CASE 36/95

Members:
BJ McMahon DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 16 June 1995

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BJ McMahon (Deputy President)

Until 10 April 1992 the applicant was a member of a State Parliament. For some time prior to that, he had contemplated retiring from that position and taking up other employment in the public sector. He looked to find what he called ``a creative and constructive role through a real job of benefit to the community''. At the time, he and his wife were expecting their first child. Family considerations were therefore central to his reasons for desiring the change. His decision to move followed extensive discussions with his wife.

2. His move also followed discussions with political associates. These discussions led to the formulation of an arrangement which culminated on 10 April 1992. On that day, the applicant resigned from Parliament, the Executive Council created a senior position within the Premier's Department, and the applicant, having applied for appointment to that position following a recent advertisement by the Department, was appointed to that

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position by the Executive Council. On the same day, the Chief Executive Officer of the Department wrote to the applicant confirming arrangements for secondment of the applicant to another department and confirming that the usual public service terms for a level 4 SES officer would govern the arrangements for his employment. The chief executive officer asked the applicant when he would be available to take up duty.

3. He and his wife had taken a short holiday after the public announcement following his appointment and it was not until 23 April 1992 that he replied, indicating that he would be available to take up duty from 4 May 1992.

4. Following public and Parliamentary debate, both Houses of Parliament resolved on 28 April 1992, to request the Independent Commission against Corruption to investigate the facts and circumstances relating to the resignation of the applicant from the Parliament and his appointment to the public service, with a view to determining whether any corrupt conduct had occurred within the meaning of the relevant statute. The Commission proceeded by way of open hearing, at which various parties were represented by counsel.

5. At the hearing before me, the applicant said that at the time he felt that ``my future was at stake. I felt my job was at risk''. He did not have, as he put it, a precise picture of the power of the Commission, but he realised that a finding that was adverse to him, for all practical purposes, meant that he would be unable to take up his appointment. Accordingly he said he accepted advice to obtain legal representation. He knew he was to be called as a principal witness in the enquiry and in fact had received a subpoena to attend and to produce records.

6. Once the enquiry had been announced, the applicant agreed with his political colleagues that he should stand aside from the position to which he had by then been appointed until the conclusion of the enquiry. His understanding was that he continued to be employed, but that he would not carry out his duties. He was not paid during this time, although he believed that in due course he would take up the appointment and would earn an income from that employment. In fact, as events turned out, he did not take up the appointment and was not paid any amount.

7. There was an adverse finding against him in one respect only, namely that he had lied to journalists. There were, however, adverse findings against other persons involved in the enquiry. The applicant said that in those circumstances, he did not regard it as appropriate to take up his position. On 22 June 1992 he wrote to the Chief Executive Officer of the Department advising him of this fact. He also indicated that he would not be seeking any compensation. Apart from the Executive Council appointment, the preliminary correspondence concerning the date on which the applicant intended to take up the employment and the letter confirming that he did not intend to proceed, the applicant had no other connection with the position which had been created. At no time did he carry out any duties, occupy an office, receive any salary or receive any other benefit that a senior executive service appointee might reasonably expect.

8. The applicant paid $65,000 for legal representation before the Commission in the financial year ended 30 June 1992. His claim for a deduction of that amount under s 51 of the Income Tax Assessment Act was refused and, on objection, the refusal was affirmed. This application is brought to review the objection decision.

9. The applicant said that his purpose in obtaining representation was ``a combination of self preservation and my future in the job''. He sought to obtain a favourable result and considered that this was more easily obtained if he had legal representation. He said that counsel would enable him to make a more effective statement in an organised way and would be able to cross-examine other witnesses much more capably than he, the applicant, could have done. He said: ``Without lawyers I would not have been able to effectively defend myself, that is to say to defend my position to which I was appointed''.

10. Section 51 excludes as allowable deductions, losses or outgoings of a private or domestic nature. One of the grounds for rejecting the applicant's claim upon which the Commissioner relied was that the expenditure was incurred for private reasons in 2 respects. Firstly it was said that the expenditure was incurred to protect the applicant's reputation, which is a private matter. I accept the applicant's evidence that his object was not to protect his reputation as such, but to protect it only to the extent relevant to his ability to take

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up his position. In my view such an object can not fairly be described as private.

11. The second basis for the privacy allegation related to the way in which some of the hearing was conducted. The applicant was compelled to produce certain diaries to the Commission. A good deal of time was spent during the hearing (according to the transcript which was made available as part of the s 37 documents) in ensuring that material which the applicant considered to be private to him, and irrelevant to the Commission's deliberations, was excluded from the public domain. The applicant also gave evidence before me that he had spent some time with his counsel instructing him as to these private parts of the diaries. He insisted however that this was ``a minor aspect'' of his relationship with his counsel. He was not challenged on this and I have no reason to disbelieve him. Although part of the expenditure may have been incurred for purposes relating to matters of privacy, no basis has been suggested for an apportionment. I accept the applicant's evidence that the vast majority of the amount involved was incurred in pursuit of the applicant's object, namely to preserve his future employment position. He affirmed his belief that an adverse decision would have affected his ability to serve the public in a creative way. If he were deprived of the opportunity of doing this, he thought ``our entire family future would be at stake''.

12. The real question for determination is whether the expenditure was of a capital nature, in that it was incurred with the object of defending a future income stream or what has been referred to as a ``profit earning subject'' (
Sun Newspapers Ltd and Associated Newspapers Ltd v FC of T (1938) 5 ATD 87 at 95; (1938) 61 CLR 337 at 361).

13. There are a large number of cases which have dealt with the distinction between losses and outgoings which are allowable deductions where other qualifying conditions apply, and those which are not allowable deductions because they are of a capital nature. Many of them were cited in argument before me. Most of them however are illustrations or applications of basic principles which have been laid down in the landmark cases and which have been affirmed over the years.

14. The first task is to establish the ``object in view''. In
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190 at 194-195; (1946) 72 CLR 634 at 647 Dixon J said-

``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 of the situation which impelled the taxpayer to undertake them.''

15. Although this was a dissenting judgment, it was approved by the High Court in
Broken Hill Theatres Pty Ltd v FC of T (1952) 9 ATD 423 at 424; (1951-1952) 85 CLR 423 at 434 and has generally been considered since then to be the preferred view. Its most recent affirmation with approval was by Burchett J in
Creer v FC of T 94 ATC 4454 at 4457.

16. As I have indicated, the object of the applicant was to take up the position in the public service to which he had been appointed. The object of the expenditure was to enable this aspiration to be achieved. Was expenditure with this object expenditure of a capital nature, being expenditure in defence of a profit earning subject, or was it expenditure that could properly be described as a working expense incurred in relation to the applicant's employment?

17. In Sun Newspapers Limited at ATD page 96; CLR page 363 Dixon J referred to 3 criteria in a passage which is often quoted as offering some guide to the distinguishing features of capital expenditure. The first matter for consideration His Honour suggested, would be the character of the advantage sought and whether it had lasting qualities. Clearly what the applicant sought here was a favourable report from the Commission which he believed would give him the ability to take up his appointment. If he did not receive this favourable report, he realised that for all practical purposes he would not have that ability. In other words, the proceedings of the Commission were a direct attack on his future income stream.

18. The second matter for consideration suggested by Dixon J was the manner in which the advantage sought was to be used, relied upon or enjoyed. Under this heading, His Honour indicated that recurrence could play a part. There is no element of recurrence in the

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expenditure which the applicant incurred. The enquiry was unique. It is not conceivable that the applicant would be involved in another similar enquiry. The expenditure, in other words, was a one off expenditure. It was incurred once to protect an advantage of ``enduring benefit'' (
British Insulated and Helsby Cables Ltd v Atherton (Inspector of Taxes) [1926] AC 205 at 213).

19. The legal proceedings in which the applicant found himself can be contrasted with those considered in other cases where taxpayers have incurred expenditure in defending actions taken in the course of earning income as an employee. In all such cases, that expenditure has arisen from the employee's day to day activities as such. Thus in
FC of T v Snowden and Willson Pty Ltd (1958) 11 ATD 463 at 465; (1958) 99 CLR 431 at 437, Dixon CJ drew the distinction between proceedings which ``imperilled the existence of the business or the capital assets of the company'' and those proceedings which merely led to ``embarrassments in the present and future conduct of its business and no doubt a decline in its custom''. The proceedings in which the present applicant found himself threatened the very existence of his future enduring advantage.

20. Similar distinctions were drawn in
Magna Alloys & Research Pty Ltd v FC of T 80 ATC 4542 at 4562. Expenditure incurred for the defence of directors of a company involved in criminal proceedings was held not to be expenditure of a capital nature as the occasion of the outgoings arose from the taxpayers commercial activities in the course of carrying on its business. Outgoings arising out of the day to day business activities of taxpayers which comprehended legal expenses included those of a jockey who was seeking to challenge suspension for 12 months (Case 49,
8 CTBR (NS) 235) and those of a policeman engaged in a promotions appeal (Case N24,
13 TBRD (NS) 95).

21. Legal expenses have been held to be not of a capital nature when they have been incurred in cases involving rearrangement of continuing income. Creer was a case in which there was no attack on the taxpayer's position as a legal partner or on his right to practise his profession. If there had been such a situation, legal expenditure incurred in defending any such attack would have been of a capital nature. The occasion of the expenditure of legal fees in that case was an arbitration which produced an increase in the income allocated to the taxpayer for the relevant years. In
Putnin v FC of T 91 ATC 4097 the legal expenses were incurred in defending criminal proceedings which arose from the activities by which the taxpayer earned his income and the mode of his performance of a particular task carried out in the course of business operations. Again there was no threat to his total ability to carry on his profession as an accountant and insolvency trustee. In Case V116,
88 ATC 737 expenditure incurred in relation to a defamation action was held to be related directly to the performance of the applicant's duties as a director and therefore his income earning activities.

22. In the present case, the applicant's expenditure could not be fairly classified as a working expense, arising out of his day to day business activities. He had no day to day activities in the position whose future he sought to defend. By preparing for the investigation by the Commission and retaining legal representatives for that purpose, the applicant hoped to resolve the propriety of his actions once and for all so that he would have the benefit of any favourable decision indefinitely. Such expenditure, when viewed in this light, is clearly of a capital nature.

23. The decision under review is therefore affirmed.