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FALCETTA v FC of T

Judges:
Ryan J
French J
RD Nicholson J

Court:
Full Federal Court

MEDIA NEUTRAL CITATION: [2004] FCAFC 117

Judgment date: 10 May 2004

Ryan, French and RD Nicholson JJ

Max Falcetta and Ian Bartlett both claimed, as deductions in their income tax returns for the year ended 30 June 1999, fees paid to their accountant and tax agent, Sam Cassaniti. The fees related to their personal tax affairs and matters connected to the affairs of companies of which they were directors. Their deductions were disallowed and they objected to the income tax assessments issued to them accordingly. The Commissioner of Taxation then disallowed those objections and they each appealed against those decisions to the Federal Court.

2. On 21 October 2003 Hill J allowed Mr Bartlett's appeal in part as to the sum of $3,090 out of a total claimed deduction of $15,000. Mr Bartlett lodged an appeal against that decision but, in a supplementary judgment dated 8 December 2003, Hill J increased the sum of the allowable deduction to $12,690. Mr Bartlett has discontinued the appeal but a cross-appeal lodged by the Commissioner is still on foot. Hill J upheld Mr Falcetta's appeal in part holding that he should be allowed a deduction of $1,815 out of a total deduction claimed of $9,411.21. Mr Falcetta has appealed against that decision and the Commissioner has cross- appealed.

3. The appeal and cross-appeal in the Falcetta case and the cross-appeal in the Bartlett case raise questions, tied very much to the facts of those cases, about the extent to which the fees claimed in respect of their personal affairs and those of their companies were deductible.

Procedural history

4. These appeals involve, firstly, an appeal by Mr Falcetta against orders made by Hill J on 21 October 2003 (
Bartlett & Anor v FC of T 2003 ATC 4962; [2003] FCA 1125) and, secondly, cross-appeals by the respondent in each proceeding (the Commissioner of Taxation) against the orders made by his Honour in each of the proceedings brought by Mr Falcetta and Mr Bartlett. Leave is sought to substitute an amended notice of appeal in the cross-appeals and it was agreed at the hearing the issue should be dealt with in the course of these reasons.

5. Each application involved the disallowance of a deduction claimed for fees charged to the taxpayer by his accountant for accounting work undertaken by him. Before his Honour the two applications were said to be test cases. This was so because a number of taxpayers who were clients of the same tax agent, an accountant Mr Sam Cassaniti (``Mr Cassaniti'') practising under the name of SP Cassaniti and Associates (``the firm''), had claimed fees payable to him as allowable deductions under s 25-5 of the Income Tax Assessment Act 1997 (Cth) (``the 1997 Act''). His Honour pointed out, however, that the facts of each case differed so that there might be some difficulty in the two cases being really seen as test cases. That is also our view. Additionally, and because of the reliance on the relevant facts in each case, the present appeal and cross-appeals are not seen by us as a suitable vehicle for providing a high point of definition in relation to the provisions in issue.

6. An appeal was originally lodged also by Mr Bartlett. However, as a consequence of further orders made by Hill J on 8 December 2003, the appeal was discontinued. It is convenient to follow the order of argument and address firstly the remaining appeal and then the cross-appeals.

Appeal in relatino to Mr Falcetta's proceeding

7. Mr Falcetta appeals against orders made by Hill J on 21 October 1993 the effect of which was that his objection decision be allowed in part by allowing a deduction of $1,815 and that the matter be remitted to the Commissioner of Taxation to be reassessed in accordance with the orders. He contended in effect that his Honour paid insufficient attention to the fact that the balance of the deduction claimed by him related to the expenses incurred in ensuring that there was compliance with Director Penalty Notices issued by the Commissioner and received by him on 4 February 1999. The key issue is 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 s 25-5(1) of the 1997 Act. A subsidiary argument is that his Honour should have taken into account the unchallenged evidence of the tax agent, who was not cross-examined on his affidavit in the Falcetta proceeding.

8. For the respondent it is conceded that the deduction allowed to the appellant should be increased by the amount of $1020. Otherwise the appeal is opposed.

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9. The grounds of appeal are formulated as follows:

``His Honour, having correctly construed s 25-5 of the Income Tax Assessment Act 1997 (Cth) in paragraphs [56]-[66] of his reasons for judgement, erred in:

  • (a) holding that no costs incurred, following the receipt by Mr Falcetta in his capacity as a director of GSA Formwork (NSW) Pty Ltd (`GSA') on 4 February 1999 of a penalty notice from the respondent advising that Mr Falcetta could become personally liable to pay to the respondent group tax and prescribed payment deductions unless he took one of the courses shown in those notice ( `director penalty notices' ) were deductible under s 25-5 to the extent that attendances by Mr Cassaniti were in connection with placing GSA into administration or attendances at meetings of creditors or attendances with solicitors or others concerning Mr Falcetta's obligations under the director penalty notices.
  • (b) holding in paragraph [81] of his reasons for judgment that attendances concerning the deed of arrangement and attendances at meetings with the administrator of GSA, or of creditors of that company and attendances concerning the liquidation of GSA and attendances with solicitors in connection with these matters would not fall within s 25-5;
  • (c) failing to take into account the unchallenged affidavit evidence of Mr Sam Cassanitti (sic)(in circumstances where Mr Cassaniti was not cross- examined and it was not suggested by the respondent that Hill J not accept Mr Cassaniti's evidence) which showed that the whole of the amount claimed fell within s 25-5.''

Background circumstances

10. Mr Falcetta was a shareholder and director of GSA. In February 1998, as the consequence of advice, an administrator of GSA was appointed by Deed of Company Arrangement executed on 10 March 1998, but nothing is said to turn on that fact. The two Director Penalty Notices were each dated 2 February 1999 and were received by Mr Falcetta on 4 February 1999. The amount of his potential personal liability under those notices was $240 576.99. It was the receipt by Mr Falcetta of the Director Penalty Notices that led him to contact Mr Cassaniti. Their first meeting occurred on 8 February 1999. By 16 February 1999 a liquidator had been appointed to GSA. It is the deductibility of the cost of work performed during that period by Mr Cassaniti and his staff that is the subject of the appeal.

11. In his affidavit Mr Cassaniti stated that, after being contacted by Mr Falcetta concerning the Director Penalty Notices, he had required his client to sign an engagement letter, a letter of instruction and an authority to deduct fees. (It will be necessary to return to these documents in connection with the cross-appeal). He then detailed actions taken by him in connection with the Director Penalty Notices, Mr Falcetta's 1998 income tax return and his 1999 tax year position including his group tax obligations. Mr Cassaniti's description of his method of billing Mr Falcetta and his summary of the character of the advice provided is set out further below in considering his Honour's reasons.

Legislative provisions

12. Section 25-5 of the 1997 Act when read together with the definition of ``entity'' in s 960-100(1) relevantly reads:

``25-5

(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
  • (c)...

(2) You cannot deduct under subsection (1):

  • (a)...
  • (b)...
  • (c)...
  • (d)...
  • (e) a fee or commission for advice about the operation of a Commonwealth law relating to taxation, unless that advice is provided by a recognised tax adviser.

(3) You cannot deduct expenditure under subsection (1) to the extent that a provision of this Act (except section 8-1) expressly

ATC 4518

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

(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.

...

960-100

(1) Entity means any of the following:

  • (a) an individual;
  • (b) a body corporate;
  • (c) a body politic;
  • (d) a partnership;
  • (e) any other unincorporated association or body of persons;
  • (f) a trust;
  • (g) a superannuation fund;''

13. The 1997 Act did not, in the year of income ending 30 June 1999, contain any definition of ``tax affairs''. There was, however, a definition of ``tax'' contained in the ``Dictionary'' to that Act (s 995-1) namely:

``tax means:

  • (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.''

14. On 22 December 1999 a definition of ``tax affairs'' was inserted by the A New Tax System (Tax Administration) Act 1999 (Cth) (No 179 of 1999), that is after the year of income in question. That definition, which appeared in s 995-1(1) of the 1997 Act is in the following terms:

``tax affairs means affairs relating to tax

tax means:

  • (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.''

``income tax means income tax imposed by any of these:

  • (a) the Income Tax Act 1986;
  • (b)...''

15. Part VI (Collection and recovery of tax) Div 9 of the Income Tax Assessment Act 1936 (Cth) (``the 1936 Act'') provided for penalties for directors of non-remitting companies. The purpose of the Division is to ensure that a company either meets its obligations under Pt VI Divs 1AAA (Payment of RPS, PAYE and PPS deductions to Commissioner), 3B (Collection of tax in respect of certain payments), 4 (Collection of withholding tax) or 8 (Prompt recovery, through estimates and payment agreements, of certain amounts not remitted), or goes promptly into voluntary administration under Pt 5.3A of the Corporations Law or into liquidation. Section 222ANA(3) provided that the Division imposes a duty on the directors to cause the company to do so and that the duty is enforced by penalties. Section 222APA provided that Pt VI Div 8 Subdivision C applied if a company became liable under s 222AHA to pay an estimate. In that subdivision s 222 APB(1) provided:

``The persons who are directors of the company from time to time on and after the day when the Commissioner sent to the company notice of the estimate must cause the company to do at least one of the following within 14 days after that day:

  • (a) pay to the Commissioner the amount of the estimate;
  • (b) make an agreement with the Commissioner under section 222ALA in relation to the company's liability to pay the estimate;
  • (c) appoint an administrator of the company under section 436A of the Corporations Law;
  • (d) begin to be wound up within the meaning of that Law.''

16. Additionally, s 222APC provided that if s 222APB was not complied with before the end of the 14 days, each person who was a director of the company at any time during the 14 days was liable to pay to the Commissioner, by way of penalty, an amount equal to the unpaid amount of the estimate.

17. His Honour accepted that there is no doubt that the expression ``begin to be wound up'' in s 222APB(1)(d) required the actual

ATC 4519

appointment by a Court of a liquidator or provisional liquidator and the mere filing of an application for winding up and the appointment of a liquidator or provisional liquidator within 14 days would not be sufficient:
Re Scobie & Anor; ex parte DFC of T 95 ATC 4525; (1995) 59 FCR 177. He considered it to be obvious that urgent action by appropriately qualified lawyers and taxation advisers would therefore ordinarily be required to ensure that a company would ``begin to be wound up'' within 14 days of a Director Penalty Notice.

Relevant reasons of the primary judge

Construction of the statutory provisions

18. No issue is raised in respect of his Honour's construction of s 25-5 of the 1997 Act by Mr Falcetta. His is Honour commenced by saying that s 25-5 of the 1997 Act had, as its origin, s 69 of the 1936 Act, as substituted by the Taxation Laws Amendment Act (No. 5) (Cth) (No. 20 of 1990), applicable to expenditure incurred on or after 1 July 1989. Section 69 as in force immediately before the enactment of the 1997 Act was in similar terms to s 25-5 save that, relevantly, it provided for a deduction for expenditure incurred to the extent to which it was in respect of a ``tax related matter''. The expression ``tax related matter'' was defined as being a reference to the management or administration of the income tax affairs of the taxpayer and, additionally, compliance with obligations imposed by Commonwealth laws ``in so far as that obligation relates to the income tax affairs of another taxpayer''. Excluded was expenditure which related to the commission of an offence. ``Income tax'' was defined in s 69(11) to mean tax, however described, that was imposed by an Act other than the 1936 Act and was payable under the 1936 Act.

19. Section 69, his Honour said, replaced a much narrower definition which had been introduced by the 1936 Act allowing a deduction for amounts paid to a tax agent for the preparation of an income tax return for the taxpayer. He considered it was obvious that Parliament intended that the scope of ``tax- related expenses'' in s 69 should include expenditure which went beyond the preparation of an income tax return and that a deduction was to be allowed for the cost of obtaining professional advice, not only where the tax advice related to the taxpayer's own tax affairs, but also where it related to compliance with obligations imposed upon the taxpayer so far as those obligations related to the tax affairs of another taxpayer. Obligations imposed upon a taxpayer where he or she was the public officer of some company or trust estate were said to be the most obvious of the cases falling within the ``obligation'' limb of s 69(2)(b).

20. After examination of the history of s 25-5 of the 1997 Act his Honour concluded that, prima facie, this section amounted to no more than an expression in slightly different language of what had been enacted by s 69 of the 1936 Act. He considered it was clear that Parliament did not intend that the expression ``tax affairs'' as used in s 69 of the 1936 Act should be limited to the income tax affairs of a taxpayer in the strict sense of the tax which is the subject of assessment under s 166 of the 1936 Act. He considered that ``advice'' in relation to compliance with requirements for provisional tax clearly would involve a tax-related matter within the meaning of s 69 of the 1936 Act and thus be potentially deductible under that section if all other requirements of the section were fulfilled. Likewise he considered that ``advice'' given in relation to group tax and prescribed payments would fall within the expression ``tax affairs'' as used in the 1936 Act because they were each ancillary to the liability imposed for income tax. He considered that a like view should be taken of the construction of s 25-5 of the 1997 Act particularly since, in the year of income, there was no definition of ``tax affairs''. His view was that in the relevant year of income here and before s 25-5 had been amended to include a definition of ``tax affairs'', payments for ``advice'' concerning provisional tax, group tax or prescribed payment deductions and obligations in respect thereof was intended to be deducted.

21. He was, therefore, of the view that, to the extent that the fees incurred by Mr Falcetta had been for advice related to group tax or prescribed payments, or otherwise related to those, the fees fell within s 25-5 and were allowable. Additionally, he considered that the fees, to the extent that they related to the preparation of tax returns for the individuals themselves or for companies of which they were public officers were deductible. However, he said ``the more difficult question is the question of the extent to which the fees fell within the section since it is clear that some of the work performed by the firm for either

ATC 4520

taxpayer in the year of income fell outside s 25-5 and was not deductible'' (at [ATC at 4974] [66]). It is on this latter consideration that the grounds of appeal focus.

Quantum and apportionment of deduction

22. The approach of his Honour to the quantum of the deduction in respect of Mr Falcetta is to be understood as also reflecting the approach which his Honour took to the quantum of the deduction in respect of Mr Bartlett. He started, in each case, with the proposition that the onus is upon the taxpayer to show that the assessment under appeal is excessive: Taxation Administration Act 1953 (Cth) s 14ZZO.

23. The reasoning of his Honour in respect of the issues of quantum concerning Mr Falcetta is summarised in the following paragraphs of the reasons, from which grounds of appeal (a) and (b) are derived and to which ground (c) relates [ ATC at 4976-4977]:

``81. While I am of the opinion that advice which Mr Falcetta was given concerning compliance with his obligations in respect of group tax and prescribed payment deduction and advice concerning the keeping of vehicle log books and potential liability to pay tax on dividends deemed to have been paid to him out of profits and thus assessable income would fall within s 25-5, I do not think that advice concerning incorporation of a new company to trade once GSA was placed into administration or advice concerning his personal liability to creditors as such would fall within that section, even if one of the creditors was the Commissioner for group tax or prescribed payment deductions not withheld or remitted. Advice on how a new company should comply with its tax obligations (whether income tax as such or group tax or prescribed payments deductions would likewise be deductible as would the work done to prepare Mr Falcetta's tax return and checking the assessment received against the return. Attendances concerning the deed of arrangement and attendances at meetings with the administrator of GSA, or of creditors of that company and attendances concerning the liquidation of GSA in my view would not fall within the section, nor would attendances on solicitors in connection with these matters.''

24. His Honour found the determination of the quantum to be difficult because in his evidence Mr Cassaniti had not endeavoured to reconstruct the account he sent to Mr Falcetta. No spreadsheet relating to it was available (as it was in the case of Mr Bartlett). His Honour said it was impossible for him to arrive at a precise figure. However, he endeavoured to make an apportionment resulting in a list providing the total deductions in the sum of $1815. These included two attendances concerning Director Penalty Notice, one charged at $60 and one at $225.

25. In the reasons his Honour set out Mr Cassaniti's summary of his work and described it as follows [ATC at 4971]:

``55. Mr Cassaniti made a calculation of the amount which he claimed Mr Falcetta owed the firm in the same way as he made the assessment for the account invoiced to Mr Bartlett. He concluded that work valued at more than the amount charged had been done but limited the invoice ultimately rendered or at least applied against the refund monies to the precise amount of the refund. He did so because he was of the view that Mr Falcetta would be unable to pay more than the amount refunded. He estimated that he and an employed accountant had spent 20 hours and charged for that time at time and a half premium. Work ensuring that Mr Falcetta complied with obligations under the penalty notices was charged out also at time and a half premium, that is to say at $450 per hour. Mr Cassaniti's summary of the work the firm performed on Mr Falcetta's instructions and which was included in the amount which Mr Falcetta paid was as follows:

`[A]ccountancy and urgent advice was given to the Applicant included such matters as the deed of arrangement of GSA Formwork (NSW) Pty Ltd, the Applicant's company: correspondence from the administrator; advising the applicant of his personal liabilities under the deed of arrangement; his obligations under the tax office notices and what the applicant had to do in order to comply with the obligation under the notices; attending meeting as did members of my staff with the applicant and the administrator; attending the Applicant and instructing solicitors to further

ATC 4521

advise the Applicant regarding the liquidation of the Applicant's company within the prescribed time permitted under the director penalty notice; considering minutes, affidavits, court applications in connection with the liquidation; meeting with the Applicant to advise him regarding his personal income tax position, and his personal tax liabilities under alternative business structures; considering prior year income tax returns and preparing and lodging the Applicant's income tax return for 1998.'''

Reasoning on deductibility

26. The primary argument advanced by Mr Falcetta is that there was no evidence that any of the expenses claimed related to attendances on creditors of the company of which Mr Falcetta was a director, or to general advice concerning Mr Falcetta's personal liability to creditors generally. Rather, it is contended that the evidence is that the only advice concerning personal liability was that relating to Director Penalty Notices.

27. Mr Falcetta's case is that, as the advice only concerned a statutory personal liability under Director Penalty Notices if Mr Falcetta had failed to comply with his obligations in relation to GSA, it is difficult to think of anything more clearly within par (b) of s 25-5(1) of the 1997 Act. It is submitted that it should have been apparent to his Honour that all of the work for which the deduction under that section was claimed in the Falcetta proceedings related to complying with Director Penalty Notices or preparation of personal income tax returns. Therefore, it is said, the whole claim of $9411.21 should have been allowed.

28. In the alternative, it is argued that there should be a significant increase for amounts allowed in the itemisation carried out by his Honour. For the respondent it is conceded that the quantum of allowable deductions should be increased by the amount of $1020.

29. For the Commissioner it is submitted that Mr Falcetta's submissions misconceive the onus placed upon him to put before the Court evidence upon which it could be satisfied that the totality of the amounts claimed was deductible in the way contended. It is said that on the evidence there was simply no factual basis for the assertion in his primary submission that the amount disallowed related totally to advice regarding the appellant's potential liability in respect of Director Penalty Notices. On the respondent's alternative argument, apart from the concession made as to $1020, there is simply no basis in the evidence to support a greater deduction. Therefore, it is said that no error by the trial judge has been shown.

30. We do not accept the submission for Mr Falcetta that all of the work described in the affidavit of Mr Cassaniti can correctly be characterised as work in connection with his personal liability. The obligation of Mr Falcetta pursuant to s 222APB(1) was to ``cause the company'' to, relevantly, be wound up. He alone could not achieve that and hence Mr Cassaniti prepared for the company minutes to effect the required result. That was necessarily the business of the company, involving other directors. The court applications were necessarily undertaken on behalf of the company. As his Honour said in his reasons ``attendances concerning the deed of arrangement and attendances at meetings with the administrator of GSA, or of creditors of that company and attendances concerning the liquidation of GSA in my view would not fall within the section, nor would attendances on solicitors in connection with these matters'' (at [ ATC at 4977] [81]). We agree with that view. At the time the instructions were given to Mr Cassaniti concerning the Deed of Arrangement, Director Penalty Notices had not issued. Furthermore, once accountancy work or other steps had begun to be undertaken on behalf of GSA, Mr Falcetta had discharged his obligation to ``cause'' the company to go into liquidation. Work and steps undertaken necessarily became those of the company because they lay beyond the authority of any single director to achieve but required the participation of the other directors.

31. That position having been reached, it became necessary for his Honour to embark on the task of apportionment. He could only do that on the evidence before him. He endeavoured to arrive at an itemisation from that evidence, to which must now be added the conceded amounts. No basis was raised in the arguments on appeal for interfering with that itemisation nor would it be appropriate in the circumstances for this Court on appeal to attempt its own apportionment.

ATC 4522

32. A subsidiary argument is that his Honour wrongly allowed his reasoning to be affected by the concept of ``advice.'' We do not accept that submission. The use of that word derived from the affidavit of Mr Cassaniti where he stated the nature of the ``accountancy and urgent'' advice which he had given. The description of matters then referred to by him was not limited to matters in the character of ``advice'' in the strict sense, and was wide and general in its nature. Furthermore 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. We do not consider there is any basis for concluding that his Honour wrongly conceived that only expenditure relating to ``advice'' came within the provisions of s 25-5(1).

33. Accordingly we conclude that the appeal should be dismissed.

Cross-appeal in relation to both Mr Falcetta's proceeding and Mr Bartlett's proceeding

34. The grounds referred to in the course of this portion of the reasons are those for which leave of the Court is sought. In each cross- appeal the same submissions at law are applicable.

Bartlett's proceeding

35. In the case of Mr Bartlett, the cross- appeal relates to $1890 of the amount of $3090 held to be deducted by the primary judge. In the case of Mr Falcetta it relates to $795 of the amount of $1815 allowed to him. In the case of Mr Bartlett there is a further cross-appeal against the allowance of a deduction of an amount of $900 representing work involved in the taking of instructions for the preparation of Mr Bartlett's tax return and the tax return for the company of which Mr Bartlett was a director (``Bombay'') (including financial statements of Bombay). The grounds contend that the primary judge erred in holding that the items to which the cross-appeal relates in each case related to the appellant's ``tax affairs'' under s 25-5(1)(b) of the 1997 Act. In the case of the sum of $900 in Mr Bartlett's proceeding, it is contended it should have been held that Mr Bartlett was not entitled to that deduction.

36. The submissions for the cross-appellant proceed as follows. First, they turn to the terms of engagement of the tax accountants. It is submitted that in the case of Mr Bartlett, so far as the accountant's work was to be undertaken concerning the tax affairs of any corporations, he contracted only as agent for the corporations. Therefore, it is submitted, he caused the corporations and not himself personally to ``incur'' expenditure within the meaning of s 25-5(1) of the 1997 Act. It is said that his only personal liability to the tax agent arose by way of personal guarantee of the primary liability of his companies for the fees.

37. In support of this submission, attention is directed to certain aspects of the ``Letter of Engagement''. First, there appears the following (emphasis added):

``You undertake and personally guarantee the payment of all professional and out of pocket expenses incurred by the following companies , trusts, super funds... [ names of four companies handwritten onto the document].''

The document is addressed to Mr Bartlett personally and is signed by him. It is submitted that the quoted words create a primary liability of the companies and show that Mr Bartlett assumed a personal liability in the capacity of a guarantor to those companies. That is, the combination of words is apt to give effect to Mr Bartlett's position both as agent to bind the companies as primary debtors and as a guarantor of them, at the same time.

38. Next, reference is made to the fact that the document is signed as 'client' only by Mr Bartlett. It is said that this is not inconsistent with him, nevertheless, having acted as agent of the companies because he was contracting on his own behalf for the work in relation to his own tax affairs as well as on behalf of the companies for their tax accounting.

39. Third, attention is directed to the ``Authority to Deduct Fees'' which contains the following (emphasis added):

``I personally undertake to pay all fees (accounting, advice, disbursements) incurred by the following companies / trusts/superannuation funds etc... [and the names of four companies are written in by hand]. I warrant that I have the authority to give the above undertakings and authorities with regard to payment of your fees.''

It is said this confirms that Mr Bartlett acted as agent for his companies to create a primary liability in them for work done in respect of their tax affairs. It is submitted the only proper

ATC 4523

construction of these words is that the only liability assumed by Mr Bartlett with respect to work on the companies was as guarantor. Additionally, it is said that the express warranty of authority would be quite superfluous unless Mr Bartlett were contracting as agent on behalf of his companies.

40. Attention is also directed to the terms of the ``Letter of Instruction'' in which it is stated (emphasis added):

``... to prepare and advise on my behalf or on behalf of any entity I am director , beneficiary, appointer, trustee, partner, member or controller of , the following documents or render advise (sic) from time to time, as and when they fall due or as requested by me.''

It is also stated in that document (emphasis added):

``I personally undertake and guarantee to pay all professional fees and disbursements as specified by my letter of engagement or as agreed on behalf of myself or any other entity previously mentioned .''

It is said that this shows the primary liability will be that of the relevant company.

41. In his Honour's reasons, after setting out the documents by which the firm was engaged by Mr Bartlett, he made reference to Mr Bartlett's concession that ``he was contracting on his own behalf and on behalf of the companies named in the documents''.

Falcetta's proceeding

42. In the case of Mr Falcetta the standard form documents were executed on 8 February 1999 and were in the same terms. There was one distinction in that the documents signed by Mr Bartlett had written into them the names of certain companies whereas Mr Falcetta did not insert the names of companies for which he was guaranteeing the payment of fees incurred. However, the cross-appellant places no reliance on this.

43. Additionally Mr Falcetta, in his capacity as a director of GSA and other companies, signed a letter of engagement and instruction and an authority for deduction of fees to the firm. In his affidavit Mr Falcetta distinguished these from the similar documents which he had signed on 8 February 1999 on the basis that the latter had been signed in his personal capacity.

Judges' reasons

44. In relation to the documentation his Honour said in his reasons (at [ATC at 4974] [ 69]):

``... There is much to be said for the view that the contractual relationship between the firm and each taxpayer as reflected in the documents signed was that each taxpayer contracted as agent for the relevant corporate entities in instructing Mr Cassaniti to perform services for the corporations and that each taxpayer guaranteed payment by the relevant corporation of the fees. Liability for amounts guaranteed was not, in the present circumstances, deductible. The requisite connection between the outgoing and the activity of the taxpayers directed at their gaining or producing assessable income, or any business they carried on did not exist. Further, money paid on a guarantee would in the present case be capital or of a capital nature:
Hooker Rex Pty Limited v FC of T 88 ATC 4392. It would be otherwise if either taxpayer carried on a business of giving guarantees, but there is no foundation in the evidence for such a conclusion...''

45. The significance of the reference by his Honour to the question of guarantee is that a liability of Mr Bartlett or Mr Falcetta under an obligation as guarantor of the primary liability of any of their companies was inherently of a capital nature. It is not in contention that s 25-5(1) does not permit deduction of expenditure of a capital nature. Generally money paid by a taxpayer pursuant to a guarantee given by the taxpayer has been held to be on capital account, notwithstanding that the guarantee is given in the course of some business activity of the taxpayer:
FC of T v Email Ltd 99 ATC 4868 at 4876-4877 per Hill, Drummond and Sackville JJ.

46. His Honour's dicta arose in the context of the consideration by him of the provisions of s 8-1 of the 1997 Act. His conclusion that such section does not avail either cross-respondent is unchallenged.

Submissions for cross-appellant

47. The submission for the cross-appellant relies on the amended notices of appeal for which leave is sought. That seeks to plead in each proceeding that his Honour ought to have held that all of the items for which a deduction

ATC 4524

was allowed by him had been incurred by each cross-respondent in his capacity as guarantor of liabilities of his respective companies in order to discharge liabilities incurred as a guarantor and as such were not deductible under s 25-55 (sic) of the Act. We take the notice as intending to refer to s 25-5.

48. In support it is submitted that a finding should have been made that, consequently, no direct liability for expenditure was incurred for the purposes of s 25-5(1) by the individual taxpayer and that amounts paid as guarantor, being of a capital nature, were not deductible under the section: see in particular the first sentence of s 25-5(4) and the scope of s 25-5(1).

49. In the submissions for the cross- appellants in respect of the deductibility of guarantee and indemnity payments under s 8-1 reference is made to:
Bell & Moir Corporation Pty Ltd v FC of T 99 ATC 4738 and Email. In Bell & Moir the taxpayer guaranteed a finance facility to be provided to a company in which it held a one-third interest. It was held the making of the guarantee resulted in a loss or outgoing of a capital nature. In Email an indemnity was given as a condition of sale of a subsidiary. It was held that amounts paid under the indemnity were capital in nature. In both of these cases the court had regard to a range of matters in determining whether the expenditure was on revenue or capital account applying in particular the tests outlined by Dixon J in
Associated Newspapers Ltd v FC of T (1938) 61 CLR 337 and
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190; (1946) 72 CLR 634.

50. It is submitted that each of the cross- respondents, by giving each of his guarantees, secured the provision of accounting and taxation services by the firm to his companies. It is said that from the companies' perspective these services formed a necessary part of their trading operations and the expenditure incurred by the cross-respondents on behalf of the companies would be deductible under the general deduction provisions of s 8-1 of the 1997 Act. In substance, it was said, that the effect of the guarantee was the provision of financial assistance support to the companies and was analogous to them each making a loan of the funds guaranteed: cf Bell v Moir at 4743 per Hely J referring to
Commr Inland Revenue (NZ) v Shipbuilders Ltd (1968) 15 ATD 128 at 130-131; [1968] NZLR 885 at 901.

Reasoning

51. The submissions for the cross-appellants rely upon the opening words of s 25-5(1) where it is stated that ``you can deduct expenditure you incur to the extent that it is for'' any of the listed items. Subsection (4) makes it clear that ``you cannot deduct capital expenditure under subsection (1).'' That is accompanied by the sentence ``however, for this purpose, expenditure is not capital expenditure merely because the tax affairs relate to matters of a capital nature.'' That makes clear that simply because the subject of the expenditure is of a capital nature it ceases to be deductible where it is incurred by the taxpayer within one of the categories of permitted deduction in s 25-5(1). Therefore even if the cross-respondents could be found to have consulted Mr Cassaniti only about the guarantee liability, that would not prevent permitted expenditure being deductible to the extent it had been incurred by them and related to their tax affairs arising from that matter of a capital nature.

52. The determinative issue is therefore whether the matters about which the cross- respondents consulted Mr Cassaniti, as evidenced by the documentation signed to bring that about, related to their tax affairs or only to the tax affairs of their relevant companies. In the submissions for the cross-appellants it is accepted that the documentation indicates that the cross-respondents were also each contracting on behalf of themselves in relation to their own tax affairs. The acceptance of primary liability by each of the cross- respondents in relation to their respective companies is said not to have been in substitution for that former role but in addition to it. Even on these submissions the cross- respondents would be entitled to claim expenditure incurred by them in relation to their own tax affairs.

53. In any event we agree with the submissions for the cross-appellant that a proper examination of the documentation establishes that each of the cross-respondents contracted both on behalf of himself and on behalf of his respective companies. The letters of instruction expressly stated that the contracting party instructed the firm ``on my behalf or on behalf of an entity [of which] I am a Director, Beneficiary, Appointer, Trustee, Partner, Member or Controller...''. It was signed both personally and ``as agreed on

ATC 4525

behalf of myself or any entity previously mentioned.'' The authorities to deduct fees were an authorisation ``on my behalf or on behalf of any company, trust, partnership or other legal entity of which I am a Director...''. The clauses specifying the list of entities, quoted above, must be read in this context.

54. It was submitted for the cross- respondents that they could not have been acting as agents for each of their companies when instructing the firm because their objective in so instructing the firm was to avoid personal liability by causing each of their companies to be wound up. As indicated in relation to the Falcetta appeal, there is a limit to the personal role of the instructing director which is reached when he has caused others in the company, if necessary with that instructing director, to bring about the result required by s 222APB(1). We have not here attempted to define a bright line when that point is reached because that depends upon circumstances in each case. Nevertheless it is clear that, when that point is reached, the liability for the expenditure passes to the entity. Consequently the submission for the cross-respondents cannot assist either Mr Falcetta or Mr Bartlett.

55. In his reasons relating to Mr Bartlett his Honour said much of the work undertaken by the firm in relation to Bombay related to dealing with the liquidator of Bombay and with creditors rather than advising Mr Bartlett on his tax obligations or assisting him in complying with them. In arriving at his list of allowable work he ``endeavoured to apportion, where necessary, work undertaken which relates to the liquidation or dealings with the liquidator and work which clearly relates to tax affairs.'' He did so in circumstances where no precise figure could be determined because of evidentiary deficiencies, particularly the absence of time sheet. The resulting items to which the proposed ground relates are those which are described in a way that signifies an interest of a company entity, for example ``1998 Income Tax Return of Bombay Preparation... 300.'' The same reasoning governed his approach to the case of Mr Falcetta. Even if the proposed ground were made out, nothing has been submitted which would entitle this Court on appeal to interfere with an evaluation based on such evidentiary sources and involving an apportionment made by his Honour in circumstances where he was aware of the clear distinction between company and personal liability, as his reasons disclose. It is important to understand that the items constituting the list formulated by his Honour are the product of an apportionment in relation to the work to which they relate. It is not open to this Court to assume that, simply because an item in the list is described by reference to a company, it has not been apportioned so as to represent the remaining portion which is properly ascribable to the cross-respondents' requiring advice or other action in relation to their personal tax liability in the context of that particular item.

56. The same may be said in relation to the further additional grounds in the ``amended notices of appeal'' (which contains the present and proposed grounds of cross-appeal) in relation to the deduction of $900 allowed by his Honour in respect of ``Instructions for both Income Tax returns (including financial Position of Bombay).'' No case was made on appeal to establish why this should not be accepted as an apportionment in respect of that item in accordance with his Honour's reasons.

57. It follows that leave should be given to the appellants to file the ``amended notices of appeal'' but that each of the cross-appeals therein should be dismissed.

Conclusion

58. For these reasons we consider the appeal should be dismissed in Mr Falcetta's proceeding save that the orders of his Honour should be varied to accommodate the concession made for the respondent in respect of the additional deduction of $1020. Each of the cross-appeals should be dismissed.

THE COURT ORDERS THAT:

1. In proceeding N1797 of 2003:

  • (a) the appeal be allowed in part and Order 3 of Hill J dated 21 October 2003 be varied by deleting the reference to ``$1,815.00'' and substituting a reference to ``$2835''.
  • (b) the cross-appeal be dismissed.
  • (c) counsel forthwith provide written submissions on all issues relating to costs.

2. In proceeding N1798 of 2003:

  • (a) the cross-appeal be dismissed.
  • (b) counsel forthwith provide written submissions on all issues relating to costs.


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