.
• 15. ………Mossensons Lawyers subsequently informed me that the Department of Land Information required a statutory declaration in relation to the EPA….
• 16. I recall that Mossensons Lawyers sent me a further document, which I believe[d] to be a statutory declaration, to support the EPA. It was my intention to deal with that document, however things became too hard for me and in the end I did not sign the document.

Terms of Agency Relationship

• 18. In or about October 2006 and subsequently, Patrick and I agreed that he would assist me in dealing with my various legal affairs.
• 19. My arrangement with Patrick was that he would take whatever action he thought was appropriate on my behalf (including engaging advisors) in order to assist me to deal with my legal affairs.
• 20. We agreed that Patrick would pay for expenses on my behalf, and that I would repay him when I was in a position to do so.
• 21. My arrangement with Patrick continued throughout the 2009 Year and the 2010 Year, and Patrick continues to act on my behalf in relation to my legal affairs.

68. In Exhibit A4, Patrick Healy states:

3. During the period of time from about February 2006 until about October 2006, Gerard was unwell and since about October 2006, I have acted as agent for Gerard. In that capacity, I have handled many of Gerard's legal and accounting affairs on his behalf.

69. In Exhibit A5, Patrick Healy states:

Agency Relationship

• 8. In about August 2006, Gerard approached me about his affairs. He asked me if I could deal with his affairs if anything happened to him.
• 9. At about this time, Gerard gave me a form to sign…….I understood that the form to be an enduring Power of Attorney. I signed the form. Gerard did not give me a copy of the document.
• 11. In or about October 2006 and subsequently, Gerard and I agreed that I would assist him in dealing with his various legal affairs.
• 12. Gerard authorised me to take whatever action I though was appropriate on his behalf (including engaging advisors) in order to assist him to deal with his legal affairs.
• 14. My arrangement with Gerard continued throughout the income years ending 30 June 2009….and 30 June 2010, and I continue to act on Gerard's behalf in relation to his legal affairs.

70. According to counsel for Gerard Healy, from about August 2006, Patrick Healy acted as Gerard Healy's "agent" in briefing accountants and solicitors and incurring expenses in relation to Gerard Healy's affairs and consequently Gerard Healy "incurred" the Expenses.

71. It was submitted by counsel for Gerard Healy that an "agency relationship" may arise by: (i) prior express or implied agreement, whether or not contractual, between the parties; (ii) ratification of the agents acts by the principal; or (iii) operation of law. It was said that the two elements necessary to establish an "agency relationship" are: (i) "consent" (of both principal and agent); and (ii) "authority" given by the principal to the agent. All that is necessary to establish "consent" is some acceptance by the agent of a mandate to act. There must be an instruction or request by the principal and conduct by the agent in undertaking the task or duty asked of him or her. Thus, if the principal intends that the agent act for him or her, and the agent does so, the relationship is created.

72. Importantly, argued counsel for Gerard Healy, it is not necessary that the terms of the agency be specified or written, nor is it necessary that the parties appreciate the legal significance of their arrangement an intention to create an agency may be manifested simply by placing another in a situation in which according to the ordinary rules of law, or according to the ordinary usages of mankind, that other is understood to represent and act for the person who has so placed him:
Pole v Leask (1863) 8 LT 645 at 648.

73. Counsel for Gerard Healy's contention is that the necessary elements of an "agency relationship" clearly exist in this case since:

• (i) Gerard Healy asked his brother, Patrick Healy, to assist him in dealing with his financial difficulties;
• (ii) Patrick Healy agreed he would Gerard Healy; and
• (iii) Patrick Healy undertook a range of tasks on his brother's behalf, including briefing and paying for accountants and solicitors, who were engaged in relation to Gerard's affairs, all of which Gerard Healy accepts and agrees were done on his behalf.

74. Further, according to counsel for Gerard Healy, an enduring power of attorney was signed by Gerard Healy and Patrick Healy and in August 2006: see Exhibit A3 at [13]-[17] and Exhibit A5 at [8]-[10], which is sufficient of itself to create a legally recognised "agency relationship": Laws of Australia TLA [8.1.10]. However, even if the enduring power of attorney failed at law, as it was never registered with Landgate (as Gerard Healy failed to execute and provide the necessary statutory declaration in support of the enduring power of attorney or otherwise by reason of some lack of compliance with the formalities), its execution by both brothers is evidence of the intention of both brothers that an "agency relationship" be created and is sufficient to evidence the existence of an "agency relationship".

75. In contrast, counsel for the Commissioner's submitted that the Expenses were not "incurred" by Gerard Healy and that the existence of an "agency relationship" between Gerard Healy and, his brother, Patrick Healy is irrelevant to the question whether Gerard Healy "incurred" the Expenses for the purposes of s 8-1(1)(a) of the ITAA 1997.

Payment of Expenses

76. In Exhibit A1, Gerard Healy states:

56. Some of the accounting and legal expenses that I incurred during the 2009 Year and the 2010 year were paid for my brother, Patrick who was acting and continues to act as my agent. Some of the advisors issued tax invoices in Patrick's name due to my bankruptcy. Patrick paid the invoices solely as my agent.

77. In Exhibit A3, Gerard Healy states:

Payment of Expenses

• 22. Between about January 2007 and the present time, Patrick instructed several accounting and legal advisors on my behalf. These advisors predominantly issued invoices due to my bankruptcy. Patrick paid those invoices on my behalf under the arrangement we have.
• 23. Between 2007 and the present time, I have not had enough money to repay Patrick in full for all the expenses he has incurred on my behalf and my options to obtain credit facilities have been limited as I was still the subject of a sequestration order until about 8 December 2010. I also had to pay child support from or about March 2004 to 21 June 2011.
• 24. I intend to repay Patrick for the expenses incurred on my behalf when I am in a position to do so. To this end, Patrick and I have discussed various business opportunities that I could establish and manage to generate additional income including fertiliser packaging and residential property development operations.

78. In Exhibit A4, Patrick Healy states (at [5]) that during the income year ended 30 June 2009 he incurred expenses totalling $15,424.20 for Gerard Healy and (at [6]) that during the income year ended 30 June 2010 he incurred expenses totalling $79,224.08 for Gerard Healy. At [7] to [9] of Exhibit A4, Patrick Healy states that he paid for all of the expenses identified in paragraphs [5] and [6], that most of the advisors issued tax invoices in his name due to his brother's bankruptcy and that he paid the invoices concerned "solely as Gerard's agent".

79. In Exhibit A5, Patrick Healy states:

13. In the course of our discussions, and given my concerns about Gerard, Gerard and I agreed that I would pay for expenses on his behalf, and that Gerard would repay me when he was in a position to do so.

Payment of expenses

• 15. During the 2009 Year and the 2010 Year, I instructed several accounting and legal advisors on Gerard's behalf.
• 16. Most of the legal advisors issued invoices to me. The work they did involved work for Gerard. I paid those invoices on Gerard's behalf. I expect to be paid back when Gerard can pay me.
• 17. Gerard paid for some of the smaller out of pocket expenses from his own funds.
• 18. I know there is little likelihood that Gerard will be able to reimburse me immediately for all of the legal and accounting expenses that I have paid on his behalf. However, I expect that over a number of years, Gerard's fortunes may well improve and he will then repay me as funds become available.

80. The evidence of Gerard Healy and his brother Patrick Healy as set out in their various witness statements, as well as in their testimony before the Tribunal, is that Patrick Healy paid for most, if not all, of the Expenses: Exhibit A1 at [1] to [56], Exhibit A3 at [4] to [24], Exhibit A4 at [2] to [18] and Transcript at p17 lines 8-9, 18-19 and 23-29.

81. A comparison of the tables of Expenses in Exhibit A1 at [53] and [55] and Exhibit A4 at [5] and [7] suggests that Gerard Healy paid $6,030 out of the total amount of the Expenses and that Patrick Healy paid the balance. However, in cross-examination, Patrick Healy said that to the best of his knowledge, his brother paid for all of the Expenses: Transcript at p 17 lines 25 - 29.

82. As such the evidence before the Tribunal as to whether Patrick Healy paid for all or just most of the Expenses is conflicting.

83. However, it is clear on the evidence before the Tribunal that Gerard Healy has not reimbursed his brother, Patrick Healy, for any of the Expenses paid for by Patrick Healy: Transcript at p 17, lines 31-33, p 19 lines 29-30 and p 30 lines 16-17.

Tribunal's view on whether the Expenses were "incurred" by Gerard Healy

84. The Tribunal agrees with the Commissioner's submission that the existence of an "agency relationship" between Gerard Healy and Patrick Healy is irrelevant to the question whether Gerard Healy "incurred" the Expenses for the purposes of s 8-1(1)(a) of the ITAA 1997.

85. The Expenses are "incurred" in the relevant income year if Gerard Healy owes a present money debt to Patrick Healy or, put another way, there is a presently existing liability on the part of Gerard Healy to make reimbursement to Patrick Healy of the Expenses paid by him on Gerard Healy's behalf: James Flood; Nilsen Development; Coles Myer; De Simone; Malouf and Sanctuary Lakes. This is so irrespective of whether an "agency relationship" exists between the brothers.

86. As stated above, there is no evidence before the Tribunal that Gerard Healy re-paid the expenses to his brother Patrick Healy. However, more importantly there is no evidence before the Tribunal that Gerard Healy is legally obligated to do so: Transcript at p 17 lines 31-33, p 19 lines 29-30 and p 30 lines 16-17 and James Flood; Nilsen Development; Coles Myer; De Simone; Malouf and Sanctuary Lakes.

87. Exhibit A3 at [5], [6], [18] to [24] and Exhibit A5 at [4] and [18] and the oral evidence of Gerard Healy and Patrick Healy before the Tribunal establish that Gerard Healy's obligation to reimburse Patrick Healy was in honour only, akin to a "gentleman's agreement" between the brothers. It is entirely in the hands of Gerard Healy to decide when he was able to repay his brother, if ever: Transcript at p 18, lines 33-46, p 19 lines, 1-14 and 24-37, p 31, lines 4047 and p 32, lines 1-18. In the Tribunal's view this is insufficient to establish a presently existing liability on the part of Gerard Healy to reimburse Patrick Healy for the Expenses paid for by him or a present money debt that Gerard Healy cannot escape: James Flood; Nilsen Development; Coles Myer; De Simone; Malouf and Sanctuary Lakes.

88. It follows, in the Tribunal's view, that with the exception of the Expenses, if any, that Gerard Healy paid for himself (refer to the discussion of the evidence on this issue in paragraphs 80 to 82 above), Gerard Healy did not "incur" the Expenses.

89. Having reached this view, it is strictly unnecessary for the Tribunal to go on and consider the deductibility of the Expenses under s 8-1 and s 25-5 of the ITAA 1997. However, for completeness, the Tribunal has done so below.

Incurred "in gaining or producing assessable income"

90. The words "incurred in gaining or producing your assessable income" have long been held to mean incurred "in the course of" gaining or producing your income
Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Dixon J.

91. The question as reinstated by the High Court in
Commissioner of Taxation v Payne (2001) 202 CLR 93 at 99 [9] is:

….is the occasion of the outgoing found in whatever is productive of actual or expected income?

See also
Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 8 ATD 431; (1949) 78 CLR 47 at 436 [57].

92. Thus, essential to the inquiry whether a loss or outgoing was incurred "in the course of" gaining or producing actual or expected income is the determination of what it is that is productive of assessable income: see
Federal Commissioner of Taxation v Day (2008) 236 CLR 163 at 179 [31] per Gummow, Hayne, Heydon and Keifel JJ.

93. The words require more than a mere causal connection between the expenditure and the derivation of assessable income. What must be shown is a closer and more immediate connection:
Day (2008) 236 CLR 163 at 176 [22] per Gummow, Hayne, Heydon and Keifel JJ, referring to
Payne (2001) 202 CLR 93 at 101 [13]. That is, the loss or outgoing must have been incurred "in" gaining or producing assessable income.

94. What is required is an objective:

• (i) identification of the "occasion" for the loss or outgoing;
• (ii) identification of the "activity" that is "productive" of the assessable income in question; and
• (iii) a determination whether the loss or outgoing can be properly regarded as having been incurred in the course of that activity: see
  Federal Commissioner of Taxation v Anstis [2010] HCA 40; (2010) 241 CLR 443 and
  Federal Commissioner of Taxation v Visy Industries USA Pty Ltd [2012] FCAFC 106; (2012) 205 FCR 317.

95. What makes the outgoing deductible under s 8-1 of the ITAA 1997 is the existence of a sufficient connection, a "link" or "nexus", between the loss or outgoing and the production of assessable income. A taxpayer's subjective purpose in incurring a loss or outgoing is not normally relevant to whether a sufficient connection exists.

96. In
Federal Commissioner of Taxation v Firth 2002 ATC 4346 Hill J (at 4348) describes the "essential character" test, which has repeatedly been applied by the courts to determine whether the necessary "link" or "nexus" exists, as follows:

…….It is sometimes said that there must be a 'perceived connection' between the loss or outgoing and the assessable income or business:
FC of T v Hatchett 71 ATC 4184 at 4187….In other cases it has been said that the expenditure must be 'incidental and relevant' to the operations and activities regularly carried on by the taxpayer for the production of income:
Ronpibon Tin NL & Tongkah Compound NL v FC of T (1949) 8 ATD 431 at 435;
(1940) 78 CLR 47 at 56,
FC of T v Smith 81 ATC 4114 at 4117. These ways of describing the connection that is a necessary prerequisite to deductibility are but part of the process of identifying the essential character of the expenditure to determine whether a particular loss or outgoing is in fact incurred in gaining or producing the assessable income….:
Lunney v FC of T (1958) 11 ATD 404; (1957-1958) 100 CLR 478 …

97. Based on the evidence before the Tribunal, the Expenses are all accounting and legal expenses: Exhibit A1 at [53] to [55] and documents 35-49, pp 218ff and Transcript at p 22, lines 39 and 40. More specifically, the Expenses concern two discrete subjects, being: (i) annulment of Gerard Healy's bankruptcy; and (ii) challenge to four proofs of debt lodged by Mr Lean as liquidator of WCS, Falaren, Gemwalk and North Wanneroo: Exhibit A1 at [1] to [48] and [52] to [55], Exhibit R1 and Transcript at p22, lines 42-46, pp 23 and 24 and p25, lines 1-35.

98. The Expenses for 2009 all relate to proof of debt expenses: Transcript at p 24, lines 46 and 47 and p 25 lines 1-8. The Expenses for 2010 relate to bankruptcy annulment expenses and proof of debt expenses: Transcript at p 25, lines 14-24.

99. In the 2009 and 2010 income years (which are relevant here), Gerard Healy was employed as a public servant and derived assessable income from such employment in the amounts of $84,330 and $85,809 respectively. There was clearly no connection between the Expenses and the assessable income which Gerard Healy earned as a public servant in the 2009 and 2010 years.

100. Instead, any claim for deductibility must be based on Gerard Healy's former role as a director of WCS in the years preceding its administration/liquidation and his bankruptcy. According to Gerard Healy's SOFIC (at [9]) and Exhibit A1 (at [17]), in the 2005 year Gerard Healy earned directors fees of $28,000 from his employment as a director of WCS and in the 2006 year he earned directors fees of $27,000 from his employment as a director of WCS. On the evidence before the Tribunal, he did not derive any income from his role as a director of WCS in the 2009 and 2010 years.

101. Based on the facts and evidence before it, the Tribunal considers that the Expenses were not incurred "in the course of" Gerard Healy deriving assessable income from undertaking the duties of his employment as a director of WCS. WCS was placed into administration on 12 September 2006 and on 2 March 2007 WCS was wound up. Gerard Healy became a bankrupt on 19 November 2007 and was then precluded from holding office as a director of WCS. Accordingly, there was no actual or expected income as a director of WCS in the 2009 and 2010 financial years: Amalgamated Zinc; Ronpibon; Payne and Day.

102. According to counsel for Gerard Healy, the Expenses were so intimately connected with Gerard Healy's paid role as a director of WCS, for which he was exposed to the Director Penalty Notice and which ultimately led him to instituting the Proceedings so as to have been incurred "in the course of" his income earning activities as a director of WCS. As such, it was submitted, there is sufficient nexus between the Expenses and Gerard Healy's actual or expected income as a director of WCS in 2005 and 2006.

103. As submitted by the Commissioner, it is the Tribunal's opinion that even if Gerard Healy's role as director of WCS in 2005 and 2006, and its concomitant duties, was productive of actual or expected income, that alone is not enough to satisfy the requirements of s 8-1(1)(a) of the ITAA 1997. This is because s 8-1(1)(a) requires an examination of the "occasion" for the relevant outgoings and consideration of whether there is a sufficient connection between that "occasion" and Gerard Healy's role as a director of WCS in 2005 and 2006.

104. As regards what was the "occasion" of the expenses, based on the evidence before the Tribunal, there are two:

• (i) Gerard Healy's challenge to the admission to proof of the proofs of debt of the four related companies (WCS, Falaren, Gemwalk and North Wanneroo) by Mr Lean in his bankruptcy. On the evidence, this appears to account for all of the accounting investigation component of the Expenses and that part of the Expenses which relate to the bankruptcy annulment and proof of debt proceedings; and
• (ii) Gerard Healy's challenge to the sequestration order by his application for the annulment of his bankruptcy to remove him from the status and stigma of being a bankrupt and to restore his personal good name, reputation and financial position: Transcript at p 24, lines 15 and 16.

105. Based on the evidence, Gerard Healy's accounting investigations and the Proceedings, being the "occasions" of the losses outgoings in dispute, do not have any connection, let alone a "sufficient" link, nexus or connection, with the his duties as a director of WCS to be deductible under s 8-1(1)(a) ITAA97: Firth;
Federal Commissioner of Taxation v Hatchett 71 ATC 4184; Ronpibon;
Federal Commissioner of Taxation v Smith 81 ATC 4114;
Lunney v Federal Commissioner of Taxation (1958) 11 ATD 404; (1957-1958) 100 CLR 478; Anstis and Visy Industries.

106. In the Tribunal's view, the Expenses had nothing to do with the "course" of the Gerard Healy's income producing employment as a director of WCS. Thus, consistent with the authorities, Gerard Healy's incurring of the Expenses cannot be classified as having the "essential character" of income-producing expenses: Firth; Hatchett; Ronpibon; Smith; and Lunney.

107. That is, the Tribunal considers, based on the totality of facts and evidence before it, that the Expenses are not "incidental and relevant" to Gerard Healy's income-producing activities as a director of WCS (Firth; Ronpibon and Smith), nor do they have a "perceived connection" with gaining or production of assessable income by him (Firth and Hatchett). The "link" or "nexus" between the Expenses and the production of assessable income by Gerard Healy is, in short, insufficient or too remote for the Expenses to be deductible under s 8-1(1)(a) of the ITAA 1997: Firth, Day, Anstis and Visy Industries.

108. In the Tribunals' opinion the Expenses do not, as was suggested by counsel for Gerard Healy, concern Gerard Healy's compliance with or failure to comply with the Director Penalty Notice, nor any dispute as to whether Gerard Healy complied with the Director Penalty Notice. Rather, based on the facts and evidence, the Expenses arose well after Gerard Healy's time for compliance with the Director Penalty Notice. Indeed, in cross-examination Gerard Healy confirmed that the Proceedings did not involve a challenge to the Commissioner's claim that he failed to comply with the Director Penalty Notice: Transcript at p 24, lines 28-31 and Exhibit R1.

Loss or outgoing of capital or of a capital nature - s 8-1(2)(a) of the ITAA 1997

109. The starting point for determining whether an outgoing is on a capital or revenue account is consideration of the criteria identified in the judgment of Dixon J in
Sun Newspapers Ltd and Associated Newspapers Ltd v Federal Commissioner of Taxation (1938) 61 CLR 337. His Honour summarised the criteria (at 359) as follows:

The distinction between expenditure and outgoings on revenue account and on capital account corresponds with the distinction between the business entity, structure or organization set up or established for the earning of profit and the process by which such an organization operates to obtain regular returns by means of regular outlay, the difference between the outlay and the returns representing profit or loss.

110. His Honour continued (at 363):

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, (c) the means adopted to obtain it; that is, by providing periodical reward or outlay to cover its use or enjoyment for periods commensurate with the payment or by making a final provisional payment so as to secure future use and enjoyment.

111. Later, in
Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 643, Dixon J stated (at 647 and 648-649):

The facts upon which the case before us must be decided present in a somewhat unusual aspect the elements or factors governing the distinction. The claim is to deduct legal expenses, and legal expenses, we may assume, take the quality of an outgoing of a capital nature or of an outgoing on account of revenue from the cause or the purpose of incurring the expenditure. We are, therefore, remitted to a consideration of the object in view when the legal proceedings were undertaken, or the situation which impelled the taxpayer to undertake them.

…

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 jurisdiction classification of the legal rights, if any, secured, employed or exhausted in the process."

112. The character of the advantage sought has come to be regarded as the guiding factor in ascertaining whether a loss or outgoing is capital or revenue in nature:
GP International Pipecoaters Pty Ltd v Federal Commissioner of Taxation (1990) 170 CLR 124 at 137 per the Court, constituted by Brennan, Dawson, Toohey, Gaudron and McHugh JJ,
Federal Commissioner of Taxation v Email Ltd (1999) 42 ATR 698 at 704 at [34] per the Court, constituted by Hill, Drummond and Sackville JJ and
Magna Alloys & Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 at 191 per Brennan J.

113. According to counsel for Gerard Healy, s 8-1(2)(a) of the ITAA 1997 is not satisfied in this case since the character of the advantage sought by Gerard Healy in incurring the Expenses was the annulment of the bankruptcy brought about directly by his alleged failure to comply with a Director Penalty Notice, the non-compliance with which is in issue and the "advantage" is to right the wrong of the Sequestration Order, which should never have been made.

114. However, based on the facts and evidence before it, the Tribunal considers that the Expenses were a 'one-off' series of expenditures which were incurred to remove Gerard Healy from his status, and the stigma, of being bankrupt and to restore his personal good name, reputation and financial position: Transcript at p 24, lines 15-16. Consequently, the predominant "advantage" sought by Gerard Healy in incurring the Expenses was to obtain an enduring benefit of a capital nature, being the avoidance of, or removal from, the status of being a bankrupt. It follows, in the Tribunal's view, that the Expenses are "capital" in nature. That is, as the "advantage" to be gained is of a capital nature, then the Expenses incurred in gaining that advantage will also be of a capital nature: Sun Newspapers; Hallstroms; GP International; Email and Magna Alloys.

115. Thus, the Expenses would be precluded from being deductible under s 8-1(2)(a) of the ITAA 1997 (i.e. if the Tribunal had not already found that the Expenses were not "incurred" be Gerard Healy "in the course of" gaining or producing his assessable income for the purposes of s 8-1(1)(a) of the ITAA 1997).

Loss or outgoing of a private or domestic nature - s 8(2)(b) of the ITAA 1997

116. To determine whether a loss or outgoing is of a private nature it is necessary to:

• (i) identify the "essential character" of the loss or outgoing:
  Handley v Federal Commissioner of Taxation (1981) 148 CLR 182 at 194 per Mason J;
  Commissioner of Taxation v Forsyth (1981) 148 CLR 203 at 216-217 per Wilson J and
  Commissioner of Taxation v Cooper (1991) 29 FCR 177 at 182 per Lockhart J and 201 per Hill J; and
• (ii) ask whether it is in the nature of a "working expense":
  Cooper (1991) 29 FCR 177 at 197 per Hill J.

117. The "essential character" of the Expenses in this case is not, in the Tribunal's view, that of a "working expense": Cooper. That is, the Expenses were not "working expenses" incurred by Gerard Healy in the course of his employment duties as a director of WCS. The Expenses incurred in relation to the Proceedings sought to remove Gerard Healy from his bankruptcy. Gerard Healy said himself that the Expenses were incurred to remove him from his status, and the stigma, of being bankrupt: Transcript at p 24, lines 15-16. This objective is inherently private in nature: Handley; Forsyth and Cooper. Similarly, in re-examination before the Tribunal (Transcript at p 26, lines 35-37), Gerard Healy stated that the purpose of the Proceedings was:

……to write (sic) the wrong of being bankrupted unjustly and to recover to the extent that was possible my financial position.

118. Consequently, the Expenses would be excluded from deductibility as being of a private nature under s 8-1(2)(b) of the ITAA 1997 (i.e. if the Tribunal had not already determined that the Expenses were not "incurred" be Gerard Healy "in the course of" gaining or producing his assessable income for the purposes of s 8-1(1)(a) of the ITAA 1997).

Section 25-5 of the ITAA 1997

119. Section 25-5 of the ITAA 1997 allows a deduction for tax related expenses, comprising expenses incurred by a taxpayer in managing his or her own tax affairs and in complying with a legal obligation in relation to another taxpayer's tax affairs.

120. Sections 25-5 of the ITAA 1997 states:

25-5 Tax-related expenses

• (1) You can deduct expenditure you incur to the extent that it is for:
  • (a) managing your *tax affairs; or
  • (b) complying with an obligation imposed on you by a *Commonwealth law, insofar as that obligation relates to the *tax affairs of an entity; or

• (3) You cannot deduct expenditure under subsection (1) to the extent that a provision of this Act (except section 8-1) expressly prevents or limits your deducting it under section 8-1 (about general deductions). It does not matter whether the provision specifically refers to section 8-1.

  No deduction for capital expenditure

• (4) You cannot deduct capital expenditure under subsection (1). However, for this purpose, expenditure is not capital expenditure merely because the *tax affairs concerned relate to matters of a capital nature.

121. "Tax affairs" is defined in s 995-5 of the ITAA 1997 as:

tax affairs relating to tax

122. "Tax" is defined in s 995-5 of the ITAA 1997 as:

• (a) income tax imposed by the Income Tax Act 1986, as assessed under this Act; or
• (b) income tax imposed as such by any other Act, as assessed under this Act.

123. The definition of "tax" is broad enough, therefore, to include amounts withheld or due under the PAYG system, withholding tax, franking deficit tax and the Medicare levy.

124. "Entity" as used in s 25-5(1)(b) of the ITAA 1997 is defined in s 960-100(1)(b) of the ITAA 1997 to include a body corporate.

125. Section 25-1(1)(b) ITAA 97 is the only positive limb at issue in this application.

126. The words used in s 25-5(1)(b) of the ITAA 1997 require that:

• (i) expenditure be "incurred" by a taxpayer;
• (ii) the expenditure is incurred by the taxpayer to "comply" with an "obligation";
• (iii) the obligation be one which is imposed on the taxpayer by a Commonwealth law; and
• (ii) the obligation be one that relates to the "tax affairs" of another taxpayer

127. It is common ground, given the authorities on s 25-5(1)(b) of the ITAA 1997, that the provision may include expenses for advice on, and management and compliance with, a directory penalty notice issued to a taxpayer pursuant to s 222AOE of the ITAA 1936: see discussion below under the heading "Obligation relates to the 'tax affairs' of another taxpayer".

Whether Expenses "incurred"

128. Like s 8-1(1)(a) of the ITAA 1997, s 25-5(1)(b) of the ITAA 1997 requires that the relevant expense be "incurred" by the taxpayer concerned. For the same reasons as set out above (in paragraphs 60 to 65 and 84 to 88), the Tribunal considers that Gerard Healy did not "incur" the Expenses and, therefore, is not entitled to a deduction for them under s 25-5(1)(b) of the ITAA 1997. That being said, the Tribunal has nevertheless considered the application of s 25-5(1)(b) to the facts in this case below.

Expenditure incurred to "comply" with an "obligation" imposed by a Commonwealth law

129. The relevant "obligation", according to Gerard Healy, is his "obligation" to ensure compliance with the Director Penalty Notice, issued under s 222AOE of the ITAA 1936, within 14 days after being given it: see Gerard Healy's SOFIC at [14] and Exhibit A1, at document 12, p 80. This "obligation" arises out of Part IV of Division 9 of the ITAA 1936 (titled "Penalties for directors of non-remitting companies"), which was appealed effective 1 July 2010: see s 222ANA of the ITAA 1936 which explains the "Object and outline" of Division 9.

130. The "obligation" it is said was imposed on Gerard Healy, as a director of WCS, pursuant to 222AOB(1) of the ITAA 1936, to do one of four things, being: (i) to cause WCS to comply; (ii) to make a remittance agreement with the Commissioner; (iii) appoint an administrator; or (iv) commence WCS to be wound up. Section 222AOB(2) of the ITAA 1936 states when the "obligation" is complied with, essentially being when one of the four things just mentioned has occurred, and s 222AOB(3) of the ITAA 1936 states that the obligation is a continuing obligation until it is complied with.

131. Gerard Healy's "obligation" under s 222AOB(1) of the ITAA 1936 ceased on the appointment of an administrator to WCS on 12 September 2006: Exhibit A1 at [26] and document 13 at p 90 ff. The Expenses were all incurred after 12 September 2006. As submitted by the Commissioner, s 25-5(1)(b) of the ITAA 1997 is therefore inapplicable on its face and the Expenses, it follows, could not have been incurred by Gerard Healy in compliance with his "obligation" under s 222AOB(1) of the ITAA 1936.

132. The Expenses here were, as discussed, bankruptcy annulment expenses and proof of debt expenses. These are, as submitted by the Commissioner, in the Tribunal's view matters manifestly separate and distinct from advice as to management of or compliance with the relevant "obligation". The nature of the Expenses means that none of them can be characterised as having been incurred in compliance with the relevant "obligation", being the "obligation" to do at least one of the four things listed in s 222AOB(1) of the ITAA 1936.

133. Further, the Tribunal agrees with the Commissioner's submission that the Expenses here are even more remote than the expenses considered by Hill J (at first instance) in
Bartlett v Federal Commissioner of Taxation;
Falcetta v Federal Commissioner of Taxation (2003) 54 ATR 261 and on appeal by the Full Federal Court in
Falcetta v Federal Commissioner of Taxation (2004) 56 ATR 59, which expenses related to dealings with an administrator/liquidator, creditors and a deed of company arrangement. As discussed in more detail below, both Hill J and the Full Federal Court rejected the submission that such expenses could be deducted under s 25-5(1)(b) of ITAA 1997.

Obligation relates to the "tax affairs" of another taxpayer

134. In
Falcetta (2004) 56 ATR 59, the Full Federal Court (constituted by Ryan, French and Nicholson JJ) considered the deductibility under s 25-5 of the ITAA 1997 of fees paid to a Mr Cassaniti, the accountant for Messrs Bartlett and Falcetta, relating to their personal "tax affairs' and matters connected to the affairs of companies of which they were directors.

135. The Court summarised the key issue (at 61) as:

…whether amounts paid by Mr Falcetta to Mr Cassaniti in respect of attendances or advice by that tax agent or his professional staff leading to the liquidation of the company, of which Mr Falcetta was a director and public officer, in the 14 day period following the receipt of the director penalty notices fell within section 25-5 (1) of the ITAA 1997.

136. The Court referred (at 64) to the primary judge's (Hill J's) view that tax related expenses should include "obligations imposed upon a taxpayer where he or she was the public officer of some company or trust estate" and (at 65) that the definition of "tax affairs" was intended to include deductions for "payments for "advice" concerning provisional tax, group tax or prescribed payment deductions and obligations in respect thereof." On appeal, the parties did not seek to challenge the primary judge's construction of s 25-5 of the ITAA 1997: see
(2004) 56 ATR 59 at 64 [18].

137. In Bartlett; Falcetta, the primary judge, Hill J, considered (at
(2003) 54 ATR 261 at 278) that fees for advice related to group tax or prescribed payments and fees for the preparation of tax returns for Mr Falcetta and Mr Bartlett personally, or for companies of which they were public officers, were deductible. However, Hill J stated (at 278 [81]) that:

I do not think that advice concerning incorporation of a new company to trade once [the company] was placed into administration or advice concerning [Mr Falcetta's] personal liability to creditors as such would fall within [section 25-5 of the ITAA 1997], even if one of the creditors was the Commissioner for group tax or prescribed payment deductions not withheld or remitted.

Attendances concerning the deed of company arrangement and meetings with the administrator of [the company], or of creditors of that company and attendances concerning the liquidation of [the company] in my view would not fall within [s 25-5 of the ITAA 1997], nor would attendances on solicitors in connection with these matters.

138. The Full Federal Court upheld Hill J's reasoning on appeal: see
(2004) 56 ATR 59 at 67 [35]. The Full Court expressly agreed with Hill J's view that "attendances concerning the deed of [company] arrangement and attendances at meetings with the administrator of [a company], or of creditors of that company and attendances concerning the liquidation of [a company]" would not fall within s 25-5 of the ITAA 1997:
(2004) 56 ATR 59 at 67 [10].

139. The Full Court also upheld Hill J's decision to disallow expenses relating to advice concerning Mr Falcetta's personal liability to creditors, even if one of the creditors was the Commissioner. Further, at
(2004) 56 ATR 59 at 67 [32] the Full Court stated:

….the items listed in s 25-5(1) in respect of which a deduction may be claimed in the event they constitute expenditure incurred by the taxpayer are not limited to advice and extend to management and compliance.

140. Accordingly, pursuant to Falcetta, expenses deductible under s 25-5 of the ITAA 1997, as they relate to the "tax affairs" of another entity, include expenses for preparing income tax returns, managing and complying with a director penalty notice and obtaining advice on these issues. That is, Falcetta establishes that a taxpayer can deduct under s 25-5 of the ITAA 1997 expenses incurred in the management and compliance of a director penalty notice.

141. However, as discussed above, none of the Expenses in this case were incurred to comply or manage compliance with the Director Penalty Notice. Instead, based on the facts and evidence before it, the Tribunal considers the nature of the Expenses was twofold: (i) accounting investigation expenses; and (ii) legal expenses as to the Proceedings. Consequently, the Expenses do not satisfy the requirement in s 25-5(1)(b) of the ITAA 1997 that the relevant "obligation" relate to the "tax affairs" of another taxpayer: Bartlett; Falcetta and Falcetta.

142. Counsel for Gerard Healy made the following submissions concerning the deductibility of the Expenses under s 25-5(1)(b) of the ITAA 1997:

• 36. In 2009, [Gerard Healy] incurred expenses by engaging Judge Constable, Royal Cornell and Maria Hall & Associates to provide accounting advice for the specific purpose of attacking the bankruptcy, it having been brought as a direct result of the issue of the director penalty notice. The substantive issue which was then, and remains, alive in the Federal Court Proceedings is whether the director penalty notice was in fact complied with in time. If Mr Healy is correct in his contention that it was complied with, neither the District Court judgment nor the bankruptcy sequestration orders were regularly obtained, hence the relationship between the expenses incurred in obtaining accounting advice in 2009 and compliance with the director penalty notice is direct and clear and falls within the boundaries of the decision in Falcetta.
• 37. In 2010, [Gerard Healy] incurred expenses by engaging De Vita + Dixon and Peter Lark & Co and by paying mandatory fees in the Federal Court and Federal Magistrate's Court directly related to the Federal Court Proceedings, seeking to overturn the bankruptcy.
• 38. In both 2009 and 2010, it was an essential component of the advice given and work done for [Gerard Healy] in seeking to overturn the bankruptcy to deal with issues arising out of [Mr] Lean ['s] proofs of debt for Falaren, Gemwalk, North Wanneroo Gas and [WCS]. This ought not detract from the central aim of the advice: to overturn the bankruptcy occasioned by the incorrect assertion by the Commissioner that the director penalty notice was not complied with.

143. The Tribunal is in agreement with the Commissioner that this argument is, with respect, misconceives. That is, as submitted by the Commissioner, it is simply untenable to suggest that, because the Director Penalty Notice formed the basis of the Judgment which, in turn, formed the basis of the Bankruptcy Notice, which gave rise to the act of bankruptcy relied on for the Sequestration Order, and that order is now attacked in the Proceedings, the Expenses are deductible under s 25-5(1)(b) of the ITAA 1997. If this was correct, any expense which would not have arisen "but for" the Director Penalty Notice would fall within s 25-5(1)(b). Section 25-5(1)(b) of the ITAA 1997 circumscribes deductibility of expenditure incurred in complying with an obligation imposed on a taxpayer by a Commonwealth law "insofar as that obligation relates to the tax affairs of" another taxpayer. Therefore, put simply, what is required is expenditure incurred by Gerard Healy on an obligation, imposed on him by a Commonwealth law, which relates to the tax affairs of WCS. However, based on the facts and evidence before the Tribunal, this is not what happened here. In the Tribunal's view, the Expenses do not fall within the scope of expenses which were allowed by the Full Federal Court in Falcetta.

Capital expenditure - s 25-5(4) of the ITAA 1997

144. In order to determine whether an expense is of a capital or revenue nature under s 25-5(4) of the ITAA 1997, it is necessary to apply the general principles applicable to s 8-1 of the ITAA 1997.

145. For the same reasons as set out above (in paragraphs 109 to 115) in relation to s 8-1 of the ITAA 1997, the Tribunal finds that the Expenses constitute expenditure of a capital nature and would therefore be excluded from being deductible under s 25-5(1)(b) of the ITAA 1997 pursuant to s 25-5(4) of the ITAA 1997.

DECISION

146. The Tribunal finds that Gerard Healy has not proven, on the balance of probabilities, that the Assessments are excessive: Dalco; ANZ Savings; Pochi; McCormack and Macmine.

147. For the above reasons, the Tribunal affirms the Objection Decision (dated 29 June 2012).