GL McDonald DP
Administrative Appeals Tribunal
G.L. McDonald (Deputy President)
The facts of this matter are not in dispute.
The applicant is a public servant and in March 1986 had been gazetted to the clerical administrative level 7. In June of that year, he was being considered by a promotion appeal committee for temporary transfer to a level 8. Whilst that was being considered, concerns were expressed by his supervisor that he was failing to perform his duties satisfactorily. His supervisor prepared a report. Pursuant to sec. 61 of the Public Service Act 1922 an authorised officer was appointed to review matters raised by the supervisor's report. That resulted in the applicant being charged under the provisions of sec. 61(2)(b) of the Public Service Act with 17 counts of various forms of improper conduct relating to the applicant's absence from the office without permission, lodging false sick and leave applications and improperly altering records on his time card. Of the 17 counts, 16 were found to be proven. All of the misconduct was connected to his compulsive gambling, a condition for which he has sought the advice of
ATC 793a psychiatrist and other assistance through joining Gamblers Anonymous.
Paragraphs 17 and 18 of the agreed statement of facts read:
``17. The inquiry officer considered that, but for mitigating factors, he would have recommended the applicant's dismissal from the service.
18. The notices listed these mitigating factors as being:
- (a) the applicant's addiction to gambling;
- (b) the rehabilitative steps he had taken;
- (c) the degree of supervision exercised over him; and
- (d) his proven ability as an officer.''
As the result of the finding, the applicant was demoted a level. The applicant appealed and, on the day before the appeal was due to be heard (5 May 1987), withdrew his appeal.
The applicant claimed as a deduction under sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act'') the sum of $4,472 being legal fees incurred by the applicant with respect to advice and representation at the initial disciplinary hearing and advice and preparation for the subsequently abandoned appeal.
The starting point as is so often the case in issues concerning the interpretation of sec. 51(1) of the Act is
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 where the High Court said (at pp. 56-57).
``For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income.
... 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.''
The applicant claims the expenditure was incurred to ensure he retained his public service position, including rights to seek further advancement, at the same level as prior to the disciplinary charges being brought. He contends that the expenditure was a necessary prerequisite for the gaining or producing of assessable income because if he had not been successfully defended there was a real chance of dismissal (see para. 17 of the agreed statement of facts).
Additionally, the applicant told the Tribunal that by lodging an appeal against the original decision to demote him his salary was maintained at the level prior to the demotion for the period up until he withdrew the notice of appeal. This resulted in him receiving some $785 which, had he accepted the first instance decision straight away, would have been denied him. The applicant told the Tribunal that he wanted to defend the complaints against him at first instance and on appeal because he did not feel that the department appreciated gambling was a disease for which he should be treated rather than punished. He also told the Tribunal that he did not proceed with the appeal because he had insufficient funds to pay for representation. From what the applicant said, I am satisfied that the appeal was lodged against the totality of the charges found to be proven against him and that it was an incident of lodging that appeal that he was enabled to receive a higher rate of payment for a longer period than would have been the case had he accepted the original decision. I can see no ground to separate the latter aspect from the totality of what he was trying to achieve by lodging an appeal.
The Commissioner submits it was no part of the applicant's duties to take unauthorised time off from work for gambling purposes and that those activities and, consequently, any resultant expense incurred by the applicant in defending his position under the provisions of the Public Service Act are not ``relevant or incidental'' to the gaining or producing of assessable income and the amounts are therefore not deductible.
The applicant relies on the Full Federal Court decision in
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 for the proposition that the expenditure was advantageous in that it was to restore his position to where it was prior to the disciplinary charges being brought. The facts under consideration in the Magna Alloys case were, however, significantly different from those under consideration here. There, the directors claimed a deduction for legal costs
ATC 794incurred in defending criminal charges arising out of promotional activities undertaken on behalf of the taxpayer company. The Court found the actions of the directors and agents charged were actions carried out in their respective capacities as directors and agents of the taxpayer company and for the (albeit misguided) purpose of obtaining a benefit for the taxpayer company. The Court found the expenditure was ``incidental and relevant'' and, therefore, an assessable deduction.
In Case N9,
81 ATC 56 the Board of Review found, inter alia, no such connection existed in circumstances where legal fees were incurred by a director defending criminal charges for activities which the Board found fell outside the scope of his duties as a director. In Case L26,
79 ATC 126 the majority found legal fees incurred by a schoolteacher of music in appealing against her dismissal for incompetence as a teacher were not deductible because the outlay was a necessary step arising prior to the gaining or production of assessable income and did not amount to expenditure in the course of gaining or producing such income. In the latter case the dissenting member found a connection to exist.
Inglis & Anor v. F.C. of T. 87 ATC 2037 at pp. 2046-2047 the Tribunal found legal expenses incurred by a librarian in prosecuting civil proceedings, aimed at maintaining her status and position which was apparently under threat from a change in procedures in the manner in which her work was to be carried out, to be deductible. Although the Tribunal found the civil proceedings to be ``unwise and ill-judged'' in characterising the expenditure, the Tribunal said (at p. 2047):
``The gravamen of the dispute that was reflected, however awkwardly, in the legal proceedings in question was the day to day situation of the first applicant in her work in the Parliamentary library.''
From those cases, it will be seen that it is a question of fact, depending on all the surrounding circumstances, as to whether or not expenditure claimed as a deduction can be regarded as being ``incidental and relevant'' to the gaining or production of assessable income.
The applicant's contention that the expenditure ``takes its character from the advantage to be gained'' and, if he had not been successfully defended, there was a real chance of dismissal, is not sustainable. Such an assertion does not, of itself, make the expenditure deductible:
Lunney v. C. of T. (1957-1958) 100 C.L.R. 478. In that case, the applicant had attempted to argue that fares necessarily incurred in getting a taxpayer to a place of employment in order to earn income were deductible. The Court, Williams, Kitto and Taylor JJ., said at p. 499:
``Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived.''
There must be some identifiable connection between the gaining or production of assessable income and the expenditure which must show in the nature of the payment made, i.e. that ``the liability is a natural or recognized consequence or incident of the regular and continuous exercise of a trade or conduct of a business or pursuit of a vocation'' (
Ash v. F.C. of T. (1938) 61 C.L.R. 263 at p. 282 per Dixon J.). Similar statements are to be found in
Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344, where the Full Court of the High Court said at p. 351:
``Phrases like... `incidental and relevant' when used in relation to the allowability of losses as deductions do not refer to the frequency, expectedness or likelihood of their occurrence or the antecedent risk of their being incurred, but to their nature or character. What matters is their connection with the operations which more directly gain or produce the assessable income.''
The Federal Court has recently confirmed the approach outlined above (
F.C. of T. v. Ryder 89 ATC 4250 at pp. 4254-4255).
In the instant case, it is the conduct of the applicant through his compulsive gambling which has led to the disciplinary charges being brought which, in turn, led to him incurring legal costs to defend himself. I do not accept that the expenditure on legal fees is, in those circumstances, ``incidental and relevant'' to the gaining or production of the applicant's assessable income in the sense in which that
ATC 795term has been interpreted by the decisions to which I have referred.
For the above reasons I would dismiss the application. The decision under review is affirmed.