Case U19

Members:
P Gerber SM
KL Beddoe SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 9 December 1986.

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Dr P. Gerber and K.L. Beddoe (Senior Members)

In this case, the applicant is a tourist resort operator running a resort at Benalong Beach, King Island. Some time in 1981, the applicant became aware that the owners of a private dwelling on Lot 7 at the back of the applicant's operation had, without council permission, created accommodation underneath the private dwelling for up to 28 guests. The septic tank on Lot 7 was located at the back fence of the allotment. Aware that heavy infiltration of additional effluent would pose a health problem, since Benalong Beach is unique, according to the applicant's manageress, in that it draws all its water from the water table into which the effluent flows, the applicant had the purity of the water tested every few months.

2. It seems that only after the unapproved facilities had been erected by the other guest house, known as Repose Lodge, did the local council become aware of the situation and, it was deposed, advised the owners of Repose Lodge that the illegality of the construction could be cured by an application for rezoning.

3. The applicant opposed the rezoning application, but was unsuccessful. He thereupon appealed to the Local Government Court where his appeal was upheld.

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ATC 182

4. It is with respect to the legal costs incurred by the applicant in this appeal that this Tribunal is presently concerned. The respondent Commissioner of Taxation disallowed the amount claimed in the 1982 tax year ($12,896) in toto, pursuant to sec. 51(1) and/or sec. 64A.

5. It is true that the evidence of the applicant stressed that his main purpose in objecting to the application for rezoning by Repose Lodge was because of the health risk posed to the area. It would fly in the face of common sense if the Tribunal were to ignore the self-evident fact that a supply of water, posing a risk to health, would have an adverse effect on the business of this applicant. As was pointed out in
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542, the identification of the dominant motive of the directors in deciding to incur the legal expenses is not an essential question in deciding whether or not the expenditure arose in carrying on the taxpayer's business. The evidence of the manageress makes it clear that since the water table in the applicant's resort was only five feet below the surface, the additional effluent could pose a serious health risk. She added that she was aware of three cases of hepatitis in a neighbouring area.

6. In the result, the Tribunal concludes that the outgoing, albeit a voluntary one, was nevertheless incurred for the purposes of the business and was perceived to be such, at least by the manageress.

7. The above conclusion would normally conclude this application in favour of the applicant. However, it appeared that the bulk of the expenditure was paid in the 1983 tax year; i.e. the year after it was claimed. The accountant who prepared the tax return was called as a witness and deposed without challenge that the resort business was conducted on what is referred to as an "accrual" basis so that the legal expenditure was, so it was said, incurred in the year in which the services were rendered. This introduced a further complication in that it transpired that the applicant had received an account during the year ended 30 June 1982 from the solicitor who acted for him, both he and the manageress had expressed surprise at the size of the account and requested an intemised bill setting out every item for which a charge was made. The Commissioner's representative thereupon submitted that since the liability for the account was not accepted by the applicant in the 1982 year, it was not "incurred" until quantum had been agreed upon by the parties - i.e., in 1983. Thus, it was argued, the sum owing being disputed, until the parties reached agreement, no loss or outgoing could be said to have been incurred. Reliance was placed on some dicta in Softwood
Pulp and Paper Ltd. v. F.C. of T. 76 ATC 4439. However, the Tribunal concludes that the facts of that case are a far cry from those presently before it.

8. The respondent's argument may well be sound, in circumstances where, for example, one of the parties insists that a bill of costs be taxed. Thus it can be maintained that until the taxing master fixed liability, no expenditure can be said to have been incurred. Be that as it may, it is a far cry from the present facts. Here, the applicant expressed surprise at the size of the bill, which, on the probabilities, was rendered in the 1982 tax year, and requested a more detailed account. He did not deny his liability, but merely sought greater particularity, and, given that the itemised bill extended over nine folios, this is hardly surprising. What does emerge is that the itemised bill made no concession from the amount shown on the previous bill of costs.

9. It follows that the profit or loss for the accounting period to 30 June 1982 must be computed by reference to the position as at that date, even when that position was not, on the respondent's argument, finally ascertained until the itemised bill of costs had been accepted.

10. The critical distinction from a case such as
Bernhard v. Gahan (1928) 13 T.C. 723 is that in that case the liability was not fixed, the only arguable dispute was on quantum. As was said in
R.A.C.V. Insurance Pty. Ltd. v. F.C. of T. 74 ATC 4169 at p. 4176:

"Once events have occurred out of which a liability to indemnify an insured arises, it appears to me that within the meaning of sec. 51(1) of the Income Tax Assessment Act a loss or outgoing has been incurred. Events have occurred which have subjected it to a liability to indemnify its insured against his liability to a third person and the extent of that liability is capable of reasonable estimate. Where there is no real question of the liability of the insured to the third party

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ATC 183

and the only question is one of estimating damages, the fact that the quantum of the loss or outgoing is a matter of estimate and that the amount may have to be adjusted in the light of later events does not stand in the way of it being a loss or outgoing."

11. The Commissioner's decision on the objection is set aside and the objection will be allowed in full.