Schokker v Commissioner of Taxation

2 This is an appeal against only one of a number of orders made by a judge of the Court who dismissed the appellant's appeal against a decision of the Administrative Appeals Tribunal. The AAT affirmed the decision of the Commissioner to reject certain claims for deductions made by the appellant in respect of his 1995 and 1996 income tax assessments. The effect of the only order of the learned primary judge now challenged was to uphold the Commissioner's decision to reject the appellant's claim to a deduction for the 1996 year in respect of a particular class of expenditure described by the Tribunal as "the s 16 expenses". It is common ground in this appeal that, if the appellant can show he is entitled to a deduction in respect of these expenses, the amount allowable is $1,199. It is the first limb of s 51(1) the Income Tax Assessment Act 1936 (Cth) only that is relevant in this appeal. 3 To understand how the point now in issue arises, it is necessary to refer to some of the factual findings of the AAT which were, in large part, based on statements of agreed facts put before it by the parties. 4 The appellant has long been employed in the audit section of the Australian Taxation Office. In January 1995, the Western Australia police informed the ATO's special audit section that the appellant was under investigation in respect of certain criminal offences. On 21 March 1995, he and his wife were charged with twenty offences of fraud in connection with the sale of certain motor vehicles. A week later, the appellant was suspended by the ATO from his employment pending determination of these charges, something that is still to occur. 5 In February 1995, soon after it learned of the existence of the police investigation, the special audit section of the ATO commenced an audit of the income tax returns of the appellant and his wife for the 1992 -1995 years; this audit included an examination of matters relating to the sale of vehicles, including those that became the subject of the fraud charges that were brought by the police in March 1995. Amended assessments ultimately issued in respect of the appellant. However, it was accepted that the appellant's wife alone was involved in the business of dealing in vehicles; his own assessments were amended only in respect of the claim he made in each of these three years to a dependent spouse rebate. Proceedings instituted by both the appellant and his wife in January 1996 challenging these amended assessments are also still pending. 6 On 21 March 1995, the same day the appellant and his wife were charged with the fraud offences, the personnel section of the ATO commenced what is called a "personnel inquiry" into the appellant. The focus of this was on whether the appellant had relied on false medical certificates in claiming sick leave he had taken in the past. In the course of executing a search warrant at the appellant's premises in aid of the fraud investigation, the WA police had discovered a number of unused medical certificates of the kind filled out by medical practitioners in support of an employee's claim to sick leave. The ATO soon learned of this discovery by the police. Hence the personnel inquiry. It ended with the ATO being satisfied that on at least one occasion, the appellant had taken sick leave in reliance on a forged medical certificate. He was ultimately charged by the police on 14 July 1995 with one count of imposing on the Commonwealth in respect of a medical certificate dated 5 March 1991. That charge was withdrawn, however, shortly before the AAT hearing. 7 It was ATO investigators from the special audit section who obtained the blank medical certificates from the police by serving on them a notice under s 264 the ITAA; one of those same investigators also obtained the appellant's confidential medical records from his medical practitioner by relying on his authority under s 263 the ITAA. These investigators passed this information on, along with other information they had obtained in the course of their audit of the appellant's income tax affairs, to the officers in the personnel section who were conducting the personnel inquiry. The Tribunal made a finding that it was the discovery by the appellant of the transmission of this information within the ATO that caused him to think that a breach of the secrecy provisions of s 16 the ITAA had occurred and precipitated various actions by him which involved, among other things, his incurring the s 16 expenses. It is unnecessary for this Court to express any opinion on whether the appellant's concerns in these regards were well-founded. 8 The Tribunal and the learned primary judge were concerned with the question of the deductibility of a wider range of expenses than the "s 16 expenses". Counsel for the appellant informed this Court that the parties had agreed upon those of the items of expense listed in para 26 of the statement of agreed facts and the amounts properly attributable to each that are the subject of the appellant's present claim to deduct the s 16 expenses. They comprise a part of each of items (i), (j), (k), (m), (n), (o) and (q), which cover incidental expenses, such as telephone calls and postage, and the whole of the following items in para 26:

(b) $400.00 was the cost of obtaining legal advice and assistance by the Applicant from Lewis Blyth & Hooper in relation to action by the WA police in respect of the alleged medical certificate imposition, both prior to and after the laying of the charge under Section 29B of the Crimes Act against the applicant.

(c) $170.00 was paid to Dave Rennardson for expenses in connection with attendances by him as a witness for the internal investigations carried out by the Australian Tax Office into the complaints of the Applicant and to lobby with the CPSU for union support for a test case on breach of Section 16(4)(a) of the ITAA.

(d) $75.00 was the cost of obtaining legal assistance from Dwyer Durack in relation to the Section 29B Crimes Act charge and the interpretation of Section 16(4)(a) of the ITAA.

(h) $30.00 was the cost of an FOI request made by the Applicant to the Australian Federal Police in relation to the complaint of Section 16 breaches.

(p) $388.00 was the cost of fees paid to the Federal Court in respect of the judicial review proceedings against the Australian Taxation Office, comprising an application fee of $368.00 and a search fee of $20.00.

(The appellant sought review of the ATO's decision not to investigate his complaint that ATO officers had breached s 16 by transmitting the information I have referred to from the special audit to the personnel section.)

"29. … This taxpayer's suspension - and possible dismissal - is not related to performance of his duties as a tax officer, but based on charges of fraudulent conduct unrelated to any activities within the Tax Office. In other words, the expenditure was not incurred in attempting to save his job; his continued employment with the Tax Office will depend on the outcome of his trial, if and when it proceeds.

30. Turning to the expenses claimed in seeking to defend the criminal charges, the first thing to observe is that these charges arise out of activities unconnected with the Applicant's work in the Tax Office, and hence the expenditure cannot easily be seen as incurred in the course of gaining or producing the Applicant's assessable income … The fact that certain advantageous consequences may flow from successfully defending these charges is not sufficient to make these expenses incidental or relevant to the Applicant gaining or producing assessable income. Indeed, I can see little distinction between the costs incurred in defending the criminal charges and any expenditure incurred in seeking to establish that the Tax Office acted in contravention of s 16 of the ITAA.

31. At its highest, the so-called 'section 16' expenses may be said to have been incurred in trawling for evidence which, arguably, may be excluded by the judge in the exercise of his judicial discretion if and when the Applicant's case finally comes to trial. It is then said, presumably, that the exclusion of this material may lead to the Applicant's acquittal or a nolle prosequi, which, in turn, would automatically result in his reinstatement to his former position. That, says the Applicant, is sufficient to attract deductibility of the expenditure because a successful defence would restore him to the position where he was before the charges were brought … I am unable to perceive that the occasion of the outgoing was the production of assessable income …

32. In the result, I am satisfied that neither the expenses incurred in defending the criminal prosecution nor those expended in seeking to establish that the ATO acted contrary to the provisions of s 16 of the ITAA are allowable deductions."

10 Counsel for the appellant submitted that, in speaking here of the "criminal charges", the Tribunal was referring only to the car fraud charges and overlooked the fact that the s 16 expenses had nothing at all to do with those charges: if the ATO special audit section breached s 16 in passing information obtained by it to the ATO personnel section, that could assist the appellant only with his defence to the imposition charge. But despite a considerable lack of clarity in the Tribunal's reasons, the Tribunal's comments in par 31 should, I think, be understood as a finding that the reason the appellant incurred the s 16 expenses was to procure evidence of assistance to him in defeating the imposition charge. Counsel for the respondent acknowledged that this finding should be so understood. 11 The appellant submitted that the objectives intended to be achieved by the incurring of the s 16 expenses were to establish his credibility, standing and competence as an ATO officer by showing that his views on the s 16 breaches were correct at law, to obtain promotion to replace the more senior ATO officers implicated in those breaches, to gain the additional salary level consequent upon such promotion, to protect and maintain his employment conditions and (in his capacity as a union official) to maintain the employment conditions of all other employees of the ATO. It was said that, given that these were the objectives intended to be achieved by the appellant in incurring the s 16 expenses, there was a sufficient nexus between those outgoings and the gaining or producing of assessable income to make the s 16 expenses deductible. 12 The threshold problem for the appellant with this argument is that, though put to it, the Tribunal did not accept it. According to the material before the Tribunal, the appellant had, on other occasions, given different reasons for incurring those expenses: it was not bound to accept what the appellant had to say in this regard. The only finding the Tribunal was prepared to make as to the appellant's reasons for incurring the s 16 expenses was that to which I have referred, viz, that he incurred them in aid of his defence to the imposition charge. It is not the function of this Court on an appeal from the AAT to review the findings of fact made by that Tribunal. 13 However, it can be seen that the Tribunal dealt with the question of the deductibility of the s 16 expenses by confining itself to ascertaining the appellant's reason or subjective motive for incurring those expenses, which it then went on to hold was not sufficient to show such a relationship between the incurring of the expenditure and the gaining or producing of assessable income as to make the expenditure deductible under the first limb of s 51(1) the ITAA. 14 As this Court pointed out in Putnin v Commissioner of Taxation (1991) 27 FCR 508 at 512, there is a distinction between involuntary expenditure (where the characterisation of the expenditure as falling within s 51(1), or not, can be determined without reference to the taxpayer's motive or purpose for incurring the expenditure) and voluntary expenditure (where the taxpayer's purpose may in some circumstances assist in the task of characterisation). Where an expense is incurred involuntarily, eg, under a contractual obligation, the taxpayer's motives will be irrelevant to the determination of its deductibility: it is the objective circumstances which compel the taxpayer to incur the expense which govern whether it is deductible under s 51(1). 15 Putnin at 512 - 513 is also authority for the proposition that when the question is whether the costs of defending a criminal charge against a natural person are deductible from that person's income, those costs should be regarded as incurred involuntarily. If the s 16 expenses here in question must be so regarded, the AAT was plainly in error in confining itself to examining the appellant's subjective motives when it came to decide whether those expenses were deductible. 16 But it is difficult, on the evidence before the Tribunal, to treat the s 16 expenses here in question as having an involuntary character. That evidence indicates that they were only incurred because the appellant became concerned at the lawfulness of the transmission of information detrimental to him between sections of the ATO and because he decided to incur the expenses in question to pursue that issue and, as the Tribunal found, to arm himself with a particular argument for challenging the sustainability of the imposition charge. 17 As the High Court pointed out in Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1, when the question is whether a voluntary outgoing is deductible under the first limb of s 51(1), the taxpayer's subjective motive for incurring the expense can be a relevant matter in determining its deductibility. However, in such case, the taxpayer's subjective motives cannot be the sole consideration, in view of s 51(1)'s "clear contemplation of apportionment". This, the High Court said, limited deductibility under the first limb of s 51(1) to only so much of the outgoing as had "a genuine and not colourable relationship" to the taxpayer's assessable income. (pp 17-18) The Court went on to point out that where the outgoing gives rise to the receipt of a larger amount of assessable income, it will commonly be possible to characterise it as being wholly of the kind referred to in the first limb of s 51(1) without any need to refer to the taxpayer's subjective thought processes. The Court then said, in a passage which is of particular relevance to this case:

"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 characterisation of the outgoing for the purposes of the sub-section 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 is so, it is a 'common sense' 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 the outgoing and income, the whole outgoing is properly to be characterised as genuinely and not colourably incurred in gaining or producing assessable income, the entire outgoing will fall within the first limb of s 51(1) unless [it is excluded by one of the exceptions to the sub-section]."

18 Where, as here, the question is whether an outgoing incurred by an employee in answering a charge that he has misconducted himself in his capacity as an employee are deductible under the first limb of s 51(1), it will rarely be the case that particular assessable income can be identified as that to be gained or produced by the outgoing. Rather will it be the case that whether there is a nexus between the outgoing and the gaining or producing by the taxpayer of assessable income, unidentifiable in amount, in the past or the current or a future financial period, that is sufficient to attract deductibility will fall to be determined by a weighing of the objective considerations that can be seen to be relevant to this question of the proper characterisation of the outgoing, as well as the taxpayer's subjective motives. 19 Even if the s 16 expenses should be treated as incurred voluntarily, the Tribunal fell into error by characterising those expenses for taxation purposes by reference solely to the taxpayer's subjective motive, as found by it, for incurring them: it should also have had regard to the whole set of circumstances in which those expenses were incurred. This error is one of law: Sharp Corporation of Australia Pty Ltd v Collector of Customs (1995) 59 FCR 6 at 12. 20 Authority provides guidance in identifying the range of circumstances that are relevant to that task of characterisation. It has long been recognised that the first limb of s 51(1), with its reference to losses, as well as outgoings, does not restrict deductions to expenditure causally related to the generation of income: see Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 and 309 and Federal Commissioner of Taxation v Snowden & Willson Pty Ltd (1958) 99 CLR 431 at 443. Assessable income in the first limb of s 51(1) refers to the assessable income of the taxpayer generally; so losses or outgoings will be deductible, provided they are incurred in connection with the income-producing operations carried on either in the year in which the loss or outgoing is incurred or in preceding or succeeding years. AGC (Advances) Ltd v Federal Commissioner of Taxation (1975) 132 CLR 175 at 197; Federal Commissioner of Taxation v Fletcher (1991) 173 CLR 1 at 16. 21 In Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56 - 57, 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"

"… to come within the initial part of the sub-section [ie, the first limb of s 51(1)] 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."

22 The position as stated in Federal Commissioner of Taxation v Smith (1981) 147 CLR 578 at 585 - 586 is that:

"The section [ie, s 51(1)] does not require that the purpose of the expenditure shall be the gaining of the income of that year so long as it was made in the given year and is incidental and relevant to the operations or activities regularly carried on for the production of income. What is incidental and relevant in the sense mentioned falls to be determined not by reference to the certainty or likelihood of the outgoings resulting in the generation of the income but to its nature and character, and generally to its connection with the operations which more directly gain or produce the assessable income":

See also Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 at 351. So long as there is "a perceived connexion" - Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494 at 499 - between the expenditure and "the operations that more directly gain or produce the assessable income", that will be enough to satisfy the sub-section. 23 That the connection between the expenditure and the income-producing operations of the taxpayer is only indirect does not preclude deductibility under the first limb of s 51(1). In Herold & Weekly Times Ltd v Federal Commissioner of Taxation (1932) 48 CLR 113, legal expenses incurred by a newspaper publisher in defending a defamation action were held to be deductible under a statute equivalent to the first limb of s 51(1): although the expenses were not incurred in carrying on the publishing activities which generated the taxpayer's income it was enough that they were incurred to defeat a liability arising from those activities (see pp 118 and 121). A similar view as to the deductibility under the first limb of s 51(1) of legal expenses not incurred in carrying on the taxpayer's income-generating activities but in defending the manner of those operations at a Royal Commission was expressed by Fullagar J, Williams J agreeing, in Snowden & Willson at 443 - 444. In Smith, the cost of insurance protection against the chance that an employed doctor might become, by injury, unable to earn income in the future from his employment, was held to be deductible. He did not incur the premium outgoing in, or in the course of, performing the activities by which he earned his salary. The connection between that outgoing and "the operations which more directly gain or produce the assessable income" - performance by the taxpayer of his duties under his contract of employment - was indirect: it was only if he was unable to perform those operations due to injury covered by the insurance, something that might never happen, that the outgoing would generate income for him in place of that which he would otherwise have earned from those operations. Nevertheless, it was sufficient to make the premium payments deductible under the first limb of s 51(1). 24 It will be a matter of fact and degree whether in the particular case, a connection that may exist between the occasion of the loss or outgoing and the taxpayer's income-producing operations is too indirect to qualify that loss or outgoing for deductibility under the sub-section. 25 In Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 49 FLR 183 at 213 - 214, Deane and Fischer JJ rejected the proposition that there is any general rule precluding the allowance as deductions of outgoings in the form of legal expenses of the defence of the taxpayer in criminal proceedings. In Putnin, legal expenses incurred by a registered trustee in bankruptcy in defending a criminal charge based on conduct engaged in by him in his administration of a particular insolvent estate, ie, in respect of an income-generating operation conducted in the past, were held to be deductible under s 51(1). 26 If, as appears likely, the imposition charge was, as a matter of fact, instigated by the appellant's employer as a reflection of its conclusion that the taxpayer had misconducted himself in his capacity as an employee (by improperly taking a benefit conferred by the same contract or arrangement under which he gained his ordinary income), that would be a matter relevant to the tax characterisation of the s 16 expenses. If (as appears likely) a decision in the criminal proceedings that the appellant had so misconducted himself might result in his dismissal, that too would need to be taken into account in characterising the s 16 expenses: legal expenses incurred by an employee to prevent termination of an existing contract of employment are capable of being deductible where the termination is sought to be based on the employee's conduct as such. See Commissioner of Taxation v Rowe (1995) 60 FCR 99 at 113 and 115 - 116, 117. 27 There is, in my opinion, a difference between expenses incurred by the appellant in defending the car fraud charges and the expenses incurred in defending the imposition charge (of which the Tribunal considered that the s 16 expenses formed part), even though a conviction on the former may be just as likely as a conviction on the latter to result in the appellant's dismissal from his employment: the imposition charge arises out of the appellant's conduct as employee, while the car fraud charges arise out of conduct by the appellant extraneous to his conduct as the Commissioner's employee. It is true that certain conduct, including criminal behaviour, unrelated to conduct as an employee may justify termination of employment: see Blyth Chemicals Ltd v Bushnell (1933) 49 CLR 66 at 81 - 82 and compare, with respect to public servants, McManus v Scott-Charlton (1996) 70 FCR 16 at 25 and 28 - 29. But dismissal for private conduct is so much more remote from the operations that generate an employee's income than dismissal for conduct as an employee as to prevent expenses incurred in relation to dismissal action on the former basis being deductible under s 51(1). 28 In the course of argument, I raised with senior counsel for the appellant whether the claim to deduct the s 16 expenses might be sustainable on the basis that they were incurred to maintain the appellant's entitlement to receipt of the day's sick pay which it appears he may have been paid as a consequence of the ATO granting him the day's sick leave in reliance on the medical certificate the subject of the imposition charge. The appellant has now formulated an amendment to his notice of appeal to raise this issue; the respondent objects to leave being granted. In order to determine this issue, further facts additional to those considered by the Tribunal need to be investigated. It is inappropriate for this Court to undertake that task. The amendment to the notice of appeal should not therefore be allowed. 29 But if it be the case that the s 16 expenses were incurred in circumstances in which they can be objectively regarded as serving to assist the appellant to defeat his employer's contention that he improperly obtained the sick pay he received for the day he had off work, that would be another circumstance to be taken into account in determining whether the nexus between the s 16 expenses and the gaining or producing of assessable income is sufficient to attract deductibility under the first limb of s 51(1). 30 In view of the nature of the error made by the Tribunal, the decision appealed from cannot stand. Since determination of whether the s 16 expenses are deductible involves the evaluation of the relative importance of a number of factual indicia and may also require the finding of further facts, this Court cannot, in my opinion, resolve the matter but must send it back to the AAT: see Commonwealth Banking Corporation v Percival (1988) 20 FCR 176 at 183 - 184 and Baxter Healthcare Pty Ltd v Comptroller-General of Customs (1997) 72 FCR 467 at 490 - 491 and 499. 31 I would therefore set aside the order of the learned primary judge in so far as it relates to the s 16 expenses and order that the appeal against the decision of the Tribunal whereby it affirmed so much of the decisions of the respondent disallowing the appellant's claim to a deduction for the 1996 year in respect of the s 16 expenses, ie, in the sum of $1,199, be allowed. I would further remit to the Tribunal for re-determination the question whether the respondent's decision in that one respect should be affirmed or set aside. I would remit the matter, in accordance with the general rule in Northern NSW FM Pty Ltd v Australian Broadcasting Tribunal (1990) 6 FCR 39, to a Tribunal differently constituted; that Tribunal should have power to receive further evidence. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Drummond.

WESTERN AUSTRALIA DISTRICT REGISTRY WAG 21 of 1998

On appeal from a Judge of the Federal Court of Australia

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

JUDGES: FRENCH, DRUMMOND & CARR JJ DATE: 12 MAY 1999 PLACE: PERTH

CARR J 32 I have had the advantage of reading Drummond J's reasons in draft. I agree generally with those reasons and gratefully adopt his statement of relevant facts and statutory provisions. 33 The only issue for decision is whether the Administrative Appeals Tribunal erred in law when it held that certain expenditure incurred by the appellant in the year ended 30 June 1996 was not allowable as a deduction under s 51(1) of the Income Tax Assessment Act 1936 (Cth). The amount of that expenditure is agreed between the parties at $1199. The expenditure was incurred by the appellant in conducting two judicial review applications in this Court challenging two administrative decisions. The challenged decisions related to the respondent's acquisition and use of certain information about the appellant which the respondent, his employer, obtained in the course of conducting income tax audits. The respondent used that information when he decided to suspend the appellant from his employment as a fairly senior officer in the Australian Taxation Office. 34 The appellant claimed that the total of the amounts so expended was an allowable deduction under the first limb of s 51(1) of the Act i.e. that the expenditure comprised outgoings incurred in gaining or producing his assessable income. The appellant contended that the Tribunal erred in holding that there was little distinction between the costs incurred in defending the criminal charges brought against the appellant and the costs incurred in seeking to establish breaches by the respondent of s 16 of the Act. The appellant maintained that what was termed the "section 16 expenditure" (a term which I shall use to identify the deduction claimed) was incurred in attempting to save, preserve or maintain the employment conditions of his job. That is, in seeking to prevent information obtained during the tax audits, and some information later obtained by the exercise of powers conferred under ss 263 and 264 of the Act, being used in relation to his position as an officer and employee of the respondent. In written submissions on behalf of the appellant, the claim was made that this was a case of incurring expenditure to preserve, or prevent erosion of, employment conditions in the course of gaining or producing income in that employment. The appellant also incurred the expenditure, so it was put, to derive greater income in the future. His objective was to establish his credibility, standing and competence by showing that his views on what he called the "section 16 breaches" were correct at law. This would lead, so it was contended, to the appellant being promoted to replace those more senior officers who committed those breaches and gaining the additional salary level applicable to the position of those officers. The expenditure was thus, so the appellant argued, relevant or incidental to the gaining or producing of that income. The appellant relied upon the observations of Beaumont J in Commissioner of Taxation v Rowe (1995) 60 FCR 99 at 109 where his Honour said (in relation to costs incurred by an engineer whose conduct was the subject of a State Government Inquiry): "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." 35 The appellant also relied upon the judgments of the other two judges in Rowe. The appellant also argued that by successfully contesting the use of the confidentially-gained information against him, he was more likely to succeed in the charge of imposition brought against him. In respect of that charge, if he had been convicted, he could have been dismissed immediately. The imposition charge arose from the alleged taking of sick leave pursuant to a false medical certificate in the course of his employment. It was important, so it was argued, that at the time when the section 16 expenditure was incurred, the imposition charge had not yet been withdrawn. A consistent (and often repeated) part of the appellant's argument was that he incurred the expenditure not only on his own behalf but, as a union delegate in the Community and Public Sector Union, on behalf of his fellow employees in the Australian Taxation Office. There was no evidence that the appellant was paid for carrying out his duties as a union delegate.

Reasoning 36 In my view, the logical disposition of this case should start with an examination of what the section 16 expenditure was actually spent on. The money was spent on filing fees, legal advice and incidental expenses in relation to two sets of proceedings in this Court under the Administrative Decisions (Judicial Review) Act 1977 ("the ADJR Act"). One application was to review the respondent's decision not to initiate prosecutions against those officers of the Australian Taxation Office who, so the appellant alleged, had contravened s 16 of the Act. The other was an application seeking review of a decision by the Commissioner of the Australian Federal Police not to investigate the appellant's allegations of such breaches. The Tribunal found as a fact (see par 31 of its reasons) that the section 16 expenditure was incurred in trawling for evidence which might result in the exclusion of the allegedly confidential material from the evidence tendered "if and when" the criminal charges against the appellant came to trial which, in turn, would result in his acquittal or a nolle prosequi and reinstatement to his former position. At the time of the hearing and at the time when it gave its reasons, the Tribunal knew that the imposition charge had been withdrawn (see the last sentence in paragraph 19 of its reasons). It was common ground that the imposition charge was withdrawn on 25 March 1997. That fact would not be determinative of the question whether the s 16 expenditure was an allowable deduction at the time when it was incurred i.e. at an earlier time when the imposition charge was still pending. However, it assists in reaching the conclusion that when the Tribunal referred in paragraph 31 of its reasons to "… if and when the Applicant's case finally comes to trial", it was referring to the charges arising out of the motor vehicle sales. It is apparent from paragraph 31 of its reasons that the Tribunal misunderstood the factual position and the appellant's argument before it. There was no evidence before the Tribunal that any evidence obtained by the police in those criminal proceedings had been gained through the use of the respondent's powers under ss 263 and 264 of the Act. The Tribunal's mistake in that regard may not matter. That is because it is common ground that the appellant's case before the Tribunal was that the section 16 expenditure was incurred partly with a view to obtaining an exercise of the trial judge's discretion, in the imposition trial, to exclude the evidence obtained by the alleged misuse of ss 263 and 264 of the Act. Mr E M Corboy, counsel for the respondent both before the Tribunal and on appeal, conceded (in my view correctly) that paragraph 31 should be read as a finding accepting what he described as "the subjective explanation" given by the appellant for incurring the s 16 expenditure. The Tribunal appears to have accepted that the appellant's subjective purpose in successfully defending the imposition charge was to restore him to the position where he was before his suspension. The task of the Tribunal was to decide whether the section 16 expenditure was sufficiently connected with the appellant's gaining of assessable income to be incurred "in" gaining that income. As Hill J observed in Commissioner of Taxation v Roberts (1992) 37 FCR 246 at 256-257, the process of characterisation involved in resolving an issue under s 51(1) will commonly be possible without reference to the taxpayer's subjective thought processes. His Honour, in that case, was considering the effect of the decision of the High Court of Australia in Fletcher v Commissioner of Taxation (1991) 173 CLR 1 at 17-19 where the High Court explained that, depending upon the circumstances of the particular case, the end which the taxpayer subjectively had in view in incurring expenditure may constitute an element, and possibly the decisive element, in characterising whether the whole or part of the outgoing fell within s 51(1) of the Act. The Tribunal appears to have fastened solely on the appellant's subjective intentions in relation to the imposition charge (which it wrongly referred to as the charges then still pending) without giving any consideration to other objective circumstances. For example, it did not ask itself what other results might have flowed from a successful outcome of the applications under the ADJR Act. They may have included the following:

1. That one or other of the decisions challenged was vitiated by error of law in that it was illegal for the respondent to obtain and use information obtained in the course of an audit, and information obtained under ss 263 and 264 of the Act, for personnel purposes. 2. Such a finding would have resulted in the removal of all that information from the appellant's personnel file. 3. In those circumstances: · there remained only the charges arising out of the motor vehicle sales which are stayed under the Dietrich principle; and · there may have been a real prospect that the appellant would eventually be restored to his former position without loss of promotion and with the prospect of earning substantially more than the salary currently paid to him whilst under suspension. 37 The case is an unusual one because the appellant is an officer in the employment of the Australian Taxation Office. Albeit in connection with his own affairs, the appellant formed a view on an important taxation matter. He was unable to make that view good in the judicial review proceedings brought against the respondent. That was because this Court held that it lacked jurisdiction because the respondent's decision was not made under an enactment. Subsequently the appellant discontinued the judicial review proceedings against the Australian Federal Police. The appellant's legal argument remains undecided. However, had he made good his legal argument then not only were there the potentially beneficial consequences of removal of information from his personnel file, but his appreciation of the proper construction of s 16 of the Act (a better understanding perhaps than that demonstrated by the Director of Public Prosecutions) might well have stood him in good stead in his future career in the Australian Taxation Office. 38 There may be other matters of an objective nature which bear upon the characterisation process. Whether they, or the other matters to which I have referred above (including the subject matter of the numbered paragraphs immediately above) would result in the conclusion that the section 16 expenditure was an allowable deduction is a factual matter for the Tribunal's assessment. By mentioning them I should not be taken as expressing a view one way or the other. 39 It might be said that the Tribunal, in having regard only to the appellant's subjective purposes, applied a characterisation test more favourable to the appellant than taking in the non-subjective matters. In my view, it is impossible to decide whether that it so. 40 The situation is that none of those matters has been the subject of any assessment by the Tribunal. 41 I think that there is merit in the appellant's submission, in reply, that the Tribunal "blurred" the car selling charges with the imposition charge in the sense that it lumped all those charges together and saw "little distinction" (see par 30 of its reasons) between the costs of defending those charges on the one hand, and the section 16 expenditure on the other hand. 42 It can be seen from a close reading of paragraphs 27 to 32, and in particular paragraph 29, of the Tribunal's reasons [a reading which, in my view, does not transgress the restrictions referred to in Wu Shan Liang (1996) 185 CLR 259] that the Tribunal lumped in the imposition charge with the charges arising out of the car sales. It approached the possibility of the appellant's dismissal, if convicted on the imposition charge, (at the time when the s 16 expenditure was incurred) as being "… not related to performance of his duties as a tax officer, but based on charges of fraudulent conduct unrelated to any activities within the Tax Office". In so doing it failed to ask itself whether expenditure originally incurred to defeat a charge of fraudulently using a medical certificate to obtain a day's salary, was sufficiently connected with the derivation of future assessable income in that continued employment, as to be incurred "in" gaining that assessable income. In my view, the error is not one of simply making a wrong finding of fact [Waterford v The Commonwealth (1987) 163 CLR 54 at 77], but was one which resulted in a failure to ask itself the right question and hence an error of law. Furthermore, as mentioned above, the Tribunal confined itself to a consideration of the subjective purpose of the appellant in incurring the section 16 expenditure. It did not consider any objective connection between that expenditure and the gaining of income by the appellant. It is unfortunate, given the small amount involved, that the matter should be remitted to the Tribunal. But I think that justice requires that to be the result.

Whether the appellant should have leave to amend his Notice of Appeal 43 During the course of argument, one member of the Court raised with senior counsel for the appellant the question whether the section 16 expenditure might be an allowable deduction on a different basis. The different basis suggested was that the expenditure was incurred to achieve a successful defence of the imposition charge and thus avoid an order for repayment of the one day's salary obtained by reason of production by the appellant of a medical certificate. Senior counsel for the appellant freely admitted that he had not thought of the point previously. The appellant sought leave to add that ground to its notice of appeal. The respondent opposed that application. Each party filed written submissions on that point, after the hearing of the appeal. 44 In my opinion, leave to add this ground should be refused. I appreciate that the appellant was not represented before the Tribunal, but he has a knowledge of tax law and chose to conduct his case without urging this particular point. Furthermore, where a relatively small amount is involved (in this matter one day's pay) the subjective purpose of a taxpayer in outlaying sums far greater than the income in question, is very likely to be relevant. This would involve a factual assessment, including the possibility of cross-examination of the appellant before the Tribunal. If we allowed the application for leave to amend, we would be denying the respondent the opportunity to cross-examine the appellant on the question whether his motives included the retention of this one day of income. I have considered the somewhat voluminous supplementary written submissions filed by the respective parties on this point (including submissions in reply from the appellant). Nothing in those arguments persuades me that the appellant's application for leave to amend should be granted. Conclusion 45 I agree with the orders proposed by Drummond J. I certify that the preceding fourteen (14) paragraphs are a true copy of the Reasons for Judgment of Justice Carr.

A/g Associate: Dated: 12 May 1999 Counsel for the appellant: Mr R K O'Connor QC Solicitors for the appellant: Mr G P Mohen of Law Access Counsel for the respondent: Mr E M Corboy Solicitor for the respondent: Australian Government Solicitor Date of Hearing: 18 November 1998 Date of Judgment: 12 May 1999