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 Federal Commissioner of Taxation (1988) 82 ALR 175 (at 182-3) 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 Federal Commissioner of Taxation v Harris (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 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 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 Federal Commissioner of Taxation 95 ATC 4,145 at 4,149 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 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 Federal Commissioner of Taxation (1932) 48 CLR 192 at 205; Deputy Commissioner of Taxation v Richard Walter Pty. Ltd. (1995) 69 ALJR 223 per Brennan J. at 240).
In Inglis v Federal Commissioner of Taxation 87 ATC 2,037 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 2,047) 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 AAT 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 Federal Commissioner of Taxation (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 2047-8):
"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 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 Federal Commissioner of Taxation (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 829-30):
"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 realization 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 s.51 of the Income Tax Assessment Act."
Counsel for the taxpayer in Kratzmann relied upon Federal Commissioner of Taxation v Snowden and Wilson (1958) 99 CLR 431, but Menzies J. distinguished it, saying (at 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 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 Federal Commissioner of Taxation (1965) 113 CLR 341 at 350; H.R. Sinclair & Son Pty. Ltd. v The Commissioner of Taxation (1966) 114 CLR 537 at 543, 545;
TNT Skypak, above, at 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 Federal Commissioner of Taxation, above, (at 4,148) 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 Federal Commissioner of Taxation (1953) 86 CLR 570 (at 633-4):
"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] A.C. 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 390-1):
"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 Federal Commissioner of Taxation v Dixon (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."