DEDUCTIBILITY OF FEES INCURRED IN CONNECTION WITH FIRST CHARGE AND THE THIRD CHARGES
52 Emmett J was correct in concluding that the legal expenses incurred by the taxpayer in relation to the First Charge and the Third Charges were not deductible pursuant to s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the "1997 Act"). That section provides relevantly:
'1. You can deduct from your assessable income any loss or outgoing to the extent that:
(a) it is incurred in gaining or producing your assessable income; or
(b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
…
2. However you cannot deduct a loss or outgoing under this section to the extent that:
(a) it is a loss or outgoing of capital; or of a capital nature; or
(b) it is a loss or outgoing of a private or domestic nature … .'
53 Section 8-1 is, of course, the successor to s 51(1) of the Income Tax Assessment Act 1936 (Cth) (the "1936 Act"). It has not been suggested that the sections are to different effect. The decision of the High Court in Federal Commissioner of Taxation v Payne (2001) 202 CLR 93 at [16]-[17] concerned the deductibility of travel expenses incurred in connection with travel between two places of work. The majority (Gleeson CJ, Kirby and Hayne JJ) said at [16]-[17]:
'16. … The principle which … must be applied in this (case), is one which limits the allowance of a deduction for outgoings to those outgoings that are incurred in the course of deriving assessable income. It is a principle which excludes outgoings which, although incurred for the purpose of deriving assessable income, are not incurred in the course of doing so. Distinguishing between those two kinds of outgoing may well invite some criticism, but if it does, the criticism is directed at the legislation, not at the way in which the legislation has been interpreted.
17. Moreover, the distinction has long been made and it is now too late for the Court to "rip it up" and treat the section as allowing any and all deductions having some causal connection with the derivation of assessable income. … (T)he distinction between outgoings incurred in the course of deriving income and other outgoings is a distinction which applies generally, not just in relation to travel expenses.'
54 For present purposes it is helpful to consider that passage in conjunction with the decision in Fletcher v Commissioner of Taxation (1991) 173 CLR 1 where, at [17]-[19], the High Court said:
'17. The question whether an outgoing was, for the purposes of section 51(1), wholly or partly "incurred in gaining or producing the assessable income" is a question of characterization. The relationship between the outgoing and the assessable income must be such as to impart to the outgoing the character of an outgoing of the relevant kind. It has been pointed out on many occasions in the cases that an outgoing will not properly be characterized as having been incurred in gaining or producing assessable income unless it was "incidental and relevant to that end" … . It has also been said that the test of deductibility under the first limb of section 51(1) is that "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" … . So to say is not, however, to exclude the motive of the taxpayer in making the outgoing as a possibly relevant factor in characterization for the purposes of the first limb of section 51(1). At least in a case where the outgoing has been voluntarily incurred, the end which a taxpayer subjectively had in view in incurring it may, depending upon the circumstances of the particular case, constitute an element, and possibility the decisive element, in characterization of either the whole or part of the outgoing for the purposes of the subsection … . In that regard and in the context of the sub-section's clear contemplation of apportionment, statements in the cases to the effect that it is sufficient for the purposes of section 51(1) that the production of assessable income is "the occasion" of the outgoing … or that the outgoing is a "cost of a step taken in the process of gaining or producing income" … are to be understood as referring to a genuine and not colourable relationship between the whole of the expenditure and the production of such income.
18. Nonetheless, it is commonly possible to characterize an outgoing as being wholly of the kind referred to in the first limb of section 51(1) without any need to refer to the taxpayer's subjective thought processes. That is ordinarily so in a case where the outgoing gives rise to the receipt of a larger amount of assessable income. In such a case, the characterization of the particular outgoing as wholly of a kind referred to in section 51(1) will ordinarily not be affected by consideration of the taxpayer's subjective motivation. If, for example, a particular item of assessable income can be earned by making a lesser outgoing in one of two possible ways, one of which is a loss or outgoing of the kind described in section 51(1) and the other of which is not, it will ordinarily be irrelevant that the taxpayer's choice of the method which was tax deductible was motivated by taxation considerations or that the non-deductible outgoing would have been less than the deductible one. In such a case, the objective relationship between the outgoing actually made and the greater amount of assessable income actually earned suffices, without more, to characterize the whole outgoing as one which was incurred in gaining or producing assessable income. If the outgoing can properly be wholly so characterized, it "is not for the Court or the commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent" … .
19. The position may, however, well be different in a case where no relevant assessable income can be identified or where the relevant assessable income is less than the amount of the outgoing. Even in a case where some assessable income is derived as a result of the outgoing, the disproportion between the detriment of the outgoing and the benefit of the income may give rise to a need to resolve the problem of characterization of the outgoing for the purposes of the subsection by a weighing of the various aspects of the whole set of circumstances, including direct and indirect objects and advantages which the taxpayer sought in making the outgoing … . Where that it so, it is a "commonsense" or "practical" weighing of all the factors which must provide the ultimate answer … . If, upon consideration of all those factors, it appears that, notwithstanding the disproportion between outgoing and income, the whole outgoing is properly to be characterized as genuinely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of section 51(1) unless it is either somehow excluded by the exception of "outgoings of capital, or of a capital, private or domestic nature" or "incurred in relation to the gaining or production of exempt income".'
55 The decision in Payne demonstrates that an outgoing will only be an allowable deduction if it is incurred in the course of deriving assessable income. An outgoing incurred for the purpose of doing so will not, by reason of such purpose alone, be an allowable deduction. However Fletcher establishes that subjective purpose may be a relevant consideration in deciding whether an outgoing was incurred in the course of deriving assessable income. An example of this is the situation in which an outgoing appears to be disproportionate to the income derived as a result of it. This fact may suggest that the outgoing was not really incurred in deriving assessable income, but in some other context. In that situation, evidence of subjective purpose may be relevant. Fletcher does not detract from the proposition established by Payne that purpose, alone, is not the test for deductibility.
56 Both Payne and Fletcher reflect a long-standing approach to this question. An early decision under the Income Tax Assessment Acts 1922-1930 (Cth) (the "1922 Act") was the decision of the High Court in The Herald and Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113. The relevant provision, s 23 was in similar but not identical terms to s 51 of the 1936 Act. That case concerned the deductibility of legal expenses incurred by the proprietor and publisher of an evening newspaper, defending proceedings for defamatory material published in the newspaper. At 119, Gavan Duffy CJ and Dixon J said:
'The money was spent to answer the claims, and whether it was expended wholly and exclusively for the production of income, must depend upon the manner in which the claims were incurred. When it appears that the inclusion in the newspaper of matter alleged by claimants to be defamatory is a regular and almost unavoidable incident of publishing it, so that the claims directly flow from acts done for no other purpose than earning revenue, acts forming the essence of the business, no valid reason remains for denying that the money was wholly and exclusively expended for the production of assessable income.'
57 The words 'no other purpose' should be treated with care. They may have referred to s 25 which denied deductibility where an outgoing was not laid out 'wholly and exclusively' for the production of assessable income. In Amalgamated Zinc (De Bavay's) Ltd v The Federal Commissioner of Taxation (1935) 54 CLR 295, the Court considered the deductibility of outgoings incurred by a company which had operated a zinc mine but had ceased to do so at the time of the relevant expenditure. Because it had previously employed workers in zinc mining it continued to be liable to make payments to a workers' compensation fund. The High Court held that such payments, made as a result of previous involvement in the conduct of that business, were not deductible under the 1922 Act. At 309, Dixon J said:
'A very wide application should be given to the expression "incurred in gaining or producing the assessable income." … The expression "in gaining or producing" has the force of "in the course of gaining or producing" and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself.'
58 At 310 his Honour continued:
'In the present case, the actual expenditure was met in the current year. But it was completely dissociated from the gaining or producing of the assessable income of that year. The payment, in effect, did no more than keep down an annual charge arising out of a business which had closed. … What is important is the entire lack of connection between the assessable income and the expenditure. None of the assessable income arose out of the business in the course of which the taxpayer became liable to the charge. The sources from which the assessable income did arise included no operations in the course of which the payment was made. It was a payment independent of the production of income, not an expenditure incurred in the course of its production.'
59 In Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47, the High Court considered the applicability of s 51(1) of the 1936 Act. The taxpayer company had, prior to the outbreak of hostilities with Japan, conducted tin mining operations in Siam from which it derived income. Following the occupation of Siam by the Japanese it derived no income from that activity but maintained an administrative structure in Australia, paying outgoings such as directors' fees and expenses of management. It claimed to deduct those expenses from other income earned by it in the relevant tax year. The Commissioner allowed only a small percentage as a deduction. At 56-57, the Court observed:
'No doubt the expression "in carrying on a business for the purpose of gaining or producing" lays down a test that is different from that implied by the words "in gaining or producing". But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative. …
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. …
Notwithstanding the differences in other respects in the present provision, the expression "incurred in gaining or producing the assessable income" has been left unchanged and bears the same meaning. In brief substance, to come within the initial part of the sub-section 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. It is by this standard that the question raised by the present cases must be determined.'
60 The decision in Lunney v Commissioner of Taxation (1957-1958) 100 CLR 478 concerned expenses incurred in travelling between home and the place of work. Dixon CJ considered the matter to be settled and beyond argument. The majority (Williams, Kitto and Taylor JJ) said, at 495-6:
'The fact that s.51 was intended to deal with a great variety of items of expenditure made it inevitable that it should be couched in general terms and both that section and its immediate predecessor have been the subject of judicial consideration on a number of occasions. In terms, the section provides that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private, or domestic nature. The language is simple enough and, in the main, little difficulty is encountered in recognising those items of business expenditure which qualify as deductions. But in the nature of things it has been impossible to devise, as a substitute for the words of the section, a simple formula which will readily and precisely mark the limits of the operation of the section. Yet, in the course of dealing with individual cases, it has been necessary to devote particular attention to the words "in gaining or producing the assessable income" and "incurred in carrying on a business for the purpose of gaining or producing such income" and to attempt to express precisely what those words mean.
… In particular, it was said, expenditure is invested with the requisite character if it may properly be regarded as "incidental or relevant" to the derivation of assessable income. This expression has been used in a variety of cases where it has been necessary to deal with problems arising under the section. For instance in dealing with the immediate predecessor of s.51 in [Amalgamated Zinc] it was said: "The expression 'in gaining or producing' has the force of 'in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself … ." In dealing with the same section in W. Neville & Co. Ltd. V. Federal Commissioner of Taxation … it was said that: "it is necessary that the expenditure should have been incurred in gaining or producing the assessable income, that is the assessable income of the given financial year or accounting period. This means that it must have been incurred in the course of gaining or producing the assessable income. It does not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income … ." The same expression was again used in [Ronpibon] … when it became necessary to solve a problem arising under s.51. In that case it was said that "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". … Examination of these cases, however, readily shows that the expression "incidental and relevant" was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section. That this is so appears from some of the brief passages already quoted and is made quite clear by consideration of the reasons in the cases referred to. In [Ronpibon] … the passage quoted above … was immediately followed by the observation "The words 'incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income" … . Thereafter, it was said: "In brief substance, to come within the initial part of the sub-section 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" … . In the context in which they have been used the expressions relied upon by the appellants have been intended as a reference, not necessarily to the purpose for which an item of expenditure has been incurred, but, rather, to the essential character of the expenditure itself.'
61 At 498-499 their Honours continued:
'The question whether the fares which were paid by the appellants are deductible under s.51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer's residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as "incidental and relevant" to the derivation of such income. No doubt both of the propositions involved in this contention may, in a limited sense, be conceded but it by no means follows that, in the words of the section, such expenditure is "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business for the purpose of gaining or producing such income". It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterized 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.'
62 I should refer to three other cases which are mentioned in the reasons prepared by Spender J. The first is the decision in W Neville & Co Ltd v Federal Commissioner of Taxation (1937) 56 CLR 290 which is also referred to in Lunney. Spender J cites a passage from the judgment of Latham CJ at 301 to the effect that the character of an outgoing 'can be determined only in relation to the object which the person making the expenditure has in view.' In that case the taxpayer company agreed with one of two joint managing directors that he should resign in consideration of the payment of a certain sum. The taxpayer's purpose was to reduce its outgoings and to resolve an unsatisfactory management situation. At 300, Latham J concluded that the payments in question 'were actually made bona fide in the course of business in the interests of the efficiency of the business', and that such expenditure was incurred in the course of gaining or producing assessable income. His Honour then dealt with the Commissioner's argument that such expenditure was directed towards reducing expenses by securing relief from the contract of employment and did not increase assessable income. The passage quoted by Spender J appears to have related solely to that argument. At 304 and 308 respectively, Rich and McTiernan JJ seem also to have treated intention as relevant. However, at 305 Dixon J said:
'The question is whether the sum of ₤2,500, or any part of it, should be deducted from the assessable income. The question is governed by sec.23(1)(a) and sec 25(e) of the Income Tax Assessment Act 1922-1932. Under the first of these provisions it is necessary that the expenditure should have been incurred in gaining or producing the assessable income, that is the assessable income of the given financial year or accounting period. This means that it must have been incurred in the course of gaining or producing the assessable income. It does not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income. …'
63 This may have been a case of the kind contemplated by the High Court in Henderson where purpose was relevant to the question of whether the outgoing was incurred in gaining assessable income but not, alone, determinative of it. In any event the decision cannot detract from the authority of the clear statement of principle in Payne.
64 The second case is Hallstroms Pty Ltd v Federal Commissioner of Taxation (1946) 72 CLR 634. That case involved legal expenses incurred by the taxpayer in resisting an application by a trade competitor to extend a patent. Had such application been successful the taxpayer's business would have suffered significantly. The case was primarily concerned with whether such outgoing should be characterized as on capital or revenue account.
65 The third case is Commissioner of Taxation v Rowe (1995) 60 FCR 99. That case was primarily concerned with an ex gratia payment made by the state government to the taxpayer, a shire engineer, as reimbursement for costs incurred by him in being legally represented at an inquiry. As the result of certain complaints concerning his work he was suspended by the shire council but subsequently reinstated by the Governor in Council. The state government directed that there be an inquiry into the circumstances surrounding the resolution to suspend him. That inquiry involved an examination of his performance of his duties. He engaged legal representation. In its findings the committee of inquiry noted that the taxpayer had, in reality, been compelled to engage a solicitor and counsel to defend himself against dismissal. The taxpayer applied unsuccessfully to the council for reimbursement of his legal expenses. He subsequently sought and received an ex gratia payment from the state government. On 26 April 1989 an amount of $24,748.24 was paid to him. In his tax return for the year ended 30 June 1986 he had claimed legal expenses in the amount of $24,727.99 as a deduction. This was initially disallowed by the Commissioner but subsequently allowed in full. He disclosed the ex gratia payment in his return for the year ended 30 June 1989 but sought a ruling that it was received on capital account and was not taxable. The Commissioner included the amount as income, and the taxpayer objected. The Commissioner disallowed the objection, but the Administrative Appeals Tribunal eventually upheld it.
66 On appeal from the decision of the Administrative Appeals Tribunal this Court considered three separate questions, namely:
· whether or not the ex gratia payment was taxable income;
· whether or not the outgoings were incurred in gaining assessable income; and
· if such outgoings were so incurred, whether they were on capital or revenue amount.
67 The second and third questions are potentially relevant for present purposes, but it will be necessary that I consider only the second question. Concerning that question, Beaumont J observed at 109:
'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.'
68 Concerning the same question Burchett J said at 113:
'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 Commissioner of Taxation (1991) 27 FCR 508. To adapt language there quoted (at 511) from [Herald & Weekly Times], the liabilityin 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 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.'
69 His Honour then turned to the question of whether or not the expenditure was on capital or revenue account, considering the decision in Hallstroms to which I have previously referred.
70 I should say that I do not understand the reference by Burchett J in the first sentence quoted above, to the Committee of Inquiry's opinion concerning the taxpayer's legal expenses, to have been part of his Honour's reasons. As appears from the observations made by Beaumont J at 108, the tax significance of the outgoings was not addressed by the Tribunal, it having assumed that such payments were properly allowable deductions. I suspect that the reference by Burchett J was relevant to the Commissioner's assertion that such outgoings ought to be treated as on capital account, notwithstanding his own treatment of them. The reasons advanced by both Beaumont and Burchett JJ are consistent with the approach taken by the High Court in Payne. They look to the connection between the work performed to earn assessable income and the incurrence of the liability to which the legal costs relate.
71 I apprehend that in the present case, the taxpayer submits that Drummond J took a different view. At [24] and [25] of his written submissions, the taxpayer refers to the decision in Rowe and, in particular, to the judgment of Drummond J as establishing that expenses incurred to defend the taxpayer from 'something which threatens to destroy or diminish his or her income-earning' will satisfy the test for deductibility. The taxpayer seems to accept that Beaumont and Burchett JJ did not adopt such an approach but submits that their reasons do not exclude it.
72 It is true that in the fourth paragraph on p 115, under the heading 'Section 25(1)' Drummond J addresses the broad question '… whether legal expenses incurred by an employee to prevent his employer terminating his existing contract of employment are deductible under s 51'. However, in the next paragraph, his Honour observed that '… a real connection between the incurring of the outgoing and the activities which directly result in the gain or production of income …' will generally be sufficient to make an outgoing deductible. In assessing the connection between the two propositions one must keep in mind the observation by Beaumont J that the inquiry concerned the 'day-to-day aspects of the respondent's employment', and that by Burchett J, that the costs were incurred in 'defending the manner of his performance of his duties'. It may be that Drummond J favoured the wider proposition that costs incurred in defence of employment were, by reason of that purpose alone, deductible. However the decision was made on facts which justified the conclusion that such costs had been incurred in gaining assessable income. With all due respect, I am concerned that a test which focuses on whether costs were incurred to defend the taxpayer from loss of employment or diminution in income is a test based on purpose, and therefore inconsistent with the decision in Payne.
73 To adopt the language of Payne, in this case it is necessary to identify the course by which the taxpayer derived assessable income. To adopt the language of Fletcher and Ronpibon, it is necessary to identify that which was productive of such income. It is relatively clear that the answer to both enquiries is that the taxpayer derived his assessable income from the performance of his duties as a Customs officer. Conduct in the course of deriving assessable income for the purposes of the test prescribed in Payne would be conduct undertaken in performance of those duties. Similarly, for the purposes of the test as expressed in Fletcher and Ronpibon, such performance would be that which produced his assessable income. I find it difficult to construe the language in the cases as necessarily establishing that conduct contrary to express prohibitions in a contract of service, and unconnected to the duties to be performed by the taxpayer, will be conduct in the course of earning assessable income. In some cases, the relevant prohibited conduct may be closely connected to the performance of particular duties so that the infringing conduct may accurately be so described. Negligence in such performance is a possible example. However, when the conduct is completely beyond the scope of the contract, and even forbidden by it, it does violence to language to describe that conduct as being in the course of earning assessable income.
74 In this case, little attention has been paid to the actual circumstances in which the liability to incur legal costs arose. The focus has rather been upon the disciplinary charges and, to a lesser extent, their resolution. The relevant question for taxation purposes may not necessarily be answered by such an approach. The facts out of which the exposure to legal expenses arose must be determined in the manner prescribed by taxation legislation. Only rarely will the Commissioner have been a party to the taxpayer's disciplinary proceedings and therefore bound by the outcome. The taxation legislation looks to the actual factual situation in which the outgoings were incurred, not necessarily to the facts as alleged in legal or disciplinary proceedings, or as found in such proceedings.
75 When the costs in question are incurred in disciplinary proceedings, a significant matter in determining whether they are deductible will be whether the alleged facts are true. An employee may be charged with misconduct, being acts unrelated to his duties, but inconsistent with his continued employment upon existing conditions. If the allegations are true, then it will be at least arguable that any costs incurred in defending the charge arose out of his or her extraneous conduct and not in the course of earning assessable income. However, if the allegations are, in fact, false, then there was no such extraneous conduct. In that situation, it may be more likely that the source of the charge is to be found in the performance of the taxpayer's duties or in the circumstances in which he or she has performed such duties. The facts surrounding the incurrence of the costs being different, the question of the deductibility of those costs may be answered differently.
76 For present purposes it is necessary to identify the circumstances out of which arose the taxpayer's need to incur the legal expenses in question. It is then necessary to consider the relationship between those circumstances and the conduct by which the taxpayer earned assessable income.
77 All of the relevant charges arose under s 61 of the Public Service Act 1922 (Cth) (the "Public Service Act"). That section provides that an officer may be charged with failure to fulfil his or her duty. Section 56 gives substance to s 61 by identifying circumstances in which a person may be taken to have failed to perform such duty. Paragraph 56(d) provides that one such circumstance is where the officer engages in improper conduct as an officer. The First Charge was that the taxpayer failed to fulfil his duty as an officer by engaging in improper conduct. It was alleged that he breached the Customs Code of Ethics and Conduct by using his identity card in order to obtain information from a Local Court officer regarding a search warrant executed upon his computer.
78 Emmett J considered that the relevant conduct had not occurred in the course of discharge of the taxpayer's duties. Although the alleged misconduct may have been described by reference to obligations related to his employment, it does not follow that the outgoings incurred in defending the charge arose out of conduct in the course of earning assessable income. The taxpayer's misuse of his identity card was unrelated to the performance of his duties. Further, unlike the position in Herald and Weekly Times, there could be no suggestion that such misuse or a charge of misconduct was 'a regular and almost unavoidable incident' of performing his duties. It is likely that the taxpayer's purpose in incurring such legal expenses was to protect himself from dismissal, reduction in rank or reduction in pay scale, but that is not itself, sufficient to satisfy the test. His position is more akin to that of a taxpayer who has paid travelling expenses between home and place of work or, as in Payne, between places of performance of unrelated work. Whilst such expenses are incurred for the purpose of deriving assessable income, they are not incurred in the course of doing so.
79 All but one of the Third Charges involved an allegation that the taxpayer had failed to fulfil his duty as an officer by engaging in improper conduct as an officer contrary to subs 56(d) of the Public Service Act. The other charge also alleged breach of that subsection but did not, in terms, allege improper conduct. Nonetheless, the reference to subs 56(d) demonstrates that such an allegation was intended.
80 Three of the charges concerned the taxpayer's alleged conduct in connection with a claim to a diesel fuel rebate by one Tony Panto. Mr Panto was the partner of Ms Blake, another customs officer. The first charge was that the taxpayer had failed to inform Customs of certain information given to him by Ms Blake concerning Mr Panto's claim. The second charge was that he rendered improper support and assistance to Ms Blake in connection with Mr Panto's claim. The third charge was that he was knowingly concerned in the creation of a false diary for use as 'supposedly contemporaneous records of business-related diesel fuel consumption'.
81 The fourth charge alleged that the taxpayer had secured access to, and organized the use of, a work vehicle for the collection and transportation of his daughter for a non-work-related purpose. The fifth charge was that the taxpayer, being absent from his workplace, asked a colleague to inform his supervisor that he was taking his wife to the doctor, not to record his absence and to turn on his computer, presumably to conceal his absence. The sixth charge was that he signed and submitted a Customs attendance record which recorded him as being in attendance on 12 June 1998 when he was not. The seventh charge was that he failed to communicate to Customs certain information concerning an investigation into the affairs of a Mr Partridge.
82 Some of these charges involved conduct more closely associated with the performance by the taxpayer of his duties, and therefore his derivation of income, than others. Although the matter seems not to have been pursued, the failure to provide information concerning Mr Panto's false claims might well be described as conduct in the performance of his duties, as might his failure to provide information in connection with Mr Partridge. Providing improper support and assistance to Ms Blake in connection with Mr Panto's claim could not easily be so described. Participating in the creation of a false diary, use of a work vehicle for an unauthorized private purpose, procuring Mr Andrews to conceal his absence and signing a false attendance record bear varying degrees of relationship to his earning of income. However it seems that the case was conducted upon the basis that all of the Third Charges should be treated uniformly. Emmett J observed in his reasons that the taxpayer had not suggested that any of this conduct had involved the performance of his duties as a Customs officer.
83 In any event the taxpayer took pre-emptive action to prevent the charges proceeding. He became aware that evidence against him had been obtained by intercepts on his home and work telephones. He sought to have the charges set aside, to have an inquiry pursuant to s 62 of the Public Service Act aborted and a declaration that communication of the intercepted information to Customs was unlawful. He did not challenge the lawfulness of the intercepts themselves. The relevant legal fees were incurred in connection with these proceedings. The question, then, is whether the claimed deductions flowed from acts done in the course of earning assessable income.
84 I agree with Emmett J that none of the conduct to which the Third Charges related was performed in discharge of his duties as a Customs officer. Indeed, all such conduct was clearly motivated by personal interest or, perhaps, a desire to obstruct Customs. To describe such conduct as being in the course of earning assessable income is, to say the least, counter-intuitive. That is not to say that outgoings incurred in connection with alleged breaches of a contract of service will necessarily always be excluded from deductibility. However, where the conduct in question is quite beyond anything contemplated as being involved in the taxpayer's duties, it will be very difficult to apply the test established in Payne in such a way as to render the outgoings deductible.
85 The taxpayer has not demonstrated that the legal expenses incurred in connection with the First Charge and the Third Charges were allowable deductions. He has therefore not demonstrated that in respect of such deductions, the assessment was excessive.