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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Beaumont J

Introduction and background

This is an appeal from a decision of the Administrative Appeals Tribunal (``the Tribunal''), constituted by Dr. P. Gerber, Deputy President, allowing a taxpayer's objection to the assessment, as income, of a sum of $24,748.24 received by the taxpayer from the Government of Queensland in April 1989 in circumstances to be mentioned shortly. The appeal is brought under s. 44 of the Administrative Appeals Tribunal Act 1975. The background to the payment in question was as follows.

(a) The statutory inquiry

The respondent taxpayer, who was then employed by Livingstone Shire Council as its Engineer, was suspended from duty on 20 June 1985, and required by the Council to show cause why he should not be dismissed by reason of several complaints made against him. In his letter to the respondent dated 20 June 1985, the Chairman of the Council referred to an extract from the Minutes of the General Meeting of Council held on 18/19 June 1985 as follows:

``Cr. M.L. Cresta made reference to the following matters:

Regarding complaints against the Shire Engineer, made by or relating to: -

1. JALATEM PTY. LTD.

2. HAMILTON AND DEANE

3. R.A. & I.M. NEWLAND

4. W.H. MILLER

5. DALEBROOK PTY. LTD.

6. Justification of contribution recommendations of the following applicants' subdivisions: -

• (a) Taranganbah Est. Pty. Ltd. (Henry George Miller)
• (b) B.J. Aston
• (c) Saxby
• (d) Herriot
• (e) Richards
• (f) Hinton,

contained in the dossier referred to in the resolution of council of August 1983, and tabled again at this meeting, and having regard to the matters involving: -

1. PRATTS ROAD

2. PROUSE ROAD

3. MILLERS ROAD (BYFIELD) - Justification of contribution recommendations of the following applicants' subdivisions: -

• (a) Rabrest Pty. Ltd.
• (b) Stan Barlow
• (c) Clare
• (d) Smith
• (e) Timba Nominees
• (f) Richards;

the correspondence from Yeppoon Area Ratepayers' and Citizens' Association, re performance of private works on the property of Mr. and Mrs. Rowe on 22nd and 23rd June 1981, the omission for six months to disclose to Council the appeal instituted by Mr. & Mrs. Rowe against Council on 23rd March 1982, the full circumstances surrounding the proposed resumptions and later acquisition of the two Wilkins' properties, and all other relevant matters touching upon the duties of the Shire Engineer, and moved the following resolutions: -

`That the Shire Engineer be suspended forthwith from employment as such, and that he be required to deliver to the Shire Clerk within 28 days, a written report replying to each and every complaint mentioned, and that he be required to show cause to Council at a Special Meeting to be convened for that purpose, why he should not be dismissed from employment by this Council;'

`That during his suspension Mr. Rowe be required forthwith to surrender his shire car and Shire Office keys, and that he be denied access to the Shire Office, except in the following circumstances: -

• (I) He shall be allowed to clean out his office under supervision of appointees of Council;
• (II) He shall be entitled to such information as shall reasonably be required to enable him to report and answer fully the complaints against him, but such information shall be requested in writing by Mr. Rowe's legal advisers;

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  ATC 4695

• (III) He shall be entitled to entry during business hours into all parts of the Shire Office which are open to the general public.'

The resolutions were seconded by Cr. S.B. Dorey.''

In the letter, the Chairman requested that the respondent abide by these resolutions.

(By s. 17(1) of the Local Government Act 1936-1985 (Q'land) (``the Act''), a Local Authority is empowered to appoint, inter alios, an engineer to assist in the execution of the Act. By s. 17(4) of the Act, `` [ t]he chairman may at any time suspend from office any officer who in his opinion is guilty of misconduct or neglect,.... Provided that at the next meeting of the... Authority after such suspension, the chairman... shall report the matter to the... Authority; and if the officer... is dismissed by the... Authority no salary or allowances shall be due or be paid to him from the date of his suspension.'')

On 27 June 1985, the Governor-in-Council pursuant to power vested in him by s. 4(5) of the Act, intervened so as to rescind the resolution passed by the Council suspending the respondent.

On 28 June 1985, the Director of Local Government for the State of Queensland, acting pursuant to s. 4A(3) of the Act directed, at the direction of the Minister, that there be an Inquiry into the matters the subject of the resolution suspending the respondent and ``into any other matters that are considered to be relevant to the matter''.

(By s. 4A(3)(i) of the Act, the Director, (who, subject to the Minister, is charged with the administration of the Act - s. 4A(2)), may make or cause to be made, inter alia, such inquiries as he thinks fit in relation to any matter respecting the administration of the Act and shall do so if so directed by the Minister. By s. 4A(3)(ii) and (iii), the Director, or other person conducting any inquiry, has the powers of a commission under the Official Inquiries Evidence Acts 1910-1929 (Q'land). By s. 3 of that Act, the President or Chairman of a Commission has power to summon witnesses. By s. 4A(3)(v) of the Act, the person so directed by the Director to make any inquiry shall as soon as practicable furnish a full report of such inquiry to the Director.)

By letter dated 28 June 1985, the Council informed the respondent of the statutory Inquiry and advised the respondent that his suspension from duty had been rescinded and that he was required to resume normal duties. The Inquiry was held in August 1985. The respondent retained a solicitor and counsel to appear for him at the Inquiry. In its report, the Inquiry ``cleared [ the respondent] of any charges of misconduct or neglect''. The Inquiry noted that, although it had no power to award costs or recommend their payment, the respondent ``ha [ d] in reality been compelled to engage a solicitor and counsel to defend himself against dismissal''.

By letter to the Council dated 1 November 1985, the respondent applied to the Council for reimbursement of his expenses associated with the Inquiry, which then were stated to be $25,101.35. A further application to the Council was made by the respondent's solicitors by letter dated 23 April 1986, but the Council failed to accede to either of these requests.

(In April 1986, the respondent was dismissed by the Council. In June 1986, he applied to the Local Government Appeals Board against the dismissal and received compensation and costs in that connection, but nothing turns on this for present purposes.)

(b) The claim to deduct the legal costs

In his return of income for the year ended 30 June 1986, the respondent claimed a deduction in the sum of $24,727.99, being his costs incurred in connection with the Inquiry. In his return, it was contended -

``... that [ this] expenditure was incidental and relevant to the gaining of assessable income. From the time of his initial suspension, it was critical from his point of view to successfully defend his actions, because, even though dismissal could still result, the question of the receipt of compensation would rely heavily on his being exonerated.''

The Commissioner initially disallowed the objection, but, subsequently on 13 July 1989, after there had been a reference made to the Tribunal at the respondent's request, the Commissioner decided to allow the objection in full.

(c) The ex gratia payment by the Government

In the meantime, the respondent applied to the Treasurer of Queensland for reimbursement

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ATC 4696

of his costs incurred in connection with the Inquiry in the sum of $24,748.24, together with interest in the sum of $13,957.53, a total of $38,705.77.

By letter dated 6 March 1989, the Treasurer, Mr. Ahern, wrote to the respondent as follows:

``I refer to the matter of your costs in relation to the Committee of Inquiry into your suspension as the Livingstone Shire Engineer.

Cabinet has agreed in principle to the State providing you with an ex gratia payment equivalent to the costs you incurred in the conduct of the Inquiry.

In order to allow a proper assessment of your costs it would be appreciated if you could request your solicitors to supply the Treasury with a statement of your costs on the same basis as would be provided to a Court Taxing Officer.

A determination and ex gratia payment will be effected as soon as possible on receipt of this information.''

By letter dated 26 April 1989, Mr. Ahern wrote further to the respondent as follows:

``I refer to the matter of your costs in relation to the Committee of Inquiry into your suspension as the Livingstone Shire Engineer.

The claim for costs and interest submitted by your Solicitors has now been examined and I advise that in accordance with Cabinet's decision on this matter, an ex- gratia payment of $24,748.24 has been approved in settlement of the claim. A cheque for this amount is enclosed.''

The assessment

In his return of income for the year ended 30 June 1989, the respondent disclosed receipt of the sum of $24,748.24, but sought a ruling from the Commissioner that it was received on capital account and thus not taxable as income. However, the Commissioner included this amount in his notice of assessment. The respondent objected against this assessment. The Commissioner disallowed the objection.

The decision of the Tribunal

Setting aside the Commissioner's decision, the Tribunal held that the receipt was not taxable income, either under s. 25(1) (as income in accordance with ordinary concepts) or under s. 26(e) of the Income Tax Assessment Act 1936. Section 26(e) provides that the assessable income of a taxpayer includes:

``the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise...''

The Tribunal found, and it has not been disputed, that the payment by the Treasury was ex gratia, was by way of reimbursement of the respondent's legal expenses, and was in no way referable to the claim made for lost interest.

The learned Deputy President rejected a submission by the Commissioner that the sum in issue was a reimbursement of expenses which were deductible under s. 51(1) and, for that reason, constituted income under s. 25(1). Dr. Gerber concluded, after a consideration of the authorities, that ``no such general principle exists''.

Turning to consider the ``guiding principles'' which distinguish between income and capital, Dr. Gerber, acknowledging that the distinction was one of ``emphasis'' or of ``fact and degree'', said:

``The following are some of those `guiding principles'...

• (a) Whether an amount is income according to ordinary concepts depends upon `a consideration of the whole of the circumstances'... and `its quality in the hands of the recipient.'...
• (b) The test to be applied is an objective rather than subjective one....
• (c) The motives of the donor of the payment are a relevant consideration but not decisive....
• (d) The regularity and periodicity or otherwise of the payment will be a relevant though not decisive consideration....
• (e) Although the cases have tended to fail in some degree to discriminate in what context use is being made of such phrases (i.e. whether in relation to sub-s 25(1) as distinct from s 26(e)), it would appear that a generally decisive consideration is whether the receipt is the

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  ATC 4697

  `product of', `incidental to', `an incident of', `a consequence of' or `in relation to' any employment of, or services rendered by, the recipient, or of any business or any revenue producing activity of the recipient... and it matters little that the payment is gratuitous or made by someone other than the recipient's employer.''

The Tribunal concluded that s. 25(1) had no application, ``particularly having regard to'' these findings:

``(a) the payment or receipt in question was a single rather than a recurrent or periodic one;

(b) the payment was not made by the [respondent's] former employer, but by the State Government;

(c) the payment was truly of an ex gratia nature, there being no obligation whatsoever on the part of the State Government to make the payment (either on its own behalf or on behalf of the [ respondent's] former employer pursuant to the [ respondent's] contract of employment or otherwise);

(d) the payment was not made to the [ respondent] until a substantial time after the termination of his employment by the Shire Council;

(e) the money was not received by the [ respondent] in return for any services rendered by him or on his behalf, or in consequence of his termination; and

(f) the receipt was not `the product of', `a consequence of' (or any of the other oft- mentioned phrases referred to above) the [ respondent's] employment or any services rendered by him.... [ A]ny connection between the receipt and the [ respondent's] employment with the Shire Council was no more than a mere historical one.''

Dr. Gerber said, with reference to the authorities on the point, that although the issue ``is not completely settled'', it would appear that ``the better view'' is that s. 26(e) is not limited to including in assessable income receipts or benefits which are, according to general concepts, of an income nature. He adopted the following summary of the cases on s. 26(e) by Deputy President Layton in Case V76,
88 ATC 538 (at 541-542):

``(1) The language used in the section is extremely broad as indicated by the phrases `in respect of', `in relation... to' and `directly or indirectly'...

(2) Broad though the language may be, there must be a `connection' or `a real relation' between the benefits and the employment of the taxpayer or, alternatively, the services rendered by the taxpayer...

(3) As to the words `directly or indirectly'... `A direct relation may be regarded as one where the employment is the proximate cause of the payment, an indirect relation as one where the employment is a cause less proximate, or, indeed, only one contributory cause';

(4) It is not necessary that the benefits described be paid as remuneration for the work which an employee is employed to perform; it is sufficient to attract sec. 26(e) that the benefits be paid to an employee as a product, incident or consequence of employment...

(5) The word `employment' is... `more than the activity for which an employee is remunerated: employment comprehends all aspects of the relationship of employer and employee in the particular case save those aspects which are merely personal. If a distinction is to be drawn between the income-producing activity which is an aspect of employment and the entirety which constitutes employment, sec. 26(e) looks to the relationship between the entirety and the payment of the allowance';

(6) The phrase `services rendered' describes work actually performed by the taxpayer, whether in the capacity as an employee, independent contractor or otherwise. The phrase must `draw in situations not encompassed by the term " employment " '... The phrase `services rendered' should... `consist of the doing of an act for the benefit of another, which is more than the mere making of a contract and which goes beyond the performance of an obligation undertaken in the course of an ordinary commercial contract';

(7) If the benefit is paid to a taxpayer voluntarily, it may still fall within sec. 26(e), but it is necessary to enquire as to why and how the gift came about. If the motive is

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ATC 4698

communicated to the taxpayer employee or is known to the taxpayer, the common understanding of the motive for the payment may be cogent evidence of `how and why it came about that the gift was made'....''

Dr. Gerber went on to hold that s. 26(e) was not applicable here, because, in particular, ``the necessary nexus between the benefit and the [ respondent's] employment... [ was] not present''.

The Commissioner's grounds of appeal

The Commissioner now challenges the Tribunal's conclusion that there is no general principle that an amount paid as compensation for, or by way of reimbursement of, a deductible expense, is income within ordinary concepts. He further contends that the Tribunal should, in any event, have held that the amount of $24,748.24 was income derived by the respondent within s. 25(1). The Commissioner also submits that the Tribunal should have held that an amount received by an employee as happened here, as compensation for, or by way of reimbursement of, a deductible expense incurred in protecting his employment, is assessable as compensation granted to him in relation, directly or indirectly, to his employment within s. 26(e).

Conclusions on the appeal

It will be convenient to consider s. 25(1) first.

(i) Section 25(1)

As Gummow J. pointed out in
TNT Skypak International (Aust) Pty Ltd v FC of T 88 ATC 4279 at 4284; (1988) 82 ALR 175 (at 182-183 ) where, in a case such as the present, there is little room for dispute about the primary facts, the characterisation of a receipt or gain in accordance with the ordinary concepts and usages of mankind is, usually, a question of law.

In
FC of T v Harris 80 ATC 4238 ; (1980) 43 FLR 36 , it was held (by Bowen C.J. and Fisher J., Deane J. dissenting) that a lump sum payment made by a former employer to members of its superannuation fund to compensate them for high inflation was not income. Bowen C.J. said (at ATC 4241; FLR 40) that -

``A generally decisive consideration is whether the receipt is the product in a real sense of any employment of, or services rendered by the recipient, or of any business, or, indeed, any revenue producing activity carried on by him...''

His Honour went on to say (at ATC 4243; FLR 44):

``It appears to me that the circumstances of this case are insufficient to lead to the conclusion that a gift, not normally to be regarded as being of an income nature, should be so regarded because the Bank as payer intended it to be, and it in fact was, a supplement to the taxpayer's pension.

This is not a case where the motives of the donor throw much light on the character of the receipt in the hands of the donee. As has been stated the Bank was concerned with the problems caused to its pensioners by high rates of inflation. It desired to mitigate the impact of inflation upon its pensioners, who were formerly its employees. It was not its motive to reward its pensioners for previous faithful service. The only underlying business consideration was one which concerned the Bank not the pensioner, that was that it was in the business interests of the Bank in relation to existing employees to be seen to be treating pensioners, who were former employees, with fairness and liberality.''

It may perhaps be said that there is some analogy here with the present case. In deciding to make the ex gratia payment, the Treasury could have been seen as acting so as to vindicate the public interest in ensuring that fair and liberal treatment is afforded to those citizens who participate in public inquiries (see
First Provincial Building Society Limited v FC of T 95 ATC 4145 at 4149 per Hill J.). On the other hand, the appearance by the respondent before the Inquiry was clearly related to the administration of the affairs of the region at the level of Local Government, and the respondent's first claim for the reimbursement of his legal expenses was made upon his employer. It may be inferred that, given the recommendation in the Inquiry's report, the State felt impelled to respond to the request for reimbursement only when the employer failed to accede to the request.

It seems that before the Tribunal, and, at least to some extent, before this Court, the arguments advanced appeared to assume that the respondent was entitled to an allowable deduction for his expenses as an item on

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ATC 4699

revenue, rather than capital, account. Although the Tribunal did not, on the previous reference, have then to decide the point because, in the end, the Commissioner was prepared to allow the deduction, it is apparent that this issue is not without its own complexities. In this connection, I accept, as was submitted on behalf of the applicant, that we are here concerned not merely with the fact that, as a ministerial act, the deduction was allowed by the Commissioner; we are now concerned with a substantive question, one of mixed fact and law, that is, whether the respondent was, in truth, entitled to a deduction because the payment by the respondent of his legal expenses had the essential character of an outgoing on revenue account; that is to say, it must be accepted that the Commissioner may make inconsistent assessments (see
Richardson v FC of T (1932) 2 ATD 19 at 23; (1931-1932) 48 CLR 192 at 205 ;
DFC of T v Richard Walter Pty Ltd 95 ATC 4067 at 4082; (1995) 69 ALJR 223 per Brennan J. at 240 ).

In
Inglis & Anor v FC of T 87 ATC 2037 the taxpayer, employed as a permanent officer of the Commonwealth Public Service in the Parliamentary Library, claimed to deduct legal expenses incurred by her in the prosecution of civil actions brought against the Commonwealth and certain individuals. She claimed in these actions that new procedures in the Library placed unwarranted restrictions on her. The actions, which were ultimately settled, were commenced by the taxpayer because she faced a loss of status and the prospect of her chances of promotion being blocked. Although she had been transferred ``sideways'', she suffered, in fact, no loss of income. The Tribunal (Mr. Todd, Deputy President) held, correctly in my view, that the expenses were deductible, after concluding (at 2047) that the expenditure was incurred by the taxpayer in gaining or producing assessable income. It was held that the ``gravamen'' of the dispute that was reflected, ``however awkwardly'', in the actions, was her ``day to day situation'' in the Library, so that the expenditure was incidental and relevant to the work which produced her income.

A similar view was taken by the Tribunal in Case 5822,
(1990) 21 ATR 3357 (at 3359) in allowing a claim for legal expenses by an officer seeking to preserve his employment then under threat.

In my opinion, notwithstanding the different outcome in Case 117,
(1959) 8 CTBR (N.S.) 671 , the approach taken in Inglis provides an appropriate analogy here. Since the Inquiry was centrally concerned with day-to-day aspects of the respondent's employment, it ought to be concluded that the respondent's cost of representation before the Inquiry was incurred by him ``in'' gaining assessable income.

The next question is whether deductibility would have been barred by the requirement of s. 51(1) that the expenditure not have been of a capital, private or domestic nature.

In
Hallstroms Pty Ltd v FC of T (1946) 8 ATD 190 at 194-195; (1946) 72 CLR 634 (at 647) Dixon J. said:

``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.''

In Inglis , it was held that the expenditure was clearly not private or domestic. In my view, the position in the present case would be similar. The real question would have been whether the expenditure was of a capital nature.

In Inglis , Mr. Todd said (at 2047-2048):

``In the present case the most relevant authority in my opinion is that of Dobbs v Commr of I.R. 74 ATC 6001, a decision of Cooke J. in the Supreme Court of New Zealand. There the legal expenses were incurred by a public servant in respect of a successful appeal which resulted in a promotion which resulted in an increase in income. No such increase was of course produced in the present case, nor in my opinion need it have been. The question is whether the expenditure was of a capital nature. The important aspect of Dobbs' case is that Cooke J. relied upon F.C. of T. v Finn ... and upon F.C. of T. v Hatchett ... to reject an argument that an expenditure in relation to a person's body, mind or capacity can be described as an outlay of capital. It is true that Cooke J. pointed out... that sec. 51(1) [ of the Australian Act]... includes the expression `or of a capital nature', and

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ATC 4700

queried whether the situation might be otherwise in Australia. In my opinion that consequence should not follow, and I refer to Hatchett's case upon which Cooke J. expressly relied. It follows that I prefer to follow the decision of the Supreme Court of New Zealand to that of Board of Review No. 3 in Case N24...

... To sum up then, the expenditure in question had a `perceived connection' (the phrase used in Hatchett's case ) with the first applicant's gaining or producing of her assessable income, and was not of a capital, private or domestic nature.''

Again, with respect, I agree with this aspect of Inglis and with the decision in Dobbs . In my opinion, similar reasoning should be applied in the present connection.

On behalf of the respondent, reliance was placed upon the decision of Menzies J. in
Kratzmann v FC of T 70 ATC 4043 ; (1970) 1 ATR 827 . There, the taxpayer incurred legal expenses in court proceedings instituted by him to prevent his public examination in connection with the liquidation of a company of which he had been a director. In rejecting the claim, Menzies J. said (at ATC 4046; ATR 829-830):

``The taxpayer's case that the expenses were necessarily incurred in gaining his assessable income was based upon the suggestion that a public examination in the liquidation would tend to keep before the public matters which would discourage possible clients from entrusting him, or any company with which he was concerned, with building contracts and might involve him in total ruin necessitating the realisation of investments from which he was receiving income. Had this been the only matter in issue I would have acceded to the Commissioner's application and dismissed the appeal as incompetent. I do not think this part of the appeal involves any question of law. The Board decided against the taxpayer on the facts and it seems to me that the Board was incontestably right that the facts showed that the expenses were not deductible under sec. 51 of the Income Tax Assessment Act.''

Counsel for the taxpayer in Kratzmann relied upon
FC of T v Snowden and Wilson (1958) 11 ATD 463 ; (1958) 99 CLR 431 , but Menzies J. distinguished it, saying (at ATC 4046; ATR 830):

``... that decision is not in point. There a company spent money advertising to counter press reports concerning allegations made against it in the conduct of its business and incurred legal costs in appearing before a Royal Commission to protect itself against allegations relating to the conduct of its business which, if proved, would affect it in the present and in the future conduct of its business. To allow such expenditure as deductible affords no warrant for allowing [ this] taxpayer as a deduction expenditure to protect his company or his investments, if, indeed, it could be thought that it could do either. The expenditure was not an outgoing incurred in gaining assessable income and, even upon the basis upon which the taxpayer sought to establish the expenses as deductible, they were clearly enough of a capital, or a private, nature.''

In my opinion, the context in Kratzmann should be distinguished from the present circumstances. Here, at material times, the taxpayer was, as in Inglis , in employment. It is true that here the inquiry or investigation was not conducted by the taxpayer's employer, at least not directly. On the other hand, the inquiry was initiated by the Central Government of the State, and it had the ultimate statutory control over, and responsibility for, Local Government. Although it was the Council which appointed the respondent as its engineer, the State Government also had a real interest in the effective performance of his duties as an important administrative aspect of efficient Local Government in the area. To this extent, the State Government was no ``mere'' donor (see Jeffrey Waincymer, Australian Income Tax Principles and Policy , (1991) at 90) or a disinterested spectator. On the contrary, it had a proper concern to ensure that the administration of the public affairs of the region, at the level of local government, were efficiently carried out. The functions of the Shire Engineer were an important aspect of this.

It is also true that an Inquiry of the kind undertaken here may have had a dual aspect in that it may have focussed on the personal integrity of those involved, as well as on management or administrative issues. It was the emphasis on the former that was relied upon to deny the deduction in Kratzmann . In the present

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ATC 4701

case, however, it appears that the latter aspect was the more important issue for the Inquiry.

Although the issue of deductibility may throw light on the different question of assessability, it is an open question whether it can be determinative, at least without qualification (see
Allsop v FC of T (1965) 14 ATD 62 at 64; (1965) 113 CLR 341 at 350 ;
HR Sinclair & Son Pty Ltd v FC of T (1966) 14 ATD 194 at 195, 196; (1966) 114 CLR 537 at 543, 545 ; TNT Skypak , above, at ATC 4289-4292; ALR 188-192). But I need not pursue this as I prefer to decide the present question by reference to the settled basic principles which, relevant to the case of a receipt by an employee or former employee, may be summarised, as Hill J. did in First Provincial Building Society Limited v FC of T , above, (at 4148) as follows:

``1. Whether a particular receipt is income is to be determined by reference to the character of that receipt in the hands of the taxpayer....

2. The question is not decided by determining whether the expenditure by the payer is of an income or capital nature.

3. The fact that the amount in question must be applied for a capital purpose will not determine its character as capital.

...''

In seeking to apply these principles here, assistance may be derived from the line of English decisions upon the question whether gratuitous payments are assessable as profits arising out of the recipient's employment or by reason of his office, of which Kitto J. said in
The Squatting Investment Co Ltd v FC of T (1956) 10 ATD 126 at 149-150; (1952-1953) 86 CLR 570 (at 633-634) :

``The distinction those decisions have drawn between taxable and non-taxable gifts is the distinction between, on the one hand, gifts made in relation to some activity or occupation of the donee of an income- producing character, such gifts being variously described as accruing to the donee in virtue of his office... or as remuneration... or in respect of his past services... or substantially in respect of his services... and, on the other hand, gifts referable to the attitude of the donor personally to the donee personally, such as those which have been called mere gifts or presents made to the donee on personal grounds... mere donations... gifts moved by the remembrance of past services already sufficiently remunerated as services in themselves... payments peculiarly due to the personal qualities of the particular recipient, or personal gifts as marks of esteem and respect....''

Some of these decisions were subsequently considered by the House of Lords in
Hochstrasser v Mayes [ 1960] AC 376 . There, an employee received from his employer an amount under a scheme to provide housing assistance to employees. The sum, which was to compensate the employee for his loss on the sale of his home on his transfer to a new place of work, was held not to be taxable. Viscount Simonds said (at 390-391):

``The question is one of substance, not form. I accept, as I am bound to do, that the test of taxability is whether from the standpoint of the person who receives it the profit accrues to him by virtue of his office.... I do not doubt that a taxable profit may take the form of the discharge of an employee's obligation as well as of a direct payment... nor that a lump-sum payment to directors may in some circumstances, just as in other circumstances it may not, be subject to tax. Here fine distinctions have been made which are not directly relevant to the present case. Again, there may well be cases, of which Nicoll v Austin ... is an example, where a managing director or other officer of a company is taxable in respect of the outgoings of a house occupied by him which are discharged by the company. Such cases may be near the line, as may cases in which the question is whether a payment is made to an employee as a reward for his services or (to use the words of Parker L.J.'s exception) is made out of affection or pity.''

The earlier English decisions were also considered by Dixon C.J. and Williams J. in
FC of T v Dixon (1952) 10 ATD 82 at 85; (1952) 86 CLR 540 , saying (at 556) :

``... it is clear that if payments are really incidental to an employment, it is unimportant whether they come from the employer or from somebody else and are obtained as of right or merely as a recognized incident of the employment or work.''

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ATC 4702

Applying the above principles and approaching the question as one of substance rather than form, and putting to one side for the moment the question of the significance of the burden of proof, it becomes apparent that the true nature of the Inquiry becomes a crucial consideration in the application, or otherwise, of s. 25(1) in the present circumstances. That is to say, if the true nature of the Inquiry was, in substance, an investigation of the personal integrity of the respondent, it would be difficult to demonstrate either that the expenses were deductible, or that an amount received by way of their reimbursement was assessable. On the other hand, if, in truth, the Inquiry was concerned, primarily at least, with matters of administration on a day-to-day basis, such a different complexion of the events would usually justify a characterisation of the legal expenditure, and its refund, as items on the revenue account of the taxpayer that were not of a private kind.

In my opinion, the latter characterisation is, as a matter of inference to be drawn from the known facts, the better view of the circumstances, when taken as a whole. Even if the personal honesty of the respondent were to have been questioned in the course of the Inquiry, it appears that this would have been no more than an incidental issue. It will be recalled that the relevant power, as found in s. 4A(3)(i) of the Act, was to inquire into ``any matter respecting the administration of this Act''. Thus, on its face, the investigation was not limited to a review of the personal qualities of individuals, but rather was aimed at the broader agenda of the administration of a local government region. To participate in such a review would, from the responent's perspective, be to do something which was central to the performance of his duties as Shire Engineer. His involvement in the Inquiry should thus be seen as an aspect of his income-earning activity. Although the question is difficult and the present case is near the line to be drawn, his legal expenses, and their reimbursement, should, I think, likewise be viewed as having a revenue, rather than a capital, character, as well as not being expenditure for a private purpose. It must follow that the respondent could not discharge the statutory onus of demonstrating that an assessment should not have been made under s. 25(1).

(ii) Section 26(e)

Although not strictly necessary, I would add that, for similar reasons, the payment was, in my view, a ``gratuity'' or ``compensation'' or ``benefit'' which was ``allowed'' or ``given'' to the respondent in respect of his employment, at least indirectly (see
FC of T v Holmes 95 ATC 4476 ). It was thus assessable under s. 26(e), despite the fact that it was, in strictness, voluntary (see
Smith v FC of T 87 ATC 4883 at 4890; (1987) 164 CLR 513 per Brennan J. at 526 ). There was an ``evident connexion'' between the respondent's employment and the sum received (cf. Smith , above, per Toohey J. at ATC 4893; CLR 533) notwithstanding that, the employer having declined to pay, the State did so. Section 26(e) does not, in terms, require that the payment be made by the employer and provided, as a matter of substance, the employment nexus exists, it is not a prerequisite to the assessability of the receipt that the employer make the payment (see, Dixon , above, at ATD 85; CLR 556). It is also, I think, appropriate to take into account, in this regard, the relationship between the Central and Local Governments already mentioned.

Proposed orders

I propose that the appeal be allowed, with costs; that the decision of the Tribunal be set aside; and that, in lieu thereof, the Commissioner's decision disallowing the objection be confirmed.