FC of T v ROWE

Judges: Beaumont J

Burchett J
Drummond J

Court:
Full Federal Court

Judgment date: Judgment handed down 20 October 1995

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Burchett J

I have had the advantage of reading the judgments prepared by the other members of the Court, and I do not find it necessary to set out the facts for myself.

On the question of the deductibility of the expenses incurred by the respondent at the inquiry, I note that the Committee of Inquiry saw these expenses as incurred by him in defending himself from dismissal from his employment. That view of the matter is, of course, correct. However, at another level, I think these expenses should be recognized as incurred by the respondent in defending the manner of his performance of his duties. It was only by so justifying himself that he could make a successful defence against dismissal. When the matter is seen in this light, it falls squarely within the rule discussed in
Putnin v FC of T 91 ATC 4097 ; (1991) 27 FCR 508 . To adapt language there quoted (at ATC 4100; FCR 511) from
The Herald and Weekly Times Limited v

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ATC 4703

FC of T (1932) 2 ATD 169 at 170-172; (1932) 48 CLR 113 at 117-119 , the liability in question was incurred, or the claim was encountered, because of the very act of performing the work by which the respondent earned assessable income. The activities which produced the assessable income were what exposed the taxpayer to the liability discharged by the expenditure. As the Court said in Putnin at ATC 4102; FCR 513, so here, ``the... proceedings arose from the activities by which the taxpayer earned his income, the mode of his performance of a particular task carried out in the course of business operations''.

To put the same point in another way, the cause or the purpose of the respondent's incurring of the expenditure was his assertion that he had faithfully performed the duties by which he had earned assessable income. In
Creer v FC of T 94 ATC 4454 at 4457 I cited a passage from the well known judgment of Dixon J. in Hallstroms Proprietary Limited v FC of T (1946) 8 ATD 190 at 194-195; (1946) 72 CLR 634 at 647 in which the correct approach is stated in respect of the question whether legal expenses are on capital or revenue account:

``The claim is to deduct legal expenses, and legal expenses, we may assume, take the quality of an outgoing of a capital nature or of an outgoing on account of revenue from the cause or the purpose of incurring the expenditure. We are, therefore, remitted to a consideration of the object in view when the legal proceedings were undertaken, or of the situation which impelled the taxpayer to undertake them.''

On this basis, the expenditure was deductible.

On the question whether the reimbursement made to the respondent by the government of Queensland should be regarded as income within s. 25 of the Income Tax Assessment Act 1936, I am in agreement with the approach adopted by Drummond J. This is a case where the government of Queensland, having the general oversight of the activities of local government in that State, considered it to be in the interests of the State to hold an inquiry. Before that inquiry, the respondent stood accused of misconduct in the performance of his duties. He was completely exonerated. However, it was not competent for the inquiry to make an order in respect of the costs he had incurred. Several years later, the government decided to make a payment to the respondent calculated to reimburse him for the costs burden he had borne. The payment was in no sense a reward for his services during his employment by the Council, which had long since been determined. It was a recognition of the wrong done to him, and also of the fact that he had been forced to shoulder the task of sharing in an inquiry undertaken by the government for public purposes. The payment was not a remuneration, but a reparation. Of course, it was far from being a complete reparation, since he had had to bear the costs, which were reimbursed without interest in the currency of some years later. In my opinion, the nature of the payment, and the purpose it served, were inconsistent with its being regarded as a reward for services performed in the past for a body that was different from that which made it, nor, in the circumstances, was it in any other way sufficiently related to the performance of income earning activities. At any rate, it would be impossible to find an error of law impugning Dr Gerber's finding of fact:

``(T)he receipt was not `the product of', `a consequence of'... the applicant's employment or any services rendered by him. Indeed, I am satisfied that any connection between the receipt and the applicant's employment with the Shire Council was no more than a mere historical one.''

This finding was supported by the material before him, and is indeed the finding I would have made on that material.

The same analysis of the payment requires it to be held to have been too remote from the employment to be caught by s. 26(e): see Smith v FC of T 87 ATC 4883; (1987) 164 CLR 513; FC of T v Dixon (1952) 10 ATD 82; (1952) 86 CLR 540.