• The impact of this case on ATO policy is discussed in Decision Impact Statement: Commissioner of Taxation v Day (Published 28 March 2011).

FC of T v DAY

Court:
Full High Court

MEDIA NEUTRAL CITATION: [2008] HCA 53

Gummow, Hayne, Heydon and Kiefel_JJ

1. The respondent was a senior compliance officer with the Australian Customs Service between 1997 and 1999. The Public Service Act 1922 (Cth), in force at the relevant time ^[1] Repealed by Sched 1 to the Public Employment (Consequential and Transitional) Amendment Act 1999 (Cth). , provided that an officer may be charged with failure to fulfil his duty as an officer ^[2] Public Service Act 1922, s 61(2). . In that event an inquiry was to be held ^[3] Public Service Act 1922, s 62(1). , and the officer charged could be suspended from duty pending the hearing and determination of the charge ^[4] Public Service Act 1922, s 63B(1)(d). . The officer holding the inquiry, if satisfied that the charge was made out, could direct that action be taken in relation to the officer the subject of the charge. Such action included deduction of salary, demotion or dismissal from the Australian Public Service ^[5] Public Service Act 1922, s 62(6). ( " the Service " ).

2. The respondent was charged with failure of duty in 1998 ( " the first charge " ) and in 1999 ( " the third charges " ). A second set of charges notified to the respondent is not relevant to this appeal. The respondent sought and obtained legal advice and representation in connection with the first and third charges (together, " the charges " ). In his objection to the Commissioner of Taxation ' s notice of assessment of his income to taxation, for the year ended 30 June 2002, the respondent claimed that $ 37,077 should have been allowed as a deduction from his assessable income. That figure represents the balance of the legal expenses incurred by the respondent with respect to the charges, after recovery of costs under an order of the Federal Court with respect to the first charge. On 19 April 2005 the Commissioner disallowed that objection. The respondent appealed to the Federal Court under s 14ZZ(a)(ii) of the Taxation Administration Act 1953 (Cth).

3. 3 Section 8 1(1) of the Income Tax Assessment Act 1997 (Cth) ( " the ITAA " ) provides:

• " (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.
• (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. "

4. The primary judge held that the legal expenses incurred with respect to the charges were not deductible within the meaning of sub s (1)(a), but also held the Commissioner to be estopped from contending that to be the case so far as concerned the expenses relating to the third charges ^[6] Day v Federal Commissioner of Taxation 2006 ATC 4268 ; (2006) 62 ATR 530 at 541 542 [ 52 ] , 546 [ 72 ] per Emmett J. . The Full Court of the Federal Court, by a majority (Spender and Edmonds JJ, Dowsett J dissenting), allowed the Commissioner ' s appeal on the issue of estoppel but allowed the respondent ' s cross appeal, holding the expenses to have been properly deductible under s 8 1(1)(a), and remitted the matter to the Commissioner for determination according to law ^[7] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 . .

5. The focus of this appeal is upon the requirement for deductibility of expenses in s 8 1(1)(a), that they be " incurred in gaining or producing … assessable income " . It is the Commissioner ' s principal contention that the legal expenses were incurred in defending charges of conduct extraneous to the performance of the respondent ' s income producing activities and therefore cannot be said to have been incurred in the course of gaining or producing assessable income.

The charges

6. Section 56 of the Public Service Act 1922 provided that an officer shall be taken to have failed to fulfil his duty as an officer if and only if:

• " (a) he wilfully disobeys, or wilfully disregards, a direction given by a person having authority to give the direction, being a direction with which it is his duty as an officer to comply;
• (b) he is inefficient or incompetent for reasons or causes within his own control;
• (c) he is negligent or careless in the discharge of his duties;
• (d) he engages in improper conduct as an officer;
• (e) he engages in improper conduct otherwise than as an officer, being conduct that affects adversely the performance of his duties or brings the Service into disrepute;

  (ea) the officer engages in conduct (including patronage, favouritism or discrimination) in breach of section 33;

• (f) he contravenes or fails to comply with:
  • (i) a provision of this Act, of the regulations or of a determination in force under subsection 9(7A) or section 82D, being a provision that is applicable to him; or
  • (ii) the terms and conditions upon which he is employed; or
• (g) he has, whether before or after becoming an officer, wilfully supplied to an officer or another person acting on behalf of the Commonwealth incorrect or misleading information in connexion with his appointment to the Service. "

7. The first charge, notified to the respondent on 23 September 1998 by an authorised officer of the Customs Service, was of improper conduct (s 56(d)). The respondent was suspended from duty. The particulars of that charge were that the respondent had breached the standard of conduct for officers set out in the Customs Code of Ethics and Conduct " Official Identification and Security Items " in that he presented his Customs identification card to a Clerk of the Downing Centre Local Court in New South Wales in order to obtain information with respect to a search warrant which had been executed on the Customs Service on 28 July 1998. The warrant had authorised the Australian Federal Police to search the respondent ' s workstation and the respondent had attempted, unsuccessfully, to obtain a copy of the search warrant. The officer conducting the inquiry found that it was improper for the respondent to have conveyed that his purpose was official.

8. The inquiry officer directed that the respondent be demoted and his salary consequentially reduced. The respondent exercised his right of appeal to the Disciplinary Appeal Committee ^[8] Public Service Act 1922, s 63D. , which found the charge proved, but varied the direction so that the respondent was to be transferred to a position and salary higher than the inquiry officer had directed. In proceedings for judicial review of that decision, brought in the Federal Court, Gyles J found that the Disciplinary Appeal Committee was able to conclude that the conduct of the respondent was conduct of an officer for the purposes of s 56(d) of the Public Service Act 1922, but that the conduct was not improper. His Honour set aside the decision and remitted it to the Committee for hearing according to law ^[9] Day v Douglas [ 1999 ] FCA 1444. . A Full Court dismissed the Commonwealth ' s appeal from his Honour ' s decision ^[10] Commonwealth v Day [ 2000 ] FCA 474 (Drummond, Whitlam and North JJ). . The Disciplinary Appeal Committee set aside the direction of the inquiry officer and ordered the Commonwealth to pay the respondent ' s costs. The respondent ' s other entitlements were restored as a consequence of the decision.

9. The seven charges making up the third set of charges were also referable to conduct described in s 56(d). On notification of these charges the respondent was suspended without salary. Three of the charges related to the respondent ' s conduct in connection with a claim for a diesel fuel rebate by the partner of another Customs officer. It was alleged that the respondent failed to inform Customs of relevant information, that he had lent the other officer improper support and assistance and that he was knowingly concerned in the creation of a false diary which supported the claim. The fourth charge was that he had secured access to, and acquired the use of, a work vehicle. The use included the collection and transportation of his daughter, by a fellow officer, for a non-work-related purpose. Two further charges involved his actions to conceal his absences from work. On one occasion he had asked a colleague to provide an excuse to his supervisor, to abstain from recording his absence and to switch his computer on. On another he submitted an attendance record which was false. The seventh charge involved a failure to communicate certain information concerning an investigation into an individual.

10. The charges were notified to the respondent on 22 March 1999. The respondent commenced proceedings in the Federal Court on 24 August 1999, in which it was alleged that information contained in telephonic communications, which had been intercepted by the Australian Federal Police as part of a criminal investigation, had been made available to officers of Customs including the officer who gave notice of the third charges, and that that communication was unlawful. He sought orders that the third charges be set aside and that the inquiry under s 62 of the Public Service Act 1922 be stayed, and a declaration. That application ^[11] Day v Commissioner of Australian Federal Police (2000) 96 IR 240. , an appeal to a Full Court ^[12] Day v Commissioner, Australian Federal Police (2000) 101 FCR 66. , and an application for special leave to appeal to this Court were refused with costs.

The decisions of the Federal Court

11. Emmett J ' s holding, that the Commissioner was estopped from asserting that the legal expenses incurred by the respondent with respect to the third charges were not deductible, was based upon an order made by the Federal Court in earlier proceedings, to which the Commissioner consented, which allowed a deduction for fees paid to one counsel for legal advice in connection with the third charges. His Honour took the view that the Court must be taken thereby to have determined the deductibility of the other legal expenses referable to those charges ^[13] Day v Federal Commissioner of Taxation 2006 ATC 4268 ; (2006) 62 ATR 530 at 546 [ 71 ] - [ 72 ] . . It is not necessary to consider that aspect of his Honour ' s reasoning further. The Full Court upheld the Commissioner ' s appeal in that regard, and the respondent does not seek to raise that aspect of the Court ' s decision. This appeal is concerned solely with the question of the deductibility of the legal expenses by reference to s 8 1(1).

12. The judges in the Federal Court were divided in their opinions on the issue of deductibility. Dowsett J, in his dissenting judgment in the Full Court, agreed with the primary judge, Emmett J, that the legal expenses were not deductible because the conduct the subject of the charges comprised acts unconnected to the duties to be performed by the respondent in the course of earning assessable income ^[14] Day v Federal Commissioner of Taxation 2006 ATC 4268 ; (2006) 62 ATR 530 at 540 [ 43 ] , 541-542 [ 52 ] per Emmett J; Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 259 [ 52 ] , 267 [ 73 ] per Dowsett J. . The misuse of the respondent ' s identity card was unrelated to the performance of his duties and none of the conduct referred to in the third charges was performed by the respondent in the discharge of his duties as a customs officer ^[15] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 268 [ 77 ] , 269 [ 84 ] . .

13. The majority in the Full Court held that the expenditure was allowable as a deduction but differed in their reasoning to that conclusion. Spender J considered it to be irrelevant whether the conduct the subject of the charges was extraneous to the discharge of his duties ^[16] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 257 [ 34 ] . . Because the expression " incurred in gaining or producing … assessable income " is to be given a very wide application ^[17] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 256 [ 25 ] , citing Amalgamated Zinc (De Bavay ’ s) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ; [ 1935 ] HCA 81. , it was necessary to consider the purpose of defending the charges, his Honour reasoned. The purpose of the respondent was to protect himself from the consequences of s 62(6) of the Public Service Act 1922, and therefore to protect his recurrent employment income from diminution or loss ^[18] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 256 [ 27 ] - [ 28 ] . . Expenditure in defence of a taxpayer ' s employment satisfies the test in s 8 1(1)(a) ^[19] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 257 [ 31 ] . .

14. His Honour ' s reasoning ^[20] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 257 [ 35 ] . was to the contrary of Emmett J, who considered that the expenses were properly characterised by reference to the activity or conduct that made it necessary to incur the expenses, rather than the object sought to be achieved in the proceedings in which they were incurred. It was therefore not sufficient to say that the proceedings were taken in order to protect one ' s reputation or keep one ' s job. Dowsett J was of the same opinion. His Honour considered that it followed from the decision of this Court in
Federal Commissioner of Taxation v Payne ^[21] 2001 ATC 4027; (2001) 202 CLR 93; [ 2001 ] HCA 3. , that purpose alone would not suffice to permit allowance of an outgoing as a deduction.

15. The other member of the majority in the Full Court, Edmonds J, referred to the following passage from the majority judgment in Payne ^[22] 2001 ATC 4027; (2001) 202 CLR 93 at 99 [ 9 ] per Gleeson CJ, Kirby and Hayne JJ. :

" The connection which must be demonstrated between an outgoing and the assessable income, in order to fall within the first limb of s 51(1), is that the outgoing is ' incurred in gaining or producing ' that income. The subsection does not speak of outgoings incurred ' in connection with ' the derivation of assessable income or outgoings incurred ' for the purpose of ' deriving assessable income. It has long been established that ' incurred in gaining or producing ' is to be understood as meaning incurred ' in the course of ' gaining or producing ^[23] Amalgamated Zinc (De Bavay ’ s) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ, 309 per Dixon J; Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56-57; [ 1949 ] HCA 15; Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 at 350; [ 1956 ] HCA 77. . What is meant by being incurred ' in the course of ' gaining or producing income was amplified in
Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation ^[24] (1949) 78 CLR 47. See also, eg, John v Federal Commissioner of Taxation 89 ATC 4101 ; (1989) 166 CLR 417 at 426; [ 1989 ] HCA 5; Fletcher v Federal Commissioner of Taxation 91 ATC 4950 ; (1991) 173 CLR 1 at 17; [ 1991 ] HCA 42; Steele v Deputy Commissioner of Taxation 99 ATC 4242 ; (1999) 197 CLR 459 at 467 [ 22 ] ; [ 1999 ] HCA 7. where it was said that ^[25] (1949) 78 CLR 47 at 57. :

' to come within the initial part of [ s 51(1) ] it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income. ' "

16. In his Honour ' s view, the test in Ronpibon Tin was helpful in the present case. On that test it was the employment of the taxpayer which was the occasion of the incurrence of the expenditure ^[26] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 271 [ 91 ] , 273 [ 101 ] . . The respondent ' s performance and observance of the duties of the employment were productive of assessable income. Those duties extended to all those duties listed in s 56 of the Public Service Act 1922, non-compliance with which could lead to a charge of misconduct under s 61 ^[27] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 273 [ 102 ] . . With respect to the charges, the respondent incurred legal expenses defending his performance and the observance of the duties of his employment. Expenditure incurred in defence of either is occasioned by the employment, his Honour concluded ^[28] Federal Commissioner of Taxation v Day 2007 ATC 5426 ; (2007) 164 FCR 250 at 274 [ 104 ] . .

17. Special leave to appeal was granted in this matter on the Commissioner ' s undertaking to pay the costs of the respondent of the appeal and not to seek to disturb the orders for costs in the Federal Court.

The Commissioner ' s argument - s 8 1(1)(a) of the ITAA

18. On the Commissioner ' s argument, the task to be undertaken under s 8 1(1)(a) is to identify the activity that is productive of assessable income and then to determine whether the outgoing in question can properly be regarded as having been incurred " in the course of " that activity. The argument draws upon references in the majority judgment in Payne to the words " in the course of " as relevant in establishing the requisite connection between expenditure and the activity which is productive of income.

19. The Commissioner submits that expenses of a legal nature have been held deductible where they were necessitated by an activity which was part of, or incidental to, the business of the taxpayer ^[29] Referring to Herald & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113 ; [ 1932 ] HCA 56 ; Federal Commissioner of Taxation v Snowden & Willson Pty Ltd (1958) 99 CLR 431 ; [ 1958 ] HCA 23 ; Putnin v Commissioner of Taxation 91 ATC 4097 ; (1991) 27 FCR 508 ; Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation 80 ATC 4542 ; (1980) 33 ALR 213 . . An employee ' s legal expenses, in connection with charges of misconduct, have been held deductible because they reflected the day-to-day aspects of the employment or because the employee could be said to be defending the manner of performance of his duties of employment ^[30] Referring to Commissioner of Taxation v Rowe 95 ATC 4691 ; (1995) 60 FCR 99 at 109 per Beaumont J, 113 per Burchett J. . The expenses here in question were incurred in defending conduct outside the performance of the respondent ' s duties, and cannot be said to have been incurred " in " or " in the course of " gaining or producing assessable income for the purposes of s 8-1(1)(a).

20. The Commissioner accepts that the respondent was also under an obligation, imposed by s 56(d) of the Public Service Act 1922, not to engage in improper conduct, but submits that the observance of that duty was not itself an activity which was productive of the respondent ' s income and was therefore not relevant. The Commissioner submits that a positive obligation to perform tasks of employment is different from one not to engage in certain other conduct, particularly where the conduct proscribed involves private misbehaviour. The Commissioner argues that the dichotomy between conduct undertaken in performance of the tasks for which the respondent was employed and improper conduct in breach of s 56(d) of the Public Service Act 1922, which was rejected by Edmonds J, is a distinction that s 8-1(1)(a) makes necessary. In the Commissioner ' s submission, the questions arising under the provision cannot be answered by identifying the occasion of the outgoing as the respondent ' s employment which, in a general sense, was productive of the respondent ' s income. The Commissioner says that the attention of s 8-1(1) is directed to specific activities which can be said to be productive of assessable income.

Consideration of the Commissioner ' s argument

21. The terms of s 8-1(1)(a) of the ITAA and its predecessors ^[31] Section 51(1) of the Income Tax Assessment Act 1936 (Cth); s 23(1)(a) of the Income Tax Assessment Act 1922 (Cth). have not been regarded as materially different ^[32] Federal Commissioner of Taxation v Citylink Melbourne Ltd 2006 ATC 4404 ; (2006) 228 CLR 1 at 30 [ 90 ] per Crennan J; [ 2006 ] HCA 35. . They refer to a relationship between expenditure incurred and what is productive of assessable income, which is to say the connection necessary for deductibility ^[33] Payne 2001 ATC 4027; (2001) 202 CLR 93 at 99-101 [ 9 ] - [ 13 ] per Gleeson CJ, Kirby and Hayne JJ, 112 [ 51 ] per Gaudron and Gummow JJ. . The words " incurred in gaining or producing … assessable income " , appearing in the section, have long been held to mean incurred " ' in the course of ' gaining or producing " income, as was observed in Payne ^[34] 2001 ATC 4027; (2001) 202 CLR 93 at 99 [ 9 ] per Gleeson CJ, Kirby and Hayne JJ (emphasis added), referring to Amalgamated Zinc (De Bavay ’ s) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ, 309 per Dixon J; Ronpibon Tin (1949) 78 CLR 47 at 56-57; Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 at 350. . In
Amalgamated Zinc (De Bavay ' s) Ltd v Federal Commissioner of Taxation ^[35] (1935) 54 CLR 295. , Latham CJ explained that it was necessary to read " losses and outgoings … incurred in gaining or producing the assessable income " as incurred " in the course of " gaining or producing that income, in order to make the section ^[36] Section 23(1)(a) of the Income Tax Assessment Act 1922 (Cth). intelligible. Outgoings may have an effect in gaining income, but losses cannot, as they simply reduce income ^[37] Amalgamated Zinc (De Bavay ’ s) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ. . In
Commissioner of Taxation v Cooper ^[38] 91 ATC 4396; (1991) 29 FCR 177. Hill J observed that an outgoing might be referable to a year of income other than that in which it was incurred ^[39] 91 ATC 4396; (1991) 29 FCR 177 at 197, referring to Federal Commissioner of Taxation v Smith 81 ATC 4114 ; (1981) 147 CLR 578 ; [ 1981 ] HCA 10. . That was a reason why s 51(1) of the Income Tax Assessment Act 1936 (Cth) did not express the right to a deduction in terms of outgoings incurred to earn income ^[40] Commissioner of Taxation v Cooper 91 ATC 4396 ; (1991) 29 FCR 177 at 197. . The words " in the course of " therefore facilitate the application of s 8-1(1)(a). They do not require a direct connection between the expenditure in question and an activity itself productive of income.

22. Dixon J in Amalgamated Zinc said that the expression " incurred in gaining or producing the assessable income " should be given a very wide application ^[41] (1935) 54 CLR 295 at 309. , although in that case the taxpayer company ' s continuing liability to pay monies to a compensation fund for miners it had employed lost any connection to assessable income when its business ceased. In Payne the majority confirmed that the words require more than a causal connection between the expenditure and the derivation of income; something closer and more immediate. The expenditure must be incurred " in the course of " gaining or producing the assessable income ^[42] Payne 2001 ATC 4027; (2001) 202 CLR 93 at 101 [ 13 ] per Gleeson CJ, Kirby and Hayne JJ. . Their Honours ' reference to the words " in the course of " should not be taken to suggest a closer or more direct connection between expenditure and that which is productive of assessable income than the words of the provision ^[43] Section 51(1) of the Income Tax Assessment Act 1936 (Cth). themselves convey. Rather the words draw attention to the connection made necessary by the provision, which the majority considered on the facts of that case to be too remote.

23. Payne was concerned with expenses incurred by the taxpayer in travelling between his place of employment as a pilot and between the place where he conducted a deer farm. The majority held that the expenditure was not incurred in the course of either income-producing activity. Adapting the language of Ronpibon Tin , their Honours held that neither the taxpayer ' s employment nor the conduct of the business of a deer farm occasioned the outgoings for travel expenses. Rather they were occasioned by the need for the taxpayer to be in a position where he could set about the tasks from which income would be derived ^[44] Payne 2001 ATC 4027; (2001) 202 CLR 93 at 102 [ 14 ] per Gleeson CJ, Kirby and Hayne JJ. . The expenditure was incurred in the interval between income earning activities ^[45] Payne 2001 ATC 4027; (2001) 202 CLR 93 at 102 [ 15 ] per Gleeson CJ, Kirby and Hayne JJ. . In Cooper , Hill J referred to an outgoing which preceded an income-earning operation or activity and which came at a point too soon to be an incident of, or relevant to, that activity. His Honour described the expenditure as referable to getting the work, rather than doing it ^[46] Cooper 91 ATC 4396; (1991) 29 FCR 197 at 198. .

24. The facts in Payne and Cooper are far removed from this case. It may also be observed that no issue arose in those cases concerning what tasks or duties are encompassed in what is productive of assessable income, as it does here. The references in those cases to the taxpayer ' s activities were to all that might be encompassed in an income-producing business or employment, not to discrete tasks. Those cases were concerned with the degree of connection to such a business or employment necessary for an expense to be deductible.

25. The Commissioner also sought support from cases which had dealt with the deductibility of legal expenses - being payments for legal services or of awards for damages - for both the closeness of the connection for which he contended and the identification of that which might be considered to be a necessary part of a business or employment.

26. In
Herald & Weekly Times Ltd v Federal Commissioner of Taxation ^[47] (1932) 48 CLR 113. it was held that a newspaper publisher ' s liability for defamation had the necessary connection to the business, publication being the common source of both revenue and the liability which gave rise to the expenditure ^[48] (1932) 48 CLR 113 at 119 per Gavan Duffy CJ and Dixon J, 121 per Rich J. . McTiernan J observed that only cessation of business would free the business from such expenditure ^[49] Herald & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113 at 127. . Gavan Duffy CJ and Dixon J distinguished the case from others by reference to the degree of connection present between the business carried on and what gave rise to the liability for damages ^[50] Herald & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113 at 119. . Their Honours referred to statements by Lord Loreburn LC in
Strong & Co v Woodifield ^[51] [ 1906 ] AC 448 at 452. that such losses can be deducted as are connected with the business, in the sense that they are really incidental to the trade itself. The illustration provided by his Lordship was the deductibility of losses sustained by a railway company in compensating passengers for accidents whilst travelling with the railway. On the other hand injury caused to a man walking in the street by a window shutter falling from a house associated with a grocer ' s shop would not be deductible as an expense of the grocery business. And, as his Lordship observed, there will be cases at the margin ^[52] Strong & Co v Woodifield [ 1906 ] AC 448 at 452. .

27. Expenses of advertising, to counter press reports, and legal costs before a Royal Commission incurred by a company the subject of allegations as to its business practices were held to be deductible in
Federal Commissioner of Taxation v Snowden & Willson Pty Ltd ^[53] (1958) 99 CLR 431. . Dixon CJ there identified the carrying on of the business as the source of the attacks and said that the taxpayer company " could do nothing else but defend itself, if it was to sustain its business " ^[54] Federal Commissioner of Taxation v Snowden & Willson Pty Ltd (1958) 99 CLR 431 at 437. . And in
Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation ^[55] 80 ATC 4542; (1980) 33 ALR 213. , a case concerned more with the relevance of a taxpayer ' s subjective purpose in relation to the expenditure, the legal expenses paid by the company for the defence of its directors from criminal charges, relating to the receipt of secret commissions, were held deductible because they were incurred in carrying on the business ^[56] Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation 80 ATC 4542 ; (1980) 33 ALR 213 at 225 per Brennan J, 238 239 per Deane and Fisher JJ. . It may be thought that the directors ' conduct there had qualities which might take it outside the scope of their proper tasks as directors. Nonetheless the connection with the taxpayer ' s business and the production of income is apparent.

28. Closer to the position of an employee are the decisions in
Commissioner of Taxation v Rowe ^[57] 95 ATC 4691; (1995) 60 FCR 99. and
Shokker v Commissioner of Taxation ^[58] (1999) 92 FCR 54. . In Rowe a shire engineer incurred legal expenses connected with an inquiry into complaints of his misconduct. A Full Court of the Federal Court held the expenses allowable as a deduction, but for reasons which differed in their identification of the connection with the taxpayer ' s employment. Beaumont J considered that it lay in the inquiry being concerned with the day to day aspects of his employment ^[59] Rowe 95 ATC 4691; (1995) 60 FCR 99 at 109. ; Burchett J because they were expended defending the manner in which he had performed his duties ^[60] Rowe 95 ATC 4691; (1995) 60 FCR 99 at 113, 114. ; and Drummond J because they were incurred to preserve his existing contract of employment so that he could retain the recurrent benefit of his salary ^[61] Rowe 95 ATC 4691; (1995) 60 FCR 99 at 116, 117. . In Shokker ^[62] (1999) 92 FCR 54. an employee of the Commissioner of Taxation had been charged with a criminal offence, in relation to his claim for sick leave in his employment. Drummond J considered that the factors that the charge was instigated by the employer, and that it could result in his dismissal, were matters to be taken into account in determining whether the necessary connection was present ^[63] Shokker (1999) 92 FCR 54 at 62 [ 27 ] . .

29. Expressions used in the cases, such as " incidental and relevant " , as referable to a business, should not be thought to add more to the meaning of provisions such as s 8-1(1)(a) of the ITAA, or to narrow its operation. They should be taken to describe an attribute of an expenditure in a particular case, rather than being an exhaustive test for ascertaining the limits of the operation of the provision ^[64] Lunney v Commissioner of Taxation (1958) 100 CLR 478 at 497 per Williams, Kitto and Taylor JJ. . Reference in some cases to the expenditure having an " essential characteristic " must likewise be treated with some care. As Gaudron and Gummow JJ observed in Payne , the use of the term may avoid the evaluation which the section requires ^[65] 2001 ATC 4027; (2001) 202 CLR 93 at 110-111 [ 45 ] - [ 48 ] , citing Professor Parsons, Income Taxation in Australia: Principles of Income, Deductibility and Tax Accounting (1985) at [ 8.62 ] . . It is perhaps better understood as a statement of conclusion than of reasoning.

30. Section 8-1(1)(a) is couched in terms intended to cover any number of factual and legal situations in which expenditure is incurred by a taxpayer. Its language and breadth of application do not make possible a formula capable of application to the circumstances of each case ^[66] See Lunney v Commissioner of Taxation (1958) 100 CLR 478 at 495 496 per Williams, Kitto and Taylor JJ. . Cases are helpful to show the connection found on the facts there present, but not always to explain how the search for the requisite connection is to be undertaken. Payne directs attention to the statement made in Ronpibon Tin , as to the question posed by a provision such as s 8 1(1)(a), as correct and appropriate to be applied. The question, as restated in Payne , is: " is the occasion of the outgoing found in whatever is productive of actual or expected income? " ^[67] 2001 ATC 4027; (2001) 202 CLR 93 at 100 [ 11 ] . That inquiry will provide a surer guide to ascertaining whether a loss or expenditure has been " incurred in [ the course of ] gaining or producing … assessable income " .

31. Essential to the inquiry is the determination of what it is that is productive of assessable income. The dichotomy to which the Commissioner ' s argument refers, that between proper conduct and that which is proscribed, may pose some difficulty in the delineation of tasks which the Commissioner would describe as falling within or without the scope of a person ' s occupation. The present case furnishes an example. It is not clear where the Commissioner would place expenses incurred with respect to charges of inefficiency, incompetence or negligence under s 56 in the carrying out by an officer of ordinary day-to-day tasks.

32. It is not necessary to consider further the difficulties inherent in this aspect of the Commissioner ' s argument. The dichotomy may be relevant in other spheres of the law, but is not useful to determine the question arising under s 8-1(1)(a), as to what it is that is productive of a person ' s assessable income. It does little more than characterise conduct by reference to wrongdoing. In some cases a reference to conduct which is wrongful may be to that which is remote from a person ' s occupation. In others, such as the present case, it will be to that which is a breach of a duty imposed by the employment itself. A determination as to what is productive of assessable income in a particular case may need to take account of any number of positive and negative duties to be performed or observed by an employee or other salary-earner. It is that determination which provides the answer as to whether the occasion is provided for the expenditure in question.

33. That no narrow approach should be taken to the question of what is productive of a taxpayer ' s income is confirmed by cases which acknowledge that account should be taken of the whole of the operations of the business concerned in determining questions of deductibility ^[68] Amalgamated Zinc (1935) 54 CLR 295 at 309 per Dixon J; W Nevill & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290 at 307 per Dixon J; [ 1937 ] HCA 9; Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 at 349-350. . A similar approach should be taken to what is productive of a salary earner ' s income, whether it be described as employment or by reference to a bundle of tasks to be performed and duties to be observed. In some cases those duties to be observed may extend beyond what is contained in a contract of employment. In Cooper , Hill J, referring to the statement in Ronpibon Tin , observed that it will often be necessary to analyse with some care the operations or activities regularly carried on by the taxpayer ^[69] 91 ATC 4396; (1991) 29 FCR 177 at 198. , and Lockhart J referred to the need to have regard to the terms and conditions of a taxpayer ' s employment ^[70] 91 ATC 4396; (1991) 29 FCR 177 at 182. . A reference to the " day-to-day " activities undertaken by a taxpayer may not be a sufficient description of what their position involves. So, in
Commissioner of Taxation v Finn ^[71] (1961) 106 CLR 60; [ 1961 ] HCA 61. expenses of a senior design architect in the public service incurred in travelling in order to improve the taxpayer ' s knowledge were considered in the context of his employment by the government in accordance with his conditions of service ^[72] (1961) 106 CLR 60 at 67 per Dixon CJ. , and as referable to his prospects of promotion ^[73] (1961) 106 CLR 60 at 65-66 per Dixon CJ. . The essential difficulty with the Commissioner ' s argument in this case is that it does not fully recognise the scope of the respondent ' s role as an officer of the Public Service and what his office exposed him to.

The Public Service and the Public Service Act 1922

34. The incurring of legal expenses with respect to charges against an officer of the Service for failure of duty must be considered in the context of the special position which such an officer holds, the extent of the duty owed by the officer and the legislative provision for the enforcement and regulation of such duty. The public service legislation in Australia has served and serves public and constitutional purposes as well as those of employment, as Finn J observed in
McManus v Scott-Charlton ^[74] (1996) 70 FCR 16 at 24. . Such legislation facilitates government carrying into effect its constitutional obligations to act in the public interest ^[75] McManus v Scott-Charlton (1996) 70 FCR 16 at 24, referring to Attorney General (UK) v Heinemann Publishers Australia Pty Ltd (1987) 10 NSWLR 86 at 191. . For reasons of that interest and of government the legislation contains a number of strictures and limitations which go beyond the implied contractual duty that would be owed to an employer by many employees. In securing values proper to a public service, those of integrity and the maintenance of public confidence in that integrity, the legislation provides for the regulation and enforcement of the private conduct of public servants ^[76] McManus v Scott-Charlton (1996) 70 FCR 16 at 25. . This extension, to what might be called private conduct, was evident in s 56(d) and (e) of the Public Service Act 1922, which provided that an officer may be taken to have " failed to fulfil his duty as an officer " if he engages in improper conduct as an officer or in improper conduct otherwise than as an officer, in the latter case the conduct " being conduct that affects adversely the performance of his duties or brings the Service into disrepute " . It is noteworthy that in McManus Finn J rejected as untenable, as a generalisation, the submission that the only limiting directions that could be given to a public servant were those which have a nexus with the performance of that person ' s employment duties ^[77] (1996) 70 FCR 16 at 25. .

35. The chief object of the Public Service Act 1922 was " to constitute a public service for the efficient, equitable and proper conduct, in accordance with sound management practices, … of the public administration of the Australian Government " ^[78] Section 6. Similar objects are stated in the current public service legislation. Whilst it does not refer to the bringing of charges, it provides for a Code of Conduct and a range of sanctions consequent upon its breach: see ss 13, 28 and 29 of the Public Service Act 1999 (Cth). . The provisions relating to disciplinary action were referable to the maintenance of those standards of conduct.

36. An " employee " was defined by the Act, but the definition of an " officer " did not include an employee ^[79] Public Service Act 1922, s 7. , whose position and terms and conditions of employment were dealt with elsewhere in the Act ^[80] Part III, Divs 10 and 10A. . Part III, Div 6 of the Act was concerned with the discipline of officers of the Service. It provided, in s 55, that " misconduct " , in relation to an officer, meant a failure of the officer to fulfil his ^[81] The language of the Act. duty as an officer. Subdivision C was referable to disciplinary action with respect to officers other than Secretaries of Departments. Section 61(2) of the Subdivision provided for the bringing of charges against such an officer by an officer authorised by the relevant Secretary ^[82] The hearing of such charges does not involve the judicial power of the Commonwealth: see, eg, Medical Board of Victoria v Meyer (1937) 58 CLR 62 at 105 per Evatt J; [ 1937 ] HCA 47. See also Comptroller-General of Customs v Disciplinary Appeal Committee (1992) 35 FCR 466 at 474 per Gummow J; R v White ; Ex parte Byrnes (1963) 109 CLR 665 at 670-671 per Dixon CJ, Kitto, Taylor, Menzies and Windeyer JJ; [ 1963 ] HCA 58; Kariapper v Wijesinha [ 1968 ] AC 717 at 737 738 per Sir Douglas Menzies, delivering the judgment of the Board. . Section 62(1) (5) provided for the holding of an inquiry into the charge, by an officer other than the officer who gave notice of the charge, and for the procedures to be undertaken and applied to statements before the inquiry officer. Where the inquiry officer was satisfied that there had been a failure, on the part of the officer, to fulfil his duty, sub-s (6) provided that he be counselled or that other action be taken. That action extended to admonition ^[83] Public Service Act 1922, s 62(6)(a)(i). ; the deduction of a sum from salary ^[84] Public Service Act 1922, s 62(6)(a)(ii). ; reduction of salary ^[85] Public Service Act 1922, s 62(6)(a)(iii). ; transfer, with or without deduction of a sum from salary ^[86] Public Service Act 1922, s 62(6)(a)(iv) and (v). ; transfer to an office with reduction of salary for a period ^[87] Public Service Act 1922, s 62(6)(a)(vi). ; and transfer to a specified office at a lower classification ^[88] Public Service Act 1922, s 62(6)(a)(vii). . The power exercised by the inquiry officer extended to dismissal ^[89] Public Service Act 1922, s 62(6)(b). . In the period during which the hearing of the charge was undertaken, the officer charged might be subject to a directive that he be suspended from duties, if the relevant Secretary was of the opinion that it would be prejudicial to the effective operation of the Service, and to the interests of the public, if the officer was to continue to perform his duties ^[90] Public Service Act 1922, s 63B. . An appeal to a Disciplinary Appeal Committee was provided by s 63D.

The occasion of the respondent ' s legal expenses

37. The respondent ' s position as an officer subject to the Public Service Act 1922 obliged him to observe standards of conduct extending beyond those in the performance of tasks associated with his office and exposed him to disciplinary procedures within the Service which might have consequences for the retention of his office or his salary. What was productive of his income must be understood in this light. It is neither realistic nor possible to excise from the scope of the respondent ' s service as an officer elements which may be associated with tasks and so identify them as income-producing. What was productive of his income by way of salary is to be found in all the incidents of his office in the Service to which the Act referred, including his obligation to observe standards of conduct, breach of which might entail disciplinary charges. The respondent ' s outgoings, by way of legal expenses, followed upon the bringing of the charges with respect to his conduct, or misconduct, as an officer. He was exposed to those charges and consequential expenses, by reason of his office. The charges cannot be considered as remote from his office, in the way that private conduct giving rise to criminal or other sanctions may be ^[91] See Herald & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113 at 120. .

38. It was necessary for the respondent to obtain legal advice and representation in order to answer the charges and to preserve his position, in the same way that the company in Snowden & Willson ^[92] (1958) 99 CLR 431. was obliged to act defensively. Whether the charges were well-founded, a fact which had not been established by the time the Full Court determined this matter, is not relevant to the question of deductibility ^[93] See Federal Commissioner of Taxation v Snowden & Willson Pty Ltd (1958) 99 CLR 431 at 436. . The incurring of expenditure by an employee to defend a charge because it may result in his or her dismissal may not itself be sufficient in every case to establish the necessary connection to the employment or service which is productive of income. Much will depend upon what is entailed in the employment and the duties which it imposes upon an employee. In the present case the requisite connection is present.

Purpose

39. In many, if not most, cases the objective relationship between an expenditure and that which is productive of income will provide a sufficient answer to the inquiry posed by the section ^[94] Fletcher v Federal Commissioner of Taxation 91 ATC 4950 ; (1991) 173 CLR 1 at 18 per curiam. . In many cases questions as to a taxpayer ' s motives, beyond what may be the outcome sought, may introduce an unnecessary evidentiary complication into the statutory inquiry. In Finn Dixon CJ left open the question whether motive might be relevant ^[95] (1961) 106 CLR 60 at 67. . In Magna Alloys Brennan J considered that the reference in some of the cases to a taxpayer ' s state of mind should not be taken as a statement of what the section required, but rather as an observation upon the evidence ^[96] 80 ATC 4542; (1980) 33 ALR 213 at 217. . However
Fletcher v Federal Commissioner of Taxation accepts that it may be relevant in the context of a voluntary expenditure ^[97] 91 ATC 4950; (1991) 173 CLR 1. . In such a circumstance explanation may be seen as necessary. In most cases the reason for the expenditure will be apparent and it will not be necessary to inquire further. The question whether the expenditure has been incurred " in gaining or producing " income will look to the scope of the operations or activities and their relevance to expenditure, rather than to a taxpayer ' s reason for the expenditure ^[98] Amalgamated Zinc (1935) 54 CLR 295 at 309. . In the present case it does not assume importance.

Conclusion

40. The respondent ' s duties as an officer of the Service, and the possible consequences to him of internal disciplinary proceedings and action with respect to the continuation or termination of his service, form part of what was productive of his assessable income in that capacity. Applying the inquiry as to connection posed by the section, as explained by Ronpibon Tin , the occasion of the legal expenses is to be found in his position as an officer. It follows that the expenses were properly allowable as deductions.

41. Much of the expense incurred with respect to the third charges was associated with the respondent ' s pre-emptive legal challenge to the evidentiary basis for those charges. It was not contended by the Commissioner that the expenses were remote from the charges so that they could not qualify for deductibility on that account.

42. Consideration of the respondent ' s position as an officer of the Service also provides the answer to the Commissioner ' s remaining contention, which relies upon the terms of s 8-1(2)(b) of the ITAA. The expenses cannot be viewed as of a private nature, in the way that some fines and penalties unconnected to a person ' s service may be.

Orders

43. The appeal should be dismissed and the Commissioner pay the respondent ' s costs, on the Commissioner ' s undertaking to do so.