Commissioner of Taxation v Day

[2008] HCATrans 315

[2008] HCATrans 315

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S315 of 2008

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

SHANE DAY

Respondent

GUMMOW J
KIRBY J
HAYNE J
HEYDON J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 28 AUGUST 2008, AT 10.11 AM

Copyright in the High Court of Australia

MR D.H. BLOOM, QC:   May it please the Court, I appear with my learned friend, MS K.J. DEARDS, for the appellant.  (instructed by Australian Government Solicitor - Sydney)

MR M.L. BRABAZON:   May it please the Court, I appear with my learned friend, MR A.H. RIDER, for the respondent.  (instructed by Leitch Hasson Dent Solicitors)

GUMMOW J:   Yes, Mr Bloom.

MR BLOOM:   Your Honours, this case concerns deductibility pursuant to section 8-1 of the Income Tax Assessment Act 1997 of legal expenses.  The expenses in issue were incurred in defending or otherwise in relation to charges laid against the respondent under the former Public Service Act, that of 1922.

The first question which arises is whether the expenses satisfy the so‑called first positive limb in subsection (1)(a) and, if that question is answered in the negative, then no further questions will, in our submission, arise.  If, on the other hand, an affirmative answer is given to that question, it will be necessary for your Honours to consider the possible application of the negative limbs of section 8-1.

Your Honours, dealing with the first positive limb first, that asks a simple question, whether the legal expenses here in issue have been incurred in – that is, in the course of – gaining or producing the assessable income of the taxpayer and “in”, as I have said, your Honours, means in the course of.  Fundamentally, that requires in our respectful submission the identification of those activities which are productive of the assessable income.

Extracted in the judgment of Justice Dowsett at page 229 of the appeal book, at about point 9 of the page, is a passage from the judgment of Sir Owen Dixon in the Amalgamated Zinc Case which I am afraid did not find its way to our list.  His Honour 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.’

KIRBY J:   The immediate question that is then presented, leaving aside the judicial gloss that follows in the second sentence of that quote, just focusing on the statute, is whether in a disciplined service the costs of legal expenses that are incurred to try to defend the employment and the income is incurred in gaining or producing the assessable income.

MR BLOOM:   Yes.  Then over the page at 230 his Honour Justice Dowsett extracts a passage from the judgment of the Court in Ronpibon Tin.  That is on our list of authorities, but it is convenient perhaps to go to the passage there.  At about line 32 the Court, Chief Justice Latham, Justices Rich, Dixon, McTiernan and Webb, said:

‘No doubt the expression “in carrying on a business for the purpose of gaining or producing” lays down a test that is different  –

that is, of course, the second limb –

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 incomes.

Notwithstanding the differences in other respects in the present provision, the expression “incurred in gaining or producing the assessable income” has been left unchanged –

that is, from 1922 to 1936 –

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.

GUMMOW J:   We all know Ronpibon, Mr Bloom.  We need to start off, do we not, by looking at the provisions of the Public Service Act that triggered all of this?

MR BLOOM:   Yes, section 61.

GUMMOW J:   And then we need to know a little bit about the facts.

MR BLOOM:   Yes, certainly.  I will come to that, your Honour, but I just wanted to illustrate the cases had really eschewed purpose as a test and identified one test and one test only, namely, the words of the statute, namely, that the outgoing must be incurred in or in the course of gaining or producing assessable income.

GUMMOW J:   Yes.

MR BLOOM:   Your Honour, the charges were laid pursuant to section 61 and alleged a failure by the respondent to fulfil his duty as an officer.

GUMMOW J:   Just stopping there for a minute.  When you say “charges”, we know I think from R v White; Ex Parte Byrnes 109 CLR 665 that although they are called charges, they do not involve any exercise of judicial power.

MR BLOOM:   No.

GUMMOW J:   So what was the section?

MR BLOOM:   Section 61, your Honour, and its heading is “Disciplinary action”.  My section 61 appears to commence with subsection (2):

Where an officer authorized by the relevant Secretary for the purposes of this subsection is of the opinion that an officer may have failed to fulfil his duty as an officer, the authorized officer shall, as soon as practicable, decide whether he should be charged and . . . 

(b)if he decides that the officer should be charged – shall, by writing under his hand delivered to the officer, charge the officer with the failure.

Section 56 sets out the exclusive circumstances of failure to fulfil duty:

For the purposes of this Subdivision and Subdivisions B, C and E, an officer shall be taken to have failed to fulfil his duty as an officer if and only if:

(a), (b) ‑ ‑ ‑

HAYNE J:   Just a moment, we have not got 56.  We have inevitably got the missing the pages, Mr Bloom.  It seems to happen in every advocate’s submission at some point.

MR BLOOM:   I am sorry, your Honour.  At least your Honours start with the right statute.

HAYNE J:   Are we sure?

MR BLOOM:   I have had that before too, your Honour.

GUMMOW J:   Anyhow, are they not attached to Mr Brabazon’s submissions?

MR BLOOM:   They were, your Honour.

GUMMOW J:   Let us go there.  Section 56?

MR BLOOM:   Yes, your Honour.  We can pass over (a) and (b).  Your Honours can note (c):

he is negligent or careless in the discharge of his duties –

Subsection (d), which was the one here invoked:

he engages in improper conduct as an officer –

and (e), which your Honours might also note –

he engages in improper conduct otherwise than as an officer, being conduct that affects adversely the performance of his duties or brings the Service into disrepute –

GUMMOW J:   I think those provisions have a long legislative history.

MR BLOOM:   They do, your Honour.  The conduct which occasioned the charges is set out in our outline of submissions, if your Honours would go to those, that is, our submissions in‑chief.  There were originally three lots of charges called, of course, first, second and third.  The second charges went as far as Justice Emmett but no further.

GUMMOW J:   What were they about?

MR BLOOM:   They were about filling in attendance records falsely and his Honour held that that related to the day‑to‑day activities of the taxpayer’s employment, namely, filling in attendance records which was part of what he was supposed to do from a positive point of view, and held that the costs in relation to those charges were deductible.  There was no appeal by the Commissioner for that.

GUMMOW J:   They are out of our consideration?

MR BLOOM:   They are out.  Your Honours are concerned with the first and the third charges as they were originally which we have called for simplicity the 1998 and 1999 charges.  The first or 1998 charge is dealt with in paragraph 10 of our outline of submissions.  It was alleged that on 21 September 1998 the respondent engaged in improper conduct.  Particulars of the charge were that he breached the standards of conduct as set out in the Customs code of ethics and conduct official identification and security items in that he presented his Customs identification card to gain access to a local court officer in order to obtain information on a search warrant which had been executed on the Australian Customs Service on 28 July 1998.

GUMMOW J:   Is there a particular provision in the code of conduct?

MR BLOOM:   There is, your Honour.

GUMMOW J:   A text of it?

MR BLOOM:   I am sorry, I thought there was.  I am told there is not.  I will just obtain what might be the relevant part of those, your Honour, but what had happened is that a search warrant had been executed in relation to his desk at Customs and he had tried to get information concerning this search warrant, which had not been made available to him.

GUMMOW J:   He was the object of the search warrant.

MR BLOOM:   Yes, he was, and he went to the Local Court and in order to make inquiries of the court officer, used his Customs identification in order to obtain access to her and to then make the inquiries that he subsequently made, and that was the subject of the disciplinary proceedings.

KIEFEL J:   Justice Emmett refers to a matter in the Customs code of ethics and conduct about the uses of badges and passes otherwise than for the performance of duties in the exercise of powers.

MR BLOOM:   Yes, in paragraph 5 of his judgment, yes, thank you, your Honour.  That is at page 174 of the appeal book.

GUMMOW J:   Yes.  That is one of the live matters.  What was the other one?

MR BLOOM:   Yes, the next of them was a series of charges dealt with in paragraph 17 of our outline of submissions and they were the 1999 or third charges and he was given notice of a further seven charges under section 61.

Each of the charges alleged that the respondent failed to fulfil his duty as an officer within the meaning of section 56(d) -

and he was suspended without pay.

The particulars of the charges were as follows:

(a)Three of the seven charges related to false claims for a diesel fuel rebate made by one Mr Tony Panto.  It was alleged that the respondent lent improper support and assistance in connection with the claims, failed to inform his employer of the false claims, and was knowingly concerned in creating a diary in connection with an audit of the claims.

(b)The fourth charge was that the respondent secured access to, and organised the use of, a work vehicle for a non‑work‑related purpose.

(c)The fifth charge was that the respondent signed and submitted a Customs Attendance Record which the respondent knew to be false.

(d)The sixth charge was that the respondent took steps to deceive his employer into believing he attended work on a day on which he did not attend work.

(e)The seventh charge was that the respondent failed to inform his employer of matters relating to an investigation into a Mr Dennis Partridge in circumstances where the respondent knew, or ought to have known, that the matters could be relevant to that investigation.

As a result of these charges the respondent was ultimately dismissed and appeals to the Industrial Commission and then a full bench of that Commission were unsuccessful.  His Honour Justice Emmett, the learned trial judge, made findings that in neither ‑ ‑ ‑

KIRBY J:   Which was the Industrial Tribunal?  Was that the federal Australian Industrial Relations Commission?

MR BLOOM:   Yes, your Honour.

KIRBY J:   So it was not the Industrial Commission?  It was not the New South Wales ‑ ‑ ‑

MR BLOOM:   The AIRC, the federal body, yes.

KIRBY J:   That they failed.  Were they the subject of the proceedings that ultimately ended up in this Court?  Were they the subject of proceedings that came to the High Court?

MR BLOOM:   No.  That related to an interception under the Telecommunications Act.

KIRBY J:   That was anterior to the decision of dismissal?

MR BLOOM:   Yes.  The proceedings, amongst other things, sought to restrain the communication by the Federal Police of the information that had been obtained under the Telecommunications Act to Customs to enable them to use them in relation to these charges.

KIRBY J:   That was dismissed by Justice Einfeld and the appeal to the Full Court failed?

MR BLOOM:   Correct, your Honour.

KIRBY J:   It is in the costs that were incurred in those proceedings that the costs were incurred that are the subject of the present claims?

MR BLOOM:   Yes, including costs of an application for special leave to appeal to the High Court.  There were some charges by Mr Jackson which the Commissioner agreed to allow and they were the subject of the argument about estoppel which was successful at first instance but not in the Full Court and which has not been pursued here, and Mr Jackson’s costs related, of course, to the potential application for special leave.

KIRBY J:   Mr Jackson got special treatment by the Commissioner?

MR BLOOM:   Mr Jackson alone stood out, your Honour, as always.  Your Honours, the trial judge, as I said, made findings that in neither the first or third charges had the conduct been shown to have been engaged in by the respondent in the discharge of his duties as a Customs officer, and by “duties” what his Honour meant is the activities by which the taxpayer gained assessable income, and that was the distinction that came from Rowe’s Case to which I will turn in due course.  If I could ask your Honours to go to page 183 of the appeal book, paragraph 36 at line 50:

Thus, it is necessary to examine the conduct or activity of the Taxpayer that was the subject of the charges under the Public Service Act.  If that activity or conduct was engaged in by the Taxpayer for the purpose of, or in the discharge of, his duties as an officer of Customs, he may be entitled to claim that the legal expenses were incurred in gaining or producing assessable income.  However, if the conduct that was the subject of the charges against the Taxpayer was conduct that was not engaged in in the discharge of his duties as an officer of Customs, the expenses were not deductible.

HAYNE J:   Why is the focus upon the conduct that gives rise to the charge rather than upon the fact of charge and the significance of the fact of charge?

MR BLOOM:   The focus is on the relationship, your Honour, between the two things, the expenditure and its relevance to the income producing activities.

HAYNE J:   That is right, and the expenditure is in response to the fact of charge?

MR BLOOM:   Yes.

HAYNE J:   It would be a common occurrence that the events giving rise to the charge are alleged to be events that stood apart from the ordinary performance of duties.  Indeed, if they stood within the ordinary performance of duties, where would be the basis for charge in many cases?  I hear he is charged with default as an officer, as it happens.

MR BLOOM:   If your Honour looks at 56(c), assuming your Honours now have a copy of that, a charge can be made for negligent or careless discharge of duties and that would be, in our respectful submission, related to the activities by which he earns his income ordinarily.

KIRBY J:   There was nothing negligent about these acts?

MR BLOOM:   No, and nor was (c) the basis for them; (d) was (e) was not, but (d) or (e) could both, in our submission, cover activities that are outside the ordinary course of the activities by which one earns one’s income.  There are, and we have sought to make this distinction, positive duties and negative stipulations or prohibitions.  So one is prohibited, as indeed many sports people are, from bringing the Public Service into disrepute or bringing the sport or the person himself into disrepute, and one is paid, in our respectful submission, for doing the positive duties of one’s employment, not for observing the negative prohibitions.

So engaging in the conduct which is proscribed only entitles one upon turning up and rendering the services to get paid.  One is not paid for not engaging the conduct which is proscribed.

GUMMOW J:   I wanted to ask you about this.  Was this taxpayer suspended when the charges were made? 

MR BLOOM:   Yes.

GUMMOW J:   There is a power of suspension, is there not, just from the fact of charge?  Section 63B.

MR BLOOM:   He was demoted two bands.  In relation to the first charge, he was demoted two bands.

GUMMOW J:   No, but that is at the end of the process, but at the very beginning simply upon the charges being made, was he then suspended, do we know?

MR BLOOM:   Yes, and he was suspended without pay and then that pay was restored and there was a bit of a history in relation to that.  Page 174 that is set out, your Honour, at paragraph 4.

GUMMOW J:   Yes, but it does not identify the statutory source of the power suspension.  It was section 63B, was it?

MR BLOOM:   Yes, 63B.

GUMMOW J:   And eventually he was dismissed?

MR BLOOM:   He was dismissed as a result of the third charges.

GUMMOW J:   And what section permitted that to happen?

HAYNE J:   Section 62(6)(b), is it not, direct dismissal?

MR BLOOM:   Yes, your Honour, page 104.

GUMMOW J:   Yes, thank you.

MR BLOOM:   Your Honours, I was at page 184, paragraph 37:

The Taxpayer has made no suggestion that the conduct that was the subject of the First Charge was in fact engaged in in the discharge of his duties.  The fact that it was alleged not to have been engaged in for that purpose would not be fatal to his claim if he were able to persuade the Court, on the balance of probabilities, that, notwithstanding the First Charge, the conduct was engaged in in a bona fide belief that it was in discharge or in performance of his duties.

GUMMOW J:   This notion of “in performance of his duties” is a difficult one in a way, is it not?  He is off on a frolic of his own to some extent, surely, and that is the complaint?

MR BLOOM:   Yes, but it might have been different.

GUMMOW J:   Notions of what might or might not involve vicarious liability are beside the point really.

MR BLOOM:   These are the sorts of things which are within the proscription.  These are not the sorts of things which he is, in effect, paid positively to do and where the service earns the income.

KIRBY J:   One of the problems is that there is as catch‑22 situation here, that the argument about whether he has stepped outside his employment may be the very subject of the investigation.  It was not really here because, I would have thought, it would be accepted that what he did, if he did it, was not furthering in any way the employment objectives with the Customs.

MR BLOOM:   It was in each instance, really, private conduct.

KIRBY J:   Yes, exactly.

MR BLOOM:   The issue was, the allegations having been made, whether it was misconduct sufficient to justify some sort of action under the Public Service Act by way of suspension or dropping a band or –

KIRBY J:   You could get a case where whether it was connected with the employment was the subject of the debate.

MR BLOOM:   Yes.

KIRBY J:   Now, in that case, what would you say about the deductibility of the legal costs of advancing that argument, even if he were to ultimately to lose that point?

MR BLOOM:   If he were to lose – it cannot depend, in our submission, on success or failure, your Honour.  If the conduct alleged is private conduct then, just as with somebody who is charged with some sort of criminal offence who ultimately wins on it, those costs are not –

GUMMOW J:   But it was improper conduct as an officer.

MR BLOOM:   As an officer, but –

GUMMOW J:   He would not have got very far when he tried to meddle with this search warrant procedure if he had not been an officer.  He would not have been filling out time sheets if he was not an officer either.

MR BLOOM:   He was using his card as an officer and he was attempting to use his position as an officer in all of the other things that he did, but he was not doing those things for which, as an officer, he was being paid to do.  That was the issue that went to Justice Gyles in the Federal Court and his Honour’s judgment is at 105 in the appeal book.  From 109 he deals with the issue of whether the conduct complained of was as an officer and gives some examples at page 111, concluding at 32 with considerable hesitation, that there was material from which the disciplinary committee could possibly conclude that the applicant did purport to be at the court pursuant to his official duties.

GUMMOW J:   What paragraph was that?

MR BLOOM:   Paragraph 32, page 112.  Even though his Honour was of the view that it was an unauthorised act, and if one goes to where the learned trial judge deals with this, his Honour does note that although Justice Gyles found that the respondent was acting as an officer for the purposes of the public service legislation, the activities were wholly outside the activities of his employment.  I will find that passage for you.

HAYNE J:   It is 185, paragraph 43, is it, about line 50.

MR BLOOM:   Yes, your Honour:  “it was not engaged in for the purpose of discharging or performing duties as an officer”.  That was the distinction that was drawn.

KIRBY J:   Is there not a problem for you in that 62(6)(b) that Justice Hayne drew attention to is not mandatory?  It is “may” direct that the officer be dismissed.  Assume a person has had 30 years service in the Customs, totally honourable, and then through a momentary lapse he gets involved in some extra employment activity and then they have to decide whether he should be dismissed.  At least prima facie it would seem to be arguable that defending your employment is absolutely integral – the continuation of your employment is integral to getting your income, so no employment, no income.  If you are dismissed, no income.  So at least arguably, and I think this was Justice Spender’s approach, it may not be the way the authorities have reasoned it in the past and ultimately will apply the statute, but one can see an argument that defending the employment and therefore the income is incidental to keeping up the income.

MR BLOOM:   Well, your Honour, we say, with respect, if that depends upon identifying the purpose of the expenditure, then it applies the wrong test and Justice Spender erred in that respect.

KIRBY J:   There would be no doubt that the bottom line purpose here was to keep the job.

MR BLOOM:   Or to keep the income that flowed from the job, yes.

KIRBY J:   Yes, and if that is so, is that gain incurred for the purpose of gaining the income, ie, gaining it in the future?

MR BLOOM:   If the test were for the purpose of as it was in the 1922 Act it might be a different question.  That is not the test, with respect.  The other problem about it which ‑ ‑ ‑

KIRBY J:   Are you talking of the statutory test or the judicial elaboration of it?

MR BLOOM:   Both, because the court has said, particularly in Payne’s Case most recently in both the majority and the minority, that the test is expressed in that language “incurred in gaining or producing the assessable income” and you look for the relevant connection between two things; the expenditure and the income.

GUMMOW J:   What are the criteria of connection?

MR BLOOM:   Of connection?

GUMMOW J:   Yes.

MR BLOOM:   Well, I think, as her Honour Justice Gaudron said in Payne, they will vary case to case.  But, with respect, if purpose plays a part, it can only be a minimal part.  It cannot be, as Justice Spender saw it, the test.  Then, of course, if it were, that would raise the other aspect which is that an employment contract, at least according to Professor Parsons, should be regarded as itself in the nature of a fixed or structural asset.  So if the purpose is the test and it is to preserve the employment, then the expenditure will be on capital account.

HAYNE J:   Can I just understand where I suspect we may have got to with your argument at this early stage.  You say that deductibility does not depend on the outcome of the discipline proceedings, is that right?

MR BLOOM:   That is correct.

HAYNE J:   You do say though, I gather, that it does depend on the nature of the conduct alleged as the default?

MR BLOOM:   Yes.

HAYNE J:   You seek to distinguish, do you, between private and employment related conduct?

MR BLOOM:   Yes, and we seek to do so with a little help from some of the decisions at least before the Federal Court in that regard and from things that have been said by this Court in cases dealing with the second limb, that is, the business limb.

KIRBY J:   No reference to the conduct in the statute?

MR BLOOM:   No, but it is the conduct that of ‑ ‑ ‑

KIRBY J:   So this is gloss?

MR BLOOM:    ‑ ‑ ‑ course enlivens the charges, your Honour.

KIRBY J:   I know you did raise this at the very beginning of your argument, that was very proper, but if you would take us to the statutory words and then we can just think about those as we read the judicial explanations of them.

MR BLOOM:   I will come to that because I will take your Honours to Payne’s Case which is the last decision of this Court on the predecessor to section 8‑1 – last relevant decision – Citylink is in between that of course.  Citylink says obviously there is no distinction between 51‑1 of the old Act and 8‑1 of the current Act.  If I can take your Honour in due course to the words when I come to Payne’s Case.

I was endeavouring to show your Honours the trial judge had concluded that the particular conduct was in the nature of private conduct rather than work conduct, if one adopts the distinction that I am endeavouring to make.  I have taken your Honours to 37.  Then paragraph 43 on the next page after the reference to Justice Gyles:

In the light of those facts and findings, it is clear that the First Charge was made by reason of conduct that was not engaged in in the performance or discharge of the Taxpayer’s duties as an officer of Customs.  While Gyles J concluded, with considerable hesitation, that the conduct was engaged in as an officer of Customs, it was not engaged in for the purpose of discharging or performing duties as an officer.

Then at page 188, paragraph 52:

The only information before the Court concerning the conduct that was the subject of the Third Charges consists of the particulars furnished to the Taxpayer in connection with the Third Charges and the reasons of Einfeld J and the Full Court.  It was not suggested on behalf of the Taxpayer that the conduct described in the Third Charges involved the performance by the Taxpayer of his duties as an officer.  It could not be said that, in defending the Third Charges, the Taxpayer was defending the manner of his performance of his duties as an officer of Customs.  I would be disposed to conclude, therefore, that the defence of the Third Charges cannot fairly be characterised as a defence by the Taxpayer of the manner of his performance of his duties as an officer of Customs.  Accordingly, legal expenses incurred in relation to the Third Charges would not be deductible.

That was the dichotomy which his Honour adopted.  Now, if I can ask your Honours to turn the judgment of Justice Spender on Appeal at 223, to the same effect in paragraph 42, his Honour says:

The conduct of the taxpayer the subject of the two sets of charges, was conduct extraneous to and outside the activities by which he derived assessable income.

Then he goes to the purpose argument and I will come back to that in a second and if can I just give your Honours a reference to the judgment of Justice Dowsett.

KIRBY J:   Why are we characterising the conduct as distinct from the income‑earning activity, which is what the statute is focusing on ‑ ‑ ‑

MR BLOOM:   I am urging your Honours to do so because I am endeavouring to suggest to your Honours that there is a distinction to be drawn between the activities which are productive of income and expenditure which is incurred in relation to those which will come within the statutory test and private or extraneous activities where the expenditure will not fall within the test and I will endeavour, your Honour, to take you to the cases that suggest that that is a proper dichotomy.

GUMMOW J:   Can you explain that dichotomy again?

MR BLOOM:   Yes.  If there is conduct which is income‑earning activity, that is the things for which one is paid to turn up and perform, those income‑earning activities in the context of an employee are the things for which you are paid.  If you are charged in relation to the manner of performance of those day‑to‑day activities, the costs of defending yourself in ‑ ‑ ‑

GUMMOW J:   What would be an example of how that would fit in?  Would it be section 56?

MR BLOOM:   Well, in this case the second charges provide an example but they are dealt with by the trial judge at paragraph 11 and following, 176 of the appeal book, not accurately recording his attendance in connection with employment.  His Honour concluded in relation to those that they related to activities in the course of his employment, not private conduct at 186, paragraph 44:

The attendance records were completed by the Taxpayer in the performance of his duties as an officer of Customs.

Similarly, I will shortly take your Honours to a case where a rugby league footballer was ‑ ‑ ‑

GUMMOW J:   It says:

the liability for legal expenses was incurred because of the way in which he performed his duties.

MR BLOOM:   Yes.  There are two cases I will come to in a moment.  Rowe’s Case is one of them, a shire engineer who was the subject of an inquiry by the Queensland Government about the manner, again, of performance of his duties, held that his costs were deductible in the Full Federal Court.  An aspect of that came to this Court but not the deductibility issue.  And Cooper’s Case, a rugby league player who was advised by his coach to eat more and drink more beer in order to increase his weight.

GUMMOW J:   Yes, I remember that.

MR BLOOM:   He embraced that suggestion and then sought the cost of the additional food and beer and a Full Court of the Federal Court, with Justice Lockhart and Hill in the majority, distinguished between the activities that he was paid to do, which did not include eating, and eating.

HAYNE J:   I hear echoes, Mr Bloom, of distinctions between misfeasance and nonfeasance.  At some point, to defend this distinction, I think you are going to have to proffer a convenient statement of the relevant criterion.

MR BLOOM:   I will hope to do so by reference to the cases, your Honour.

HAYNE J:   Yes.

KIRBY J:   It would be blissful if the criteria could appear to have some anchor in the statute.

MR BLOOM:   They do because the focus is on, with respect, an identification of income producing activities.  The approach Justice Edmonds took was to say, well, it is the employment contract that is productive of the income and if you can find a connection between the expenditure and the employment contract, that is enough.  The approach which Justice Emmett and Justice Dowsett took, and which we commend to the Court, is that one must identify those activities which are productive of the income and see whether in applying the statutory test the outgoing is relevant to them.

KIRBY J:   Could that be characterised as a sort of extra punitive approach?  If you step outside your employment, you have to face the consequences, you lose your job and you cannot get any deduction for trying to defend your job from which all income flows, like the old hymn 100; blessings flow from God, income flows from jobs.

MR BLOOM:   The service begets the income I think this Court has said for a long, long time.  If one takes a different example.  If one takes the footballer who misbehaves, takes drugs or assaults somebody and it is a condition of that person’s contract that he can be dismissed or otherwise disciplined for that sort of misbehaviour, that would be private conduct, and, yet, it is a condition of his contract of employment with his club that he not perform that sort of conduct.

KIRBY J:   But what about the case where the dismissal is not mandatory but discretionary and the worker, taxpayer, endeavours to defend the continuation of the income stream by fighting the case and getting a lawyer to do it?

MR BLOOM:   It is always discretionary and in the case of a sportsperson many such people can go to the Court of Arbitration for Sport and sometimes not once but twice and pay the costs of appearing before that arbitral court and can lose or win, but in neither case are the costs of doing so, in our respectful submission, deductible.

KIRBY J:   But if their aim is to get a lawyer to try to help them keep the job and thus the income stream, subject to finding the words of the Act, the authority that has elaborated it, just seems to me logically, if you are endeavouring to defend the income stream, then that is the sine qua non without which you are not going to have the income on which to pay taxes.

MR BLOOM:   Your Honour, it is but it is the wrong one, with respect, because it allows purpose to obscure the test which is the statutory test.  It allows purpose to, in effect, make deductible something which otherwise is not and purpose is not the test.

KIRBY J:   Conduct is not the test either.  We are not in the business of adding extra punishment here.

MR BLOOM:   No, nor in the business, because one bears in mind that a courier for instance could be driving home and could be picked up for drunk driving and no doubt would be seriously motivated in defending the charges to try and keep his job as a courier, but the tax system does not provide tax deductibility for charges or the cost of charges of that kind.

KIRBY J:   But if it is incurred in gaining the income, why is it not incurred in gaining the income to keep the income stream, or to try to?

MR BLOOM:   Well, it is not incurred in the course of, “in” meaning “in the course of”.

KIRBY J:   Because you have fixed in your idea that you have to go back to the conduct, whereas if you are looking at what is essential to keep to maintain the income stream, then it is a different kettle of fish.  You may win or you may lose, but that is the purpose and that can be the consequence that you keep the income stream on which to pay more and more tax to your client.

MR BLOOM:   Well, I am sure he is grateful for all of it, your Honour, but the error, with respect ‑ ‑ ‑

KIRBY J:   He does not seem to be.

MR BLOOM:   Well, he would like to get it right, your Honour.  The error that lies in that approach is to elevate purpose to the test and to supplant what the Court has said is the test.

KIEFEL J:   Why do you not focus though on the words “in the course of” as involving a continuum in relation to employment and then to see the expense as the occasion within that continuum of maintaining the employment.  If you view it in that way, is not the connection sufficient for statutory purposes?

MR BLOOM:   It is if one says that the employment involves the positive and the negative duties.

KIEFEL J:   But you do not have to have regard to within or without.  The test then only involves perhaps the two questions that Justice Edmonds posed.  The first is what produces the income?  Answer, the employment.  The second question, what was the occasion for the expense?  Answer, the steps necessary to maintain employment.  That is not a purposive inquiry.

MR BLOOM:   No, as Justice Edmonds saw it, it is not.  The approach that Justice Edmonds preferred is what we might say is the macro approach.  It is the employment, the whole of it, that produces the income.  We suggest to the Court a micro approach which looks at the income‑producing activities in the employment and distinguish those from private conduct.

KIEFEL J:   But on Justice Edmonds’ approach, why is his Honour’s approach inconsistent with the discussion in Payne about “in the course of”?

MR BLOOM:   Because the private conduct engaged in is conduct which is proscribed.

KIEFEL J:   You are just defining the word “employment” then?

MR BLOOM:   Well, I am trying to eke out of there, as the courts have done in relation to the second limb, the activities which are productive of income.

KIEFEL J:   You should not really confuse the second limb with the inquiry on the first though, should you?

MR BLOOM:   No, but there are some parts of the cases in relation to the second which are helpful, at least in this aspect, because in the second limb what is important is to identify the business.  When your Honour says one should not confuse, Justice Spender gets to his purpose argument by applying second limb cases or cases on the earlier provision.  The earlier provision, at least in the negative limb, did have purpose as a relevant aspect.  So we seek to get out of them what we can, but they do focus on - Snowden & Willson, that I will take your Honours to, that was conduct of the business that led to a royal commission which impugned the methods by which the taxpayer conducted its business.  Therefore, the expenses of were appearing before the royal commission were deductible.

Magna Alloys, the directors had been charged in methodology that they employed to carry on the business of the company with offering secret commissions, but because it related to the methods of carrying on the business, the expenditure in defending the directors was held to be deductible.  That is the sort of analogy that we seek to draw into the first limb, with respect.

Indeed, it would probably be convenient to go to Snowden & Willson now.  I should take your Honours first to Payne (2001) 202 CLR 93 and there your Honours recall the Court divided on whether or not the expenditure of travelling between two unrelated points of income production was deductible. In the judgment of the majority, Chief Justice Gleeson, your Honours Justices Kirby and Hayne, at 98, section 51(1) is set out, paragraph 6:

“All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income –

that is the first limb –

As the majority of the Full Court pointed out, the general principles governing the construction . . . of s 51(1) are familiar.  Under the first limb of s 51(1), outgoings incurred in gaining or producing the assessable income of the taxpayer are deductible.  The sub‑section requires the identification of a loss or outgoing, an understanding of what is meant by “the assessable income”, and the identification of a particular connection between the two.

In paragraph (9):

The connection which must be demonstrated between an outgoing and the assessable income, in order to fall within the first limb of s 51(1), is that the outgoing is “incurred in gaining or producing” that income.  The subsection does not speak of outgoings incurred “in connection with” the derivation of assessable income or outgoings incurred “for the purpose of” deriving assessable income.  It has long been established that “incurred in gaining or producing” is to be understood as meaning incurred “in the course of” gaining or producing.  What is meant by being incurred “in the course of” gaining or producing income was amplified in Ronpibon Tin NL –

and then those words again, you look for “whatever is productive of the assessable income”.  Justice Edmonds would say that is the contract.  We would say, no, it is the activities, the positive activities, under that contract.

KIEFEL J:   What if you saw the occasion as the fact of the charges by the employer?

MR BLOOM:   Yes, but that of itself, of course, gains no income.

KIEFEL J:   No, but that is the occasion; being the charges by the employer gives you the connection to the employment, does it not?

MR BLOOM:   But the occasion has to be productive of the assessable income.

KIEFEL J:   No, it does not.

MR BLOOM:   The occasion needs to be ‑ ‑ ‑

KIEFEL J:   It has to be found in the subject matter of the production.  It does not itself have to be productive.  It has to be found in what it is that is productive, that is to say, the employment.

MR BLOOM:   It is either the employment, on the view of Justice Edmonds, or it is the income producing activities, if we could persuade your Honour to the contrary.  And then at paragraph 11, the last two sentences:

The question is whether the outgoing was incurred in the course of gaining or producing actual or expected income.  That is, is the occasion of the outgoing found in whatever is productive of actual or expected income?

Then at paragraph 16 on page 102 there is a reference to Sir Owen Dixon’s judgment in Lunney and, as he pointed out:

the question in Lunney was how an undisputed principle was to be applied.  The principle which had to be applied in that case, and must be applied in this, 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.

Then at paragraph 25, in the judgment of the minority, and there was very little difference really between the two judgments in relation to these aspects –

GUMMOW J:   I think there is – paragraph 42.

MR BLOOM:   I will come to 42 in a moment, your Honour, but 25, if I may, first.  At the end of 25 there is a sentence:

Long before Lodge, the preposition “in” was said in this Court here to have the force of “in the course of” and to look to the relevance of the expenditure to the operations or activities in question rather than to purpose in itself.

Then at paragraph 42:

The preposition “in” has been given much work to do by the decisions construing the phrase in s 51(1) . . . What is required is a connection between the incurring of the losses or outgoings and the gaining or producing of the assessable income.  As Professor Parsons put it:

“[A]ll the decisions are concerned with fixing the point where connection with a process of income derivation is sufficient to make an outgoing relevant.”

A decision fixing that point in a given case will involve considerations of some indeterminacy, with leeways for judicial choice indicated by the subject matter, scope and apparent purpose of s 51(1).

Later on, your Honours referred in paragraph 45 to the term “in” as the “criterion of connection”.

KIRBY J:   Why cannot one say that there is a connection with the process of income derivation to try to save the income and source, a very intimate and ‑ ‑ ‑

MR BLOOM:   Leaving aside the capital argument, there is a connection, which is a purposive connection and if purpose is the test, that gets one there.  But if purpose is not the test then one must find a connection other than purposive.

KIRBY J:   It is not only purposive, it is also common sense and real, actual.  Unless you have the income source you do not get further income and therefore defending the income source is at least arguably incurred in gaining and producing the assessable ‑ ‑ ‑

MR BLOOM:   The difficulty with that sort of approach, your Honour, is to take it back to travelling expenses, and if we leave aside for the moment travelling between two related or unrelated points of income production, if one travels to work one does not get a deduction for the costs of doing so because travelling to work is a necessary precondition to earning the income; it is not incurred in gaining or producing it and yet if you do not go to work you do not get the income.

HAYNE J:   But what that proposition does not confront and what I think is the central point you have to confront is that the disciplinary processes with which we are concerned are internal disciplinary processes – that is to say, they are processes within the employment.  True it is, they are elaborated in the way that they are – I understand that – but the expenditure in question is an expenditure at the choice of the taxpayer.  Choice is presently irrelevant, I think – expenditure at the choice of the taxpayer in meeting an internal disciplinary process that may result in a number of outcomes:  diminution of income or cessation of employment.

MR BLOOM:   Your Honour, that may be true of the first charge and the second ‑ ‑ ‑

HAYNE J:   But not the third.

MR BLOOM:   But it is hardly true of the third.

HAYNE J:   It is internal.

MR BLOOM:   Yes.

HAYNE J:   This is the internal discipline of the service.  You are not charging outside the service.  It is within the employment.  This is the employee carpeted before the boss.  True it is because of the way in which it is set up, the employee carpeted before the boss may bring with him high‑powered assistance.

MR BLOOM:   In relation to the third charges, of course, what was sought to be done was to, amongst other things, stop the communication of information which had been obtained by the Australian Federal Police to those responsible for charging him.  Now, that starts to get away from the internal disciplinary aspect of it.  It is not purely in defence of the charges.  Your Honours, the test that we propose makes no such distinction.  It makes a distinction based upon whether the conduct, the subject of the charges, was private conduct on the one hand or what we might call work conduct on the other. 

Your Honours, I was going to take you next to Federal Commissioner of Taxation v Snowden & Willson Pty Ltd 99 CLR 431which is the Royal Commission case. Sir Owen Dixon sets out the relevant facts at 434 at the bottom of the page.

The company carried on a business which included the speculative buildings of houses for customers on terms.  The business covered the work of an estate agent, insurance agent and the kind of things associated with such enterprises.  What, perhaps, is more material for present purposes is its business in building for its customers.  The company would build for a customer owning the site or it would contract to sell him the site and to build the house.  The transaction would in each case be upon terms.  It is unnecessary to enter upon the details of the complaints made in the Legislative Assembly, or elsewhere, of the company’s methods.  It is enough to say that they reflected on the integrity of those conducting the company’s business and upon the fairness of the transactions to the customers and the sufficiency of the disclosure to them of the operation of the terms.

The company’s methods were attacked in the Western Australian Assembly in September 1952, the Royal Commission was appointed in December 1952 and it sat for some thirty days in January, February and March 1953, and made its report . . . on 27th April 1953.  The taxpayer began by expending a sum on advertising to counter the effect produced by the reports in the press concerning the charges made . . . Then the taxpayer company proceeded to defend itself and its officers before the Royal Commission.  This involved fees for counsel, solicitors, valuers, surveyor and accountants . . . That amount the taxpayer sought to deduct from the assessable income in the assessment for the year in question.

Then if one goes to 436 at about point 4 of the page, the first full paragraph:

But, as it appears to me, the carrying on of the business of the nature described brought with it the attacks against which the taxpayer company sought to defend itself.  The attacks touched its business nearly; they disparaged the methods by which it was conducted; they were calculated to deter intending or likely customers from dealing with it and to destroy the faith of existing customers in their current relations with the company.

Just while your Honours are there, if you could go to page 437 on the capital argument that I will come to later, his Honour says at about point 7 of the page:

An examination of the facts does not support the view that the proceedings in Parliament and before the Royal Commission imperilled the existence of the business or the capital assets of the company.  The proceedings were not ‑ ‑ ‑

GUMMOW J:   Page 437, line 12 is important, is it not:

In the present case it appears to me that the taxpayer company could do nothing else but defend itself, if it was to sustain its business and continue carrying it on ‑ ‑ ‑

MR BLOOM:   At the same volume.

GUMMOW J:   That seems to me to be enough.

MR BLOOM:   But nonetheless he says that the business itself was not imperilled.  He says that at about point 7:

An examination of the facts does not support the view that the proceedings in Parliament and before the Royal Commission imperilled the existence of the business ‑ ‑ ‑

GUMMOW J:   Slightly in that expression at 436 is somewhat ambiguous too:

But, as it appears to me, the carrying on of the business of the nature described brought with it the attacks ‑ ‑ ‑

MR BLOOM:   Yes, so it was the carrying on in the methodology adopted.  So it was the day‑to‑day activities, in effect, of the carrying on of the business that brought with it the attack.

GUMMOW J:   Is that saying that this is the sort of thing you expect in Western Australia in the building trade at this time?  It is just a vicissitude of life in that business?

MR BLOOM:   I cannot speak for 1952 in the State of Western Australia or any other State for that matter, your Honour.

GUMMOW J:   No.

MR BLOOM:   Then at page 444 in the judgment of Justice Fullagar, with whom Justice Williams agreed, first full paragraph:

In the present case the company is carrying on a business for the purpose of gaining or producing assessable income.  Attacks were made in Parliament and before the commission upon its conduct of that business‑attacks which were capable of seriously affecting that business both directly and indirectly.  It would naturally seem essential to the company’s directors that a vigorous effort should be made to repel those attacks, and no defence could have any prospect of being effective which did not involve the expenditure of substantial sums of money.  The relation between the expenditure and the carrying on of the business is clear.  The expenditure was incidental to the carrying on of the business.  It was incurred in carrying on the business, and it was necessarily incurred because the exigencies of the business imperatively demanded that it should be incurred.

GUMMOW J:   So it is really the attacks in Parliament on this company.

MR BLOOM:   On its methods of carrying on its business.

GUMMOW J:   Yes, that the Chief Justice is talking about a little elliptically at 436.

MR BLOOM:   Yes, it was not the wider – and at the bottom of 445 his Honour Justice Fullagar says again it was not of a “capital nature”.  Justice Taylor deals with it at the bottom of 447 and refers to:

those business activities and the manner in which they were conducted were, as the facts show, the very things which created the situation which led to the appointment of a Royal Commission ‑

At 451, his Honour concluded at about point 7 that:

There is nothing to suggest that the business of the respondent was faced with the prospect of annihilation either wholly or in part.

Therefore, it was not on capital account.

Magna Alloys (1980) 49 FLR 183 is the next case to which I would ask your Honours to go. It is a decision of the Full Federal Court. It was a decision of Justices Brennan and Deane then on that court and Justice Fisher. Justice Brennan in short form at page 184 sets out the relevant facts:

Three of the appellant’s directors were charged, tried on indictment and convicted on a charge of conspiracy in Victoria.  Four of its agents were also charged and tried, and three were convicted on the same charge.  The directors were fined and the agents were released on bonds:  none was imprisoned.  Two of the directors were charged under the Secret Commissions Prohibition Act, 1919 (N.S.W.), in New South Wales, but the charges were not prosecuted.  The charges all related to the marketing methods adopted to sell the appellant’s products.

Then there is a wider description in the joint judgment of Justices Deane and Fisher.  At page 187, the third paragraph, his Honour refers to Ronpibon Tin and says that:

the court did not explain either limb in terms of motive or purpose.  The phrases “in the course of”, “incidental and relevant”, and “the occasion of” appear.  These phrases, though not synonyms for the statutory terms, import a connexion between the incurring of expenditure on the one hand and the gaining or production of assessable income or the carrying on of a business on the other.

They refer to Lunney’s Case which was the travelling expenses case:

The emphasis placed upon the objectivity of the test of deductibility has run through the history of s 51, and particularly through the history of its first limb, though the importance placed in particular cases upon evidence of a taxpayer’s state of mind has sometimes given the appearance of a statement of principle to what is no more than an observation upon evidentiary material.

He sets section 51 out and refers to the earlier provisions, 23(1)(a) and 25(e) in the 1922 Act.  Your Honours see that 25(e), which is set out at the top of page 188:

money not wholly and exclusively laid out or expended for the production of assessable income.

was what the courts at that time thought invoked the concept of purpose.  Justice Brennan says:

To qualify for deductions under these provisions, it was necessary that expenditure should fall within s 23(1)(a) and outside s 25(e) –

In Finn Sir Owen Dixon:

compared the criteria expressed by s 23(1)(a) and s 25(e): “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.  Purpose in itself may be the criterion expressed by the word ‘for’ which occurs in the correlative prohibition contained in sec 25(e).

Then at the bottom of the page, about four lines from the bottom:

But when s 51 was introduced in 1936, “the principle expressed by the former s 25(e) [was] abandoned” (the Ronpibon Tin case), and it became necessary to consider, according to the circumstances of each case, whether and to what extent reference to purpose is required or appropriate to determine deductibility under the first limb of s 51(1).  Clearly enough, purpose in itself could not be the test . . . What matters is their connection with the operations which more directly gain or produce the assessable income”.

The word “directly” may be important in that sentence –

Though purpose is not the test of deductibility nor even a conception relevant to a loss involuntarily incurred, in cases where a connexion between an outgoing and the taxpayer’s undertaking or business is effected by the voluntary act of the taxpayer, the purpose of incurring that expenditure may constitute an element of its essential character, stamping it as expenditure of a business or income‑earning kind.

Then over at page 192, the first full paragraph:

When s 25(e) of the 1922 Act required a test of purpose to be applied, the test was objective.  In Robert G. Nall Ltd v Federal Commissioner of Taxation Dixon J applied a test of purpose which may be taken to give the meaning of purpose in the objective sense: “But, in matters of income tax, purpose is an elusive and indefinite criterion.  The purpose of a payment when a deduction is claimed for it becomes an attribute of the transaction rather than a state of mind in some actual person. . . . when it is said that gaining or producing assessable income must be the purpose of the expenditure if its deduction is to be allowed, no more can be meant that that the circumstances of the transaction must give it the complexion of money laid out in furtherance of a purpose of gaining income”.

When purpose is used in this sense, it means little more than that the incurring of expenditure in the circumstances in which it is incurred is conducive to the gaining or producing of assessable income or to the carrying on of a business by the taxpayer.  But in ascertaining whether this connexion exists the character of the taxpayer’s undertaking or business must be known; and in order to say what relationship to the undertaking or business is borne by the incurring of expenditure, it is necessary to identify what the expenditure is for.  Thus, in Federal Commissioner of Taxation v Midland Railway Co of Western Australia Ltd Dixon J, referring to a number of considerations which bore upon the deductibility of the payments there in question, said:

GUMMOW J:   We can read along you know, Mr Bloom.

MR BLOOM:   Your Honour, it comes to a point where I would like to get to, with respect, each of these and I have ‑ ‑ ‑

GUMMOW J:   All I am saying is we are not sitting here to have passages read out to us.  Those days have gone and they are not going to come back.

MR BLOOM:   Apart from committing them to your Honour I will pass on then if I may to page 195.

GUMMOW J:   Make the point, for goodness sake.  Do not make it by reading out passages to us.

MR BLOOM:   At page 195, his Honour extracts the full passage from the judgment of Sir John Latham in Nevill’s Case and from it concludes that purpose is not the test.  Your Honours will recall that Justice Spender at page 220 of the appeal book in paragraph 26 simply extracts some of the words in that passage and from it draws the conclusion that object or purpose is the test; the opposite conclusion to that drawn by Justice Brennan and, indeed, it would seem by Sir John Latham himself in an extract of the full passage, but bearing in mind ‑ ‑ ‑

GUMMOW J:   What about the other judges in Magna Alloys?

MR BLOOM:   In Magna Alloys, yes.

GUMMOW J:   Yes, the joint judgment, Justices Deane and Fisher?  They have a very detailed discussion on this question of purpose, do they not?

MR BLOOM:   They do, but ‑ ‑ ‑

GUMMOW J:   I am not sure what it all comes to in the end.  That is why we need your assistance.

MR BLOOM:   Well they say at 210, for instance, that if the essential question were identification of dominant motive of the directors then you might get a different result, but that is not the question.

GUMMOW J:   Then they use this word “voluntary” and “involuntary”.

MR BLOOM:   Yes.  It seems hardly voluntary to defend oneself against dismissal proceedings, but yet that is thought to be voluntary expense because one has the choice to make or not make it, as that dichotomy goes.  They refer to purpose or motive at 207 to 208, but, your Honours, likewise exclude it as the test and point out its relevance, as does his Honour Justice Brennan to the previous Act.  Then, when one goes back to Justice Spender, who favoured the purpose argument, one sees that two out of the three cases to which his Honour refers dealt with the 1922 statute.  All of them did depend upon the business limb.

GUMMOW J:   Notions of purpose would introduce evidentiary complexities into the administration of the Act, I suppose?

MR BLOOM:   Yes, and the courts have consistently said since 1936 when section 51(1) came in that purpose is not the test in looking at those opening words in the first positive limb.  Your Honours, Cooper’s Case 29 FCR 177 – the footballer’s case – if I might just give your Honours a reference to the relevant passages ‑ ‑ ‑

GUMMOW J:   How did Justice Wilcox support the deduction in dissent?

MR BLOOM:   He, of course, dissented, but he thought there was a sufficient connection between getting a playing weight up to a certain weight in accordance with the coach’s suggestions and being able to play at your maximum ability.

GUMMOW J:   One has some sympathy at the bottom of page 187:

The problem about the “essential character” test ‑ ‑ ‑

MR BLOOM:   Yes, well it is not a test that we have relied upon today, your Honour.  Justice Lockhart says at 185, third full paragraph:

In one sense the taxpayer consumed the additional food and drink for the purpose of deriving income as a professional footballer, just as employees incur expenditure on fares in travelling between their homes and places of employment . . . 

The taxpayer incurred the expenditure on additional food and drink for the purpose of increasing his weight and thus to play professional football and earn assessable income.  But its character as the cost of additional food and drink is neither relevant nor incidental to the training for and playing of football ‑ ‑ ‑

GUMMOW J:   Yes, but look at Justice Lockhart at about point 7 of the page:

The taxpayer incurred the expenditure on additional food and drink for the purpose of increasing his weight ‑

MR BLOOM:   Yes, but he then says:

training for and playing of football matches, which is the activity by which he gained assessable income.

So there is a focus on what he got paid for and his income‑producing activities did not include the consumption of food and drink, notwithstanding that Mr Masters had suggested it.  Justice Hill was to the same effect at 199 at the bottom of the page, focusing again on, as we seek to have your Honours do here, the income‑producing activities:

The income‑producing activities to be considered in the present case are training for and playing football.  It is for these activities that a professional footballer is paid.  The income‑producing activities do not include the taking of food, albeit that unless food is eaten, the player would be unable to play.  Expenditure on food, even as here “additional food” does not form part of expenditure related to the incoming‑producing activities of playing football or training.

Rowe’s Case 60 FCR 99, and the headnote is fairly accurate, and if I may just go to that:

The taxpayer was employed as a shire engineer.  Complaints of misconduct were made against him.  In June 1985, the Shire Council (the Council) resolved to suspend him from employment; the Governor‑in‑Council rescinded the resolution; the State government directed there be an Inquiry into the matters the subject of the resolution; and the Council required him to resume his duties.

In August 1985, the Inquiry was conducted.  The Inquiry found the complaints were not made out.

The taxpayer instructed a solicitor and was represented by counsel before the Inquiry, thereby incurring legal costs which he paid . . . 

In April 1989, the State government gratuitously paid an amount equal to the costs, without interest (the reimbursement) to the taxpayer.

It was assessability of that amount which was the subject of this Court’s decision 187 CLR 266, but deductibility of the legal costs did not come here. Justice Beaumont held that:

As the inquiry was centrally concerned with day‑to‑day aspects of the taxpayer’s employment, the costs were incurred by him in gaining assessable income.

And Justice Burchett:

The activities which produced the taxpayer’s assessable income were what exposed him to the liability for the costs –

So again there is the focus in both of those cases on the actual activities which are productive of the assessable income.  That sort of distinction would help again in the context of the sportsperson who is charged with some private misconduct and therefore faces dismissal proceedings or takes action before the Court of Arbitration for Sport or is faced with criminal charges and seeks to defend those.  That would be again in relation to private conduct, but his employment contract proscribes that very conduct, and if the approach which Justice Edmonds takes here is correct, then the costs of that sportsperson would likewise be deductible in those circumstances.

HEYDON J:   Just in relation to Justice Spender, will you be dealing with Fletcher v Federal Commissioner of Taxation?

MR BLOOM:   No, I had not proposed to, your Honour.  Fletcher is an unusual case ‑ ‑ ‑

HEYDON J:   But what seven Justices said was that you are:

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 s 51(1).  At least in a case where the outgoing has been voluntarily incurred, the end which the taxpayer subjectively had in view in incurring it may, depending upon the circumstances of the particular case, constitute an element, and possibly the decisive element, in characterization –

That is 173 CLR 1 at 17.

MR BLOOM:   Yes, and they said so in the context of facts where it was a tax scheme, where there was a substantial upfront outgoing and no income and so in those circumstances motive could be looked at to see whether there was any connection at all with the production of assessable income.  So the facts are quite different.  But it says nothing different to what was said by Justices Brennan, Deane and Fisher in Magna Alloys in relation to that aspect.  It will still bring purpose in as an evidentiary aspect, and particularly where there is no explanation for the outgoing and no income is produced, so there is no income‑producing activity, then one might turn to motive as governing, but certainly not the test and certainly not in cases of the ordinary kind.

The approach taken by Justice Edmonds, to which your Honour Justice Kiefel has referred, at paragraphs 101 to 105 at page 247 of the appeal book, is what I have referred to this morning as the macro approach.  His Honour says:

In my view, the test for deductibility of legal expenses is not whether the employee’s conduct or activity that resulted in the need to take defensive proceedings was conduct or activity engaged in for the purpose of producing assessable income –

So he rejects purpose as the test –

contrary to the extract at [97] above from the primary judge’s reasons at [35]; rather, as explained in Payne, it is whether the expenditure was incurred in the course of . . . 

In the present case, it is the taxpayer’s employment which is the occasion of the expenditure and the taxpayer’s performance and observance of the duties of that employment is undoubtedly productive of assessable income.  In this regard, the duties of the taxpayer’s employment are not confined to the performance of the tasks of the job description for which he is employed, but extend to the observance of all those duties listed in s 56 of the PSA, non-compliance with any of which, may lead to a charge of ‘misconduct’ under s 61 of the PSA.  Using the present case by way of example, such duties extend to observance of the duty not to engage in improper conduct . . . the subject of the first charge, and to observance of the duty not to contravene or fail to comply with a provision of the Public Service Regulations . . . 

I am also of the view that the suggestion in [98] above, leading to the conclusions in [99] and [100] above, that legal expenses will be deductible if the conduct or activity of the taxpayer that was the subject of the charges was engaged in by the taxpayer for the purpose of, or in the discharge of, his duties as an officer of Customs, but not otherwise, is not the correct test.

That of course is the issue for your Honours.  In our submission, it is the correct test.  One isolates those income‑producing activities and if the conduct, proscribed conduct or private conduct, is not one of those income‑producing activities then the costs of defending charges based on that conduct are not deductible – certainly not within the first limb.  We draw the distinction, obviously, between the positive duties and the negative stipulations in that regard.

If your Honours are against us on the first limb, it is necessary then to ask whether the outgoings are excluded under the negative limbs.  Two are invoked.  The first is private, and I can say not much more than I have already said about the first limb in relation to whether or not the outgoings are private.  They relate, we say, to private conduct and for that reason they are private outgoings.

Your Honours will know that there seems to be a difficulty in comprehending something which is private conduct, getting into the first limb in the first place.  Certainly, Professor Parsons, at paragraph [8.1] of his work, describes private or capital expenditure as irrelevant expenditure, and if it is irrelevant it never became relevant in the first place and never got in under the first limb.  He points out in [8.2] that:

there is no case in which an expense has been found to be incurred in gaining assessable income, but has been denied deduction as a private or domestic expense.

Then that Forsyth and Handley contain suggestions that it might be possible.  So too in John’s Case 166 CLR 417 at 431, this Court said that there is no necessary antipathy between an outgoing which is incurred in gaining or producing and an outgoing which is private, but the fact remains that even since then, what Professor Parsons says remains true – there is still no decided case where one can find it happening.

If your Honours were to find that this expenditure is within the first limb, and particularly on the basis of what Justice Spender decided, namely purposive test or object of the expenditure, then insofar as it relates to the employment, we would say the expenditure is arguably on capital account and excluded for that reason.  There is a difference, of course, between the first and the third charges.  He was dismissed in relation to the third, not dismissed in relation to the first.  But if your Honours go to the appeal book at page 61.

HAYNE J:   Was he suspended without pay in both first and third charges or only in respect of one set?

MR BLOOM:   Only one set, I think he was demoted in respect of the first.

GUMMOW J:   We had better be sure about this.

HAYNE J:   But pending hearing, was he suspended without pay at any stage?

MR BLOOM:   Yes.  There is a notice of suspension at page 77, your Honour.

HAYNE J:   A consequence, therefore, of a matter at stake in the subsequent disciplinary proceedings was whether he could obtain the salary that he was denied during suspension?

MR BLOOM:   Yes.

HAYNE J:   Salary which, if paid, would have been brought to account on revenue account, would it not?

MR BLOOM:   Quite.  Yes, and it was restored.  What one has to understand about this particular taxpayer is that he had quite a history and it was possible in relation to both the first and the third charges that dismissal could occur.  Although it did not in relation to the first, it was a possibility.  He refers in his affidavit at page 61, paragraph 26, to the inquiry in relation to the third charges and I have brought your Honours up to date in terms of what happened with regard to those.

Then at page 181 the submissions to Justice Emmett at paragraph 28 in relation to all of the charges, including the first charge, were that there was a deduction available because of possible dismissal, amongst other things, and the notice of contention that was filed by our learned friends in the appeal to the Full Court of the Federal Court is at 201.  Paragraphs 4) and 5) deal with the first charge and again 5)b), in particular, with possible loss of employment as a sanction.

Yours Honours, there is a case to which Professor Parsons refers – Maddalena 2 ATR 541, which is another footballer case but not one involving food. It basically involved a taxpayer who was both an electrician and a professional rugby league player seeking a deduction for the costs of negotiating a new contract of employment with his Newtown club and he was denied that deduction on the basis that this Court was of the view that the expenditure was incurred at a point too soon, and that appears from page 549 in the judgment of Justice Menzies with whom the rest of the Court agreed, at about 45 and following. Of course, that footballer, like all footballers is an employee. That is the way that the clubs maintain control throughout all of the various codes.

Then Professor Parsons at paragraph [5.46] refers to Maddalena and in [5.47] he says:

Maddalena could have been decided on the basis that the expenses were not working expenses.  They were capital as expenses relating to the structure of the income‑earning activity–the contract of employment.

Interesting that he uses that in conjunction –

The contract was a structural asset, as distinct from a revenue asset.  A contract of service will normally be a structural asset ‑

and he compares Phillips’ Case where the business was providing employees under contracts of employment to others.  Then earlier at [2.385] Professor Parsons had again referred to the contract of employment as in the nature of a structural expense.  He says:

A contract of employment will normally be structural, however, and it is assumed to be such in the discussions that follow –

So, your Honours, for those reasons we would ask that the Court make the orders sought in the notice of appeal.

GUMMOW J:   Thank you, Mr Bloom.  Yes, Mr Brabazon.

MR BRABAZON:   Thank you, your Honours.  Could I begin by addressing some matters of factual background that arose during my friend’s submissions to your Honours.  My friend informed your Honours that in respect of the third charges the respondent was dismissed and that his appeal to the Industrial Relations Commission was unsuccessful.  The situation as it was before his Honour Justice Emmett is as set out in paragraph 26 of Mr Day’s affidavit at page 61 of the appeal book, that is to say, his employer had made a decision to dismiss him and he had taken steps to challenge that decision in the Industrial Relations Commission.  That proceeding had not been resolved at the time of the primary hearing or judgment.  That was the state of the material before Justice Emmett and therefore in subsequent appeals. 

In relation to the third charges, it was the case that the expenditure was incurred before the section 62 inquiry could be held and therefore at the point where the expenditure was incurred, at least in the normal accrual sense of the test of incurrence, there was no recommendation as between dismissal on the one hand or demotion or even a finding in favour of the respondent if, for example, the charges were not found by the employer to be substantiated after the inquiry.

Another preliminary matter, your Honour Justice Hayne raised the question whether he had been suspended in relation to the first and third charges.  He was suspended in relation to both.  The suspension in relation to the first charge was lifted after a couple of months.  The suspension in relation to the third charges continued and the income which had effectively been withheld in respect of the first charge, suspension, was credited back to the respondent.

Your Honours, the respondent submits that the first positive limb is satisfied in respect of the outgoings and that none of the negative limbs is engaged.  In respect of the first limb, we submit that the occasion is found either in the employment or in the defence of the income or, for that matter, in the two things together.  In support of that we would point briefly to a number of factors. 

First, the allegations against the respondent were explicitly allegations of breaches of duties of his employment.  Secondly, the allegations were that the respondent had engaged in the alleged conduct as an officer, that is to say, as an employee of the class to which he belonged.  Thirdly, the allegations were made by the respondent’s employer and not by some other person.  Fourthly, they were made in a process that was internal and, as your Honour Justice Hayne observed, it was incidental to the employment.  Fifthly, the proceedings bore directly upon the employment income and that is through the differential consequences that could flow under section 62.  And, sixthly, that his resistance of those allegations and of the proof of them against him was defensive of the income both in purpose and effect and as far as purpose is concerned, that is so whether one regards objective purpose or subjective purpose. 

This is not a case in which it has been suggested that there is a material difference between them and in relation to the third charges where it might have been thought that there was a remoter connection because he was seeking to pre‑empt the charges, there was some evidence before the court about his internal, that is, subjective purpose, at paragraph 21 of his affidavit on pages 60 and 61 of the appeal book where he refers to the litigation that he engaged in and says:

My purpose in commencing and prosecuting that litigation was to defend myself against [what he called] the Wave 3 charges and to prevent determinations from being made against me in respect of my employment of the kind referred to in paragraph 4 above. 

Paragraph 4 of the affidavit is on page 58.

GUMMOW J:   Was this affidavit read without objection?

MR BRABAZON:   It was read without objection and there was no cross‑examination upon it, your Honour.

GUMMOW J:   Thank you.

MR BRABAZON:   Paragraph 4 refers in a shorthand fashion to the outcomes of admonition, deduction from salary, reduction of salary, transfer within the service, demotion or dismissal.  The point that is urged by the appellant against us is that the conduct which gave rise to the first and third charges did not involve the performance or discharge of the respondent’s duties as a Customs officer, and by that he has obviously meant the positive duties of performance rather than duties as a whole.  What is precisely meant by that would appear to be qualified by the appellant’s submissions in reply.  Paragraph 8 concedes that:

The approach contended for by the appellant does not turn on whether the allegations made against a taxpayer are true and/or proved.  In the appellant’s submission, it is the nature of the conduct alleged to have been engaged in by the employee that determines the character of the legal expenses –

and I apprehend that to have been the tenor of our friend’s submissions to your Honours.  In this case it amounts to this, that the conduct which was alleged against the respondent would not presumably have been done by him for the employer’s purposes.

GUMMOW J:   Yes.  I do not want to take you off your course, but at some stage I think we should be taken to Justice Finn’s judgment in McManus which is, as I recollect, a valuable discussion of a public service structure; 70 FCR, is it not?

MR BRABAZON:   I will go to that now, if your Honours please.  The case concerned Public Service Act proceedings against a public servant, in this case under section 56(a), for failing to fulfil his duty by wilfully disobeying a direction with which it was said he had a duty as an officer to comply.  Section 56 appears in the judgment at pages 19 and 20.  Justice Finn says at page 19, about letter E:

Though the order of review itself is unilluminating as to the applicant’s actual ground of complaint, it has in the hearing before me resolved itself into a single issue:  was the direction given on 18 January 1995 a lawful and reasonable one?  If it was not, the applicant was not obliged to comply with it.

So the question was whether he was obliged to comply with it.  He had been directed by a superior not to approach a female fellow worker outside the requirements of his official duties.  The background was that she had made complaints about his unwanted advances of a sexual nature and their common employer gave the direction to him in response to that.  It was alleged against him that he had approached her out of work hours and I think it was common ground that he had.  The question was whether he was obliged to comply with the direction.  At page 21, about letter B, his Honour says that:

The accepted view in this Court –

that is, speaking of the Federal Court –

is that it is the common law obligation of an employee to obey the lawful and reasonable commands or directions of the employer –

and his Honour refers to authority.  He also refers to the common law test as enunciated by Justice Dixon in Ex parte Halliday at about letter C of the page.  At page 22 at about letter C his Honour observes that:

It is now well accepted in this country that the “fundamental legal relationship” between the Crown and the public servants is “contractual in character” –

but that ‑

contract does not provide an adequate explanation of the possible incidents –

of the ordinary public service relationship and that is because there is an overlay of statutory obligations. 

GUMMOW J:   I think what is said on page 25, beginning letter B, “From 1862”, down to letter D, this is not an ordinary contractual situation.

MR BRABAZON:   That is correct.

GUMMOW J:   These sanctions are put in there for some important constitutional purposes really.

MR BRABAZON:   Yes.  His Honour then goes on to address the particular case before him and in the passage at the bottom of page 25 and over to the top couple of paragraphs at page 26, his Honour observes ‑ ‑ ‑

GUMMOW J:   At the bottom, all this is about – the execution of the laws of the Commonwealth by the public service by a law made by the Parliament under the incidental power to assist in execution of the laws of the Commonwealth. That is the bottom line.  Upon that all this structure is erected and it goes beyond the ordinary master and servant type situation.  I am not saying this is against you at all, but we have to understand the universal discourse in which these disciplinary procedures are erected.  They are not judicial.

MR BRABAZON:   Of course they also exist in a relationship which is primarily contractual with an important overlay, as your Honour says, of ‑ ‑ ‑

GUMMOW J: I do not think it is an overlay. I think the contract is the overlay, actually. If Justice Gaudron were here, she would exhort you to think about the Constitution first, and she would be right.

MR BRABAZON:   Your Honour, Justice Finn observes that in the case before him, the direction would have to be justified, not on the basis of particular public service regulations but on, as his Honour says in the second paragraph on page 26:

while the PS Act and PS Regulations at least indicate that private conduct can be the subject of legitimate interest to the Crown . . . that Act and those Regulations do not in terms provide any lawful justification for the direction with which I am concerned here.  If it is to have justification, this must be found elsewhere.

Then his Honour goes on at page 28 to describe a linkage in terms of employment, not specifically public service employment.  The relevance of that, with respect to this case, your Honours, would appear to be this, that this is an illustration of the relevance of conduct that happens outside the workplace or perhaps for purposes of the employee that are not directed to serving the employer, not necessarily bad purposes or good purposes, but just not with his intention of performing the work that may nevertheless be important to the employment relationship and in respect of which he has obligations to ‑ ‑ ‑

GUMMOW J:   He has fiduciary obligations, too.

MR BRABAZON:   To the employer.

GUMMOW J:   Well, to the Commonwealth.

MR BRABAZON:   Yes.

GUMMOW J:   Reading v The King would be a good example.

MR BRABAZON:   The point is that the service of the employer – the service of the Crown as a public servant may require an employee in that capacity to constrain his or her activities away from the workplace provided that a sufficient connection exists with the employment and that connection is required in what Justice Finn says at page 28.  What might otherwise have been private in the sense of being no business or concern of the employer may become the employer’s business because of its connection with the employment.

Your Honours, the first part of this case concerning the first positive limb raises the question how the statutory words are to be interpreted and those words are simply to the effect that a loss or outgoing is deductible to the extent that it is incurred in gaining or producing the taxpayer’s assessable income, subject, of course, to the negative limbs.  That form of words can be traced back through section 51(1) of the 1936 Act to section 23(1)(a) of the 1922 Act.  Our friends referred to the purpose test under the 1922 Act but that was found in a negative limb in a different section.

The seminal authorities are well known to your Honours.  Some of them are referred to in Justice Spender’s judgment at paragraphs 25 and following on page 220 and, as is well known, Justice Dixon has said that:

A very wide application should be given to the expression “incurred in gaining or producing the assessable income.”

Could I take your Honours to Nevill’s Case because that would appear, with respect, to be of assistance in the present circumstances.

GUMMOW J: That is 56 CLR 290.

MR BRABAZON:   Thank you, your Honour.  The case concerned an outgoing paid, in effect, to reduce expenditure by effecting a saving on the salary paid to a senior official.  Could I take your Honours to the judgment of Chief Justice Sir John Latham at pages 300 and 301.  At page 300 his Honour refers to section 23(1)(a) and adopts something that had been said by Viscount Cave, albeit in relation to a trade case, but his Honour finds it equally applicable to the first limb, as it now is.

On the following page 301 at about point 3 of the page his Honour deals with the argument that this was not incurred in gaining or producing any income, it was incurred in reducing expenses.  His Honour says:

In my opinion the answer to this contention is to be found in a recognition of the fact that it is necessary, for income tax purposes, to look at a business as a whole set of operations directed towards producing income.  No expenditure, strictly and narrowly considered, in itself actually gains or produces income.  It is an outgoing, not an incoming.  Its character can be determined only in relation to the object which the person making the expenditure has in view.

So at a very early stage one has a recognition of the importance, indeed, the centrality of the object of an outgoing to its characterisation for the purposes of the positive limb. 

The effect, in our respectful submission, of the judgment in Payne is not to say you throw out purpose, but rather to say you look for the connection.  Purpose is not the test, but purpose in context is a very important guide and it can be, in many cases it is, the decisive consideration.  Your Honour Justice Heydon referred to Fletcher’s Case.  That was a case where purpose in an objective or subjective sense bulked large in the task of characterising an outgoing, as it was also in Ure’s Case.

The relevant occasion in this case would appear to be identified in the majority in the Full Federal Court in the judgment of Justice Spender, ultimately at paragraph 34.  It is true that his Honour ‑ ‑ ‑

GUMMOW J:   Appeal book page?

MR BRABAZON:   I am sorry, your Honour.  Appeal book page 222.  His Honour refers to:

The situation which impelled the taxpayer to undertake the outlaying of those expenses was the fact that he had been charged under the Public Service Act and the consequence of those charges being successful would be that his income would be diminished or lost.

In respect of the first charge, there was only ever a question of it being diminished, at least as at the time that the expenditure was incurred, because the initial inquiry had come back with a demotion, not a dismissal, and that is what he appealed against.  In respect of the third charges, a consequence had not been fixed upon for any or all of them by the employer, although they included some serious matters.

The relevant occasion is identified by Justice Edmonds at paragraph 91 of his judgment at page 244 of the appeal book.  This is immediately after referring to some passages to which our learned friends took your Honours, including the reference to occasion in Ronpibon.  His Honour refers to Payne and says:

As a test, it cannot be so readily applied to expenses incurred in defending legal proceedings because the decision to defend those proceedings is divorced from the activities which are productive of that income; this is where the Ronpibon test is helpful – the expenditure will be deductible where the occasion of its incurrence is productive of assessable income.  In the present case, it is the employment of the taxpayer that is the occasion of its incurrence.

Your Honours, that passage and the passage to which I took your Honours in Nevill’s Case would appear to bear upon some questions that your Honour Justice Kiefel addressed to my learned friend about the occasion.  I think your Honour asked, what if the occasion is the charges?  If the occasion is the charges or the allegations, then the relationship is established because the content of the charges is that they are allegations by the employer – not somebody else – against the employee.  They are allegations of breaches of the duties of employment, of particular characters and in proceedings which exist for the purposes of the employment, that is, in the regulation of the public service in which the respondent was employed.

His Honour repeats the same thing towards the end of his judgment at page 247 of the appeal book, paragraph 102, where his Honour draws his reasoning together under the heading “ANALYSIS”.  At paragraph 101 his Honour rejects the conduct test, and says at 102:

it is the taxpayer’s employment which is the occasion of the expenditure –

and he refers to the duties of the employee not being confined to the performance of the tasks of the job description for which he is employed, and in the following paragraph, his Honour sets up the dichotomy which is implicit in our friend’s approach and in the approach of Justice Emmett and says that it is not a correct dichotomy for tax purposes.

HAYNE J:   If one were to approach this on the footing that processes of charging and inquiry provided for by sections 61 and 62 and the opportunity for subsequent appeal provided by section 63D are an aspect of the statutory regulation of engagement – I use the term as a neutral term, “of engagement” – of a public servant, and that implementing those processes against a particular public servant presents the question of whether the expenditure incurred by the servant is in the course of gaining or producing, et cetera, has any distinction been drawn, hitherto in this litigation, between the outgoings incurred in respect of the first charges which were, I think, fees of counsel for appearing on the disciplinary appeal proceedings?

MR BRABAZON:   Fees on the disciplinary appeal proceedings and also judicial review of the first committee’s findings.  So there was a first committee judicial review before Justice Gyles, employer’s appeal to the Full Court, and then back to a second disciplinary appeal.

HAYNE J:   Has any distinction been drawn hitherto in the proceedings between the elements of those fees?

MR BRABAZON:   No, in short.  The differences between them have been noted, but it has not been suggested that the fact that the third charges involved an attempt to pre-empt the inquiry before it could happen and to quash the charges would make those expenses too remote on that basis.

HAYNE J:   Expenses of interception of charges have not been said to be too remote from employment.

MR BRABAZON:   No, the wording that our friends have used has been expenses of defending charges or in relation to charges.

HAYNE J:   Of or incidental to defence of, in effect.

MR BRABAZON:   Yes.  So our approach to that has been that “in relation to” has been wrapped up and that there has been no attempt to say that the third charge expenses were too remote upon that ground. 

HAYNE J:   Just on the statutory foundation for all this process, I notice ‑ I do not think our attention has been drawn to it – in section 61(3), particularly (3)(b):

An officer charged under subsection (2) may request the relevant Secretary to furnish copies of the charge to either or both of the following, that is to say . . . 

(b)to a person specified by the officer, being a person whom the officer wishes to assist him in relation to the charge;

Part of the statutory framework is an expectation that an officer may not wish to do this on his or her own.

MR BRABAZON:   Yes, your Honour. 

HAYNE J:   Whether the industrial organisation is engaged or an individual.

MR BRABAZON:   That is so.  That is at the stage of the inquiry.

HAYNE J:   Just so, and we are at the appeal process.

MR BRABAZON:   In the appeal there is a – it was certainly the practice, as the facts of the case attest, to allow legal representation.  It may be that there was – I cannot put my hand on it at present, but it may be that there was some explicit provision.

HAYNE J:   I could not find it.  If there is, I would be assisted by any reference to it.

MR BRABAZON:   Thank you, your Honour.  In the context of those proceedings, the only relevance of the allegations of misconduct was in their relation to the employment.  If we look at 56D, it must be failure to comply with the duties of employment and failure to do so in a particular way, that is to say, as an officer.

HAYNE J:   But what McManus reveals is that the regulation of the conduct of public servants, directed as it is to higher or, if you like, more basic governmental purposes, extends into fields which employment law might not ordinarily reach, such as wholly private conduct.

MR BRABAZON:   That is true.

HAYNE J:   And thus the distinction asserted against you confronts in the public service context a difficulty of application that may not be readily observed in a wholly private employment context.

MR BRABAZON:   The nature of the charges are ones that would make as much sense in a private employment context.

HAYNE J:   Yes, but how many private employments have elaborate systems for charging and the like?  Perhaps they exist.

MR BRABAZON:   I take your Honour’s point in that respect; that is entirely true.

GUMMOW J:   It makes the dichotomy that is asserted against you doubtful, I suspect.

MR BRABAZON:  It does, your Honour.  In the present case it would be concluded, we submit, that the occasion falls squarely within the employment relationship because the disciplinary process was an incident of the relationship, its criteria bore on the respondent’s duties as an employee and in his conduct as an officer and its outcome directly affected his income earning as an employee.

GUMMOW J:   Does the statute talk about employees?

MR BRABAZON:   The Income Tax Assessment Act?

GUMMOW J:   No, the Public Service Act.

MR BRABAZON:   Yes, it does.  It draws a distinction between an officer and an employee in its terms.

GUMMOW J:   Where does that appear?

MR BRABAZON:   I do not think it is in the material before your Honours but it is in the general definition section which I think is ‑ ‑ ‑

HAYNE J:   Page 3 of the bundle we have defines “Employee” as “a person employed under Division 10 of Part III”.  “Officer” is section 7, page 4 of the print:  “a person appointed or transferred to the Service . . . but does not include an employee”.

MR BRABAZON:   No.  Leaving aside the terminology of the Act, an officer is an employee of a particular class.  Employees seem to be defined mostly as people who are employed on a short‑term or similar basis under a particular Division of the Act, at least as it stood at the time.

GUMMOW J:   The history of this is in the United Kingdom, or in England at any rate.  Many of these people would have held an office, which is a form of property.  So if you ignore all of the history and just say this is a contract case between an employer and an employee is just myopic as well as ill‑informed.

MR BRABAZON:   Your Honour.  Could I take your Honours briefly to a dictum of Justice Taylor in Snowden & Willson (1958) 99 CLR 431 at page 450 which, whilst uttered in a somewhat different context, would appear to be apposite. It is at the very bottom of page 450, your Honours. His Honour says:

It may, I think, be said that the true character of the expenditure in question in this case is to be sought in a consideration of its immediate purpose as revealed by an appreciation of the occasion which was thought to call for it and of the circumstances in which it was made.

That purpose and that occasion were the defence of the public service disciplinary allegations and the context was the context of the employment by which the income was earned.  Could I move, your Honours, to Payne’s Case - I think I have said something about this ‑ ‑ ‑

KIRBY J:   It is natural that you should be concentrating on the cases and the authorities, but at some stage before you finish I would like you to bring it all back to the terms of the statute if you would not mind.

MR BRABAZON:   Your Honour.  Our friends have taken your Honours to most of the material parts of Payne’s Case ‑ ‑ ‑

GUMMOW J:   With reference to the matter I was just taking up with you; the joint judgment in Jarratt (2005) 224 CLR 44 at 64, paragraphs 64 and following, there is a reference to various authorities including Justices Windeyer in Marks as to the nature of Crown employment and that plus Justice Finn’s judgment plus the statute seems to be a starting point in all of this, if you are to be approaching us as “well‑furnished lawyers”, to use Sir Robert Menzies’ expression.  Yes, go on.

MR BRABAZON:   If your Honour pleases.  Our friends have taken your Honours to Payne’s Case. There is not necessarily a great deal more to be said about it other than perhaps to take your Honours to 202 CLR 93 at 102 after the Chief Justice and your Honours, Justices Kirby and Hayne, had referred to the course of authority towards the top of page 102. There is an adaptation of what was said in the Ronpibon that:

neither the taxpayer’s employment as a pilot nor the conduct of his business farming deer occasioned the outgoings for travel expenses.  These outgoings were occasioned by the need to be in a position where the taxpayer could set about the tasks by which -

his employment income was earned.  That was, in a sense, cognately what Payne’s Case was about, the application of settled authority about travel expenses and their relation to the process of earning income.  That, of course, is not the situation being dealt with here.  Payne does not question the relevance of purpose, rather it requires a consideration of the whole connection between the outgoing and the earning of the income, and that, with respect, we submit, is what Justice Spender did, clearly Justice Edmonds did it, but Justice Spender also did that by reaching his conclusion by reference to the situation which impelled the respondent to incur the relevant outgoings and that is at paragraph 34 of his Honour’s judgment which your Honours saw earlier.

This was not a case of the taxpayer incurring expenses to be in a position to set about the business of earning, nor was it a case of a taxpayer incurring expenses in order to obtain a new position of employment as an employee.

KIRBY J:   A factual difficulty of applying the statute, though, is not really incurring the expenses in gaining the taxable income because that has been suspended by reason of the charge.  It is a prospective activity to gain future income, but is that what the Act is getting at?

MR BRABAZON:   The gaining of future income and the preservation of income, with respect, are sufficient.  That is seen in Snowden & Willson.  What was at risk there was not the past income that had already been earned but the future income.  In Finn’s Case the income that was to be earned, if at all, by the travel expenses of the government architect was future income and he hoped to gain a promotion.

KIRBY J:   What do you say to Mr Bloom’s suggestion that that is on capital account rather than revenue account?

MR BRABAZON:   With respect to our friend, that was the subject of decision in Rowe’s Case in the Full Federal Court which of course does not bind this Court, but it is on revenue account when one applies the traditional tests.  First, the nature of the benefit can only sound in the recurrent income.  Secondly, the nature of the expenditure is not such as to acquire any new asset or advantage, it is defensive and in its defensive capacity it is an expenditure which is not once for all but can recur.  Indeed, the fact that there were three rounds of charges illustrates that matter.

So long as one continues in employment one can be subjected to disciplinary charges.  One would hope not to be, but if there are charges that are made about what one has done allegedly as an officer, then they can only be met as they arise.  I had intended to go to Rowe’s Case at a later stage of the argument, but, in essence, that is, with respect, an answer concerning the capital revenue distinction.  Could I take your Honours to Commissioner of Taxation v Finn (1961) 106 CLR 60.

GUMMOW J:   What do we get out of Finn?

MR BRABAZON:   Your Honour, Justice Kitto makes an observation at page 69 that the office of the taxpayer in that case:

was of a kind which by its nature made incumbent upon the occupant much more than the performance of set duties at set times.

That is at about point 7 or point 8 of the page.  Secondly, your Honours, at page 67 it is instructive to observe the analysis undertaken by the Chief Justice Sir Owen Dixon under the first limb.  He refers to Ronpibon and the reference to occasion and then in the large paragraph beginning about point 3 of the page his Honour identifies seriatim some points of materiality, the first of which is that “the increased knowledge the taxpayer sought” would make “his advancement in the service more certain” and assist him to gain promotion, which could only be future, but in the existing employment. 

Secondly, he says, “so far as motive or purpose is material” – and there his Honour seems to be referring to subjective purpose – advancement was a “substantial element”.  In the third place the view of the heads of his department would be a valuable thing.  So he is improving his standing with his employer.  In a sense, Finn is the converse of the present case.  Mr Finn was seeking to improve his position and standing with his employer.  The respondent here is seeking to resist damage.

GUMMOW J:   All you need really appears in Mr Toohey’s argument at the top of page 63, does it not?  Mr Toohey appeared for the taxpayer.

MR BRABAZON:   One should never ignore the arguments of counsel, your Honour.

GUMMOW J:   No:

It is not necessary for the taxpayer to show that the expenditure was necessary, if it was reasonably incurred and incidental to the production of income.

MR BRABAZON:   Yes, your Honour.

GUMMOW J:   That seems fair enough.

MR BRABAZON:   The suggested dichotomy is also inconsistent with Shokker’s Case (1999) 92 FCR 54, in our respectful submission. Our friends have referred to Shokker in the written submissions in reply, so I should deal with it.

GUMMOW J:   Yes.

MR BRABAZON:   The facts are unfortunately somewhat convoluted.  The facts appear in the judgment of Justice Drummond.

GUMMOW J:   What are you trying to get out of this case?

MR BRABAZON:   In the first instance, your Honour, what we can get out of it is this.  The taxpayer incurred expenses which, as the AAT found, were with his subjective purpose of trawling for evidence the so‑called section 16 expenses which might assist him in resisting a charge of imposition.  It was a criminal charge, not a Public Service Act charge.

GUMMOW J:   Yes.

MR BRABAZON:   Their Honours considered that the AAT had erred in having regard only to the subjective purpose and that they should have had regard also to objective connecting factors.

GUMMOW J:   They referred to Fletcher?

MR BRABAZON:   I do not recall whether their Honours did, but I think that must be so given the date of it.

GUMMOW J:   Paragraph 17, Justice Heydon draws attention to.

MR BRABAZON:   Thank you, your Honour.  When one looks at the objective connecting criteria that their Honours identified – I should say that Justice Drummond wrote the leading judgment, Justice French concurred with him and with Justice Carr, and Justice Carr agreed generally with Justice Drummond, but also gave reasons of his own.

GUMMOW J:   The end result was it went back to the AAT, did it not?

MR BRABAZON:   It did, to consider the objective criteria.  The objective connecting factors, which included the likely effect on his employment, positive and negative, and perhaps I should simply give your Honours the citations:  page 60, paragraph 18 and page 62, paragraph 27.  There is a reference in the judgment of Justice Carr at pages 65 to 66.  There is a very long paragraph - in essence, it is about the last eight or nine lines at page 65 ‑ ‑ ‑

GUMMOW J:   Beginning with a reference to Fletcher, probably?

MR BRABAZON:   Yes, your Honour, that would be a good place to start, to the end of paragraph 37 which is ‑ ‑ ‑

GUMMOW J:   How much longer do you think you will need, Mr Brabazon?  It is just a question of when we adjourn, that is all.

MR BRABAZON:   Yes.  The only large thing that I have yet to deal with, your Honours, is Rowe’s Case which bears both on the first limb and on the capital revenue distinction.  An estimate of time is always difficult, but perhaps 10 minutes.

GUMMOW J:   Yes, go on.

MR BRABAZON:   One matter that is urged against us in Shokker’s Case and which I probably ought to explain or at least, I should say, address in submissions, our friends in submissions in reply, have drawn the Court’s attention to page 62 of the judgment in Shokker and in a passage which appears at the end of paragraph 28.  In our submission, when that is read in context, the meaning becomes much clearer.  The passage reads:

“.. 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 section 51(1).”

When one reads the whole of paragraph 28, it becomes apparent that what Justice Drummond was referring to was a distinction between incurring expenses that would help the taxpayer defend the imposition charge and incurring expenses that would help him defend a separate charge referred to as “the car fraud charges”.  The car fraud charges are the ones that his Honour is referring to as private, and as appears from the factual recitation at about page 56 of the judgment, the car fraud charges related to a business of selling motor cars which the taxpayer’s wife was engaged in and there was no suggestion that that charge or the circumstances of it had anything to do with his employment by the Australian Taxation Office.

GUMMOW J:   I do not think we are going to be deciding this appeal on one view or another of the tangled facts in Shokker, which may comfort you.

MR BRABAZON:   Indeed, your Honour.  That being so could I move to Rowe’s Case?

GUMMOW J:   Yes.

MR BRABAZON:   Rowe’s Case (1995) 60 FCR 99 has importance to the present proceeding for two reasons. One its treatment of the first limb and the other its treatment of the negative limb. Your Honours would be familiar with the facts of the case in relation to which I will say only one further thing which is that despite references to the charges or the allegations having been made against Mr Rowe and comments by their Honours about them, we nowhere discover what the allegations actually were or, indeed, exactly what their relationship was with his duties.

For example, whether he was alleged to be taking bribes or engaging in some dishonest activity; whether what he was doing was doing his job badly or whether what he was doing was doing something for a purpose that could not possibly be his employer’s purpose, but because it was connected with his work, perhaps taking an advantage of being in the position that he was, that it was reprehensible and justified his dismissal.

Perhaps I could deal with it this way by looking first at the first limb and then secondly at the negative limbs.  In relation to the positive first limb, Justice Drummond gives an analysis on pages 115 and 116 which, we would respectfully submit, is sound.  It commences at about the beginning of the page and his Honour, at about letter E, expresses the issue under section 51 as being:

whether legal expenses incurred by an employee to prevent his employer terminating his existing contract of employment are deductible under s 51.

Pausing there, that is perhaps a stronger situation than we have here.  Certainly it is a situation where the employer had already given him a show cause notice.  His Honour proceeds to identify the incidental and relevant test and at the top of page 116 his Honour says:

His incurring of those costs can be assumed to have contributed to his success in defending himself from dismissal from his employment as Shire Engineer.  They were incurred to preserve the respondent’s entitlement to receive, in return for his services, assessable income.  They are more closely connected with the production of that income than the legal expenses incurred to remove a legal impediment to a professional footballer engaging in the activities for which he was paid –

Then his Honour refers to Kemp’s Case.  Justice Burchett dealt with the matter at page 113.  His Honour deals with the capital revenue distinction almost in the same breath, but not quite.  What His Honour says appears to reflect two possible views under the first limb.  His Honours says:

I note that the Committee of Inquiry saw these expenses as incurred by –

the taxpayer in that case –

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 recognised as incurred by the respondent in defending the manner of his performance of his duties.

As to the first point, that would appear to be consistent with what Justice Drummond said as to the second.  The manner of performance of his duties is not explored in Justice Burchett’s judgment.  It certainly does not contradict the analysis of Justice Drummond.

Justice Beaumont was the other member of the court, the senior judge present.  His Honour’s judgment in relation to the first limb occurs at pages 108 and 109 commencing at about halfway down page 108 and his Honour concludes at about letter C of page 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 costs of representation before the Inquiry was incurred by him “in” gaining assessable income -

which is a different way of putting it from what Justice Drummond said.  It does not necessarily harm the respondent’s case here.  Importantly, though, it does not contradict Justice Drummond, particularly when one considers the immediately preceding paragraph in Justice Beaumont’s judgment at about letter B of page 109 where his Honour refers to a tribunal case in allowing a claim for legal expenses by an officer seeking to preserve his employment then under threat.

If one goes to the Administrative Appeals Tribunal case, and I do not intend to take your Honours to it, of course, that was a case where there was no suggestion that there was any antecedent conduct at all.  The only fact there present was that the taxpayer became aware that his existing employment was under threat and he hired a solicitor to negotiate for him.  That was referred to in an approving fashion by Justice Beaumont so his Honour does not appear to have been expressing disagreement with the proposition at the least.

In respect of the capital revenue distinction, your Honours, that is also dealt with by each of the members of the Court - by Justice Beaumont at pages 109 to 111 and your Honours will see that his Honour commences in an orthodox fashion with what Justice Dixon said in Hallstroms Case and then his Honour refers to and adopts what was said in the another tribunal case, Inglis, referring to a decision in New Zealand concerning a man called Dobbs, the legal costs, in short, of a public service appeal with a view to securing promotion.

In essence, his Honour accepts the proposition that an existing contract of employment, or preserving an existing contract of employment from destruction, is not an affair of capital, it is something personal to the taxpayer.  His Honour distinguishes Kratzmann’s Case on the basis that at all material times the taxpayer was, as in Inglis, in employment.

Justice Burchett deals with the matter at pages 113 to 114.  He refers to the assertion that the taxpayer had faithfully performed his duties.  In this case the assertion was not explicitly, “I have faithfully performed my duties”.  In respect of the first charge it was, “I have not breached my duties as an officer and in a manner that should be characterised as improper conduct”.  In respect of the third charges, it was, in effect, “You cannot prove these matters against me.  You ought not legally be able to proceed”.

GUMMOW J:   Now, do you want to say anything about Phillips and Maddalena?

MR BRABAZON:  Maddalena’s Case was decided on the first limb, your Honour, and whatever Professor Parsons thought about it, it was not decided on the basis of the capital revenue distinction.  What Professor Parsons wrote predated the judgements in Rowe by about 10 years and they overtake the matter.  The other member of the court was Justice Drummond.  His Honour dealt with the capital revenue distinction at pages 116 to 118 in a manner which follows the orthodox approach of looking at the distinct items that had been identified in Sun Newspapers by Justice Dixon.  As to the first matter, at the top of page 117, his Honour found that:

the preservation of the respondent’s then existing employment would ensure receipt by him of the recurrent benefit of his ordinary fortnightly salary.

As to the second, that benefit could only be enjoyed period by period and for an uncertain future period, which is also true.

GUMMOW J:   How much longer are you going to need, Mr Brabazon?

MR BRABAZON:   About 10 seconds, your Honour.  The third matter he dealt with at 118.  It does not appear to be material here but, in our submission, your Honours, this is a case that would fall on the revenue side of the line.

GUMMOW J:   Now, any luck in locating that further provision?

MR BRABAZON:   I am told not, your Honour.

GUMMOW J:   Very well.  We will adjourn until 2.15 pm when we will take your reply, Mr Bloom.

AT 12.47 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.16 PM:

GUMMOW J:   Yes, Mr Bloom.

MR BLOOM:   Thank you, your Honour.  Your Honour should have a copy of the relevant parts of the judgment of Sir Owen Dixon and Justice McTiernan in Blyth Chemicals v Bushnell.

GUMMOW J:   Blyth Chemicals 49 CLR 66, is it?

MR BLOOM:   Yes, your Honour.  At 81, at the bottom of the page, their Honours say this:

Conduct which in respect of important matters is incompatible with the fulfilment of an employee’s duty, or involves an opposition, or conflict between his interest and his duty to his employer, or impedes the faithful performance of his obligations, or is destructive of the necessary confidence between employer and employee, is a ground of dismissal . . . But the conduct of the employee must itself involve the incompatibility, conflict, or impediment, or be destructive of confidence.  An actual repugnance between his acts and his relationship must be found.

KIRBY J:   This is in the context of employment law.  It is not for the purpose of the question which is now before us in income tax law.

MR BLOOM:   It may become that, if your Honours please.  If one takes the example, for instance, given in Jarratt of a chief constable of police who is drunk in public or a bank employee who is charged with dishonesty in another context and then one imagines dismissal proceedings brought upon the basis of what is here said, on the purposive approach the costs of defending or challenging the dismissal would be deductible.  Likewise on the whole of employment approach of Justice Edmonds the costs would be deductible.

If we turn from that example to the express condition that one finds in the contracts of sports people or entertainers, and again we assume dismissal based upon that sort of proscribed conduct, the purposive approach would again entitle deduction for the costs of challenging the dismissal or other sanction and likewise the approach preferred by Justice Edmonds.  Now, turning to the public servant ‑ ‑ ‑

KIRBY J:   I have found over the years I have sat here, Mr Bloom, that in tax cases generally, those who are very familiar with the cases know all the little categories, they know all the instances, but as Justice Gummow pointed out, I think, in the Federal Court, it is a wilderness then and there does not seem to be a very conceptual approach to it and that is why it is very useful, if we can, to anchor it back in the terms of the statute and if there is anything you can say from the point of view of the policy of the law that is expressed in the language of the statute, why the deduction should not be allowed in this instance when intuitively one thinks well, this person is defending the income stream and that therefore that is incidental to maintaining the income flow.

MR BLOOM:   We have that implied situation, we have the express situation.  These are the non‑public service situations and if we turn to the public service situations, true, of course as Justice Hayne has pointed out that the entire framework of charging and of dismissal and of sanctioning is dealt with in the public service legislation, but in the other instances it is extraneous but nonetheless it exists.

If one goes back to his Honour Justice Finn’s judgment in McManus 70 FCR 16 at 25, his Honour points out, just above letter B, that:

From 1862, Australian public service legislation has imposed strictures and limitations upon the employment and non‑employment (or private) conduct and activities of public servants –

The approach for which we contend would deny deductibility whether it relates to an implied condition in relation to private conduct, an express condition in relation to private conduct or a prohibition in the public service legislation.

KIEFEL J:   Mr Bloom, this focus on the nature of the conduct, is that not coming very close to treating the employment as if it had ceased, which is to say that which is productive of income has in some de facto way ceased to exist whereas here the point is that it has not, but that lies in prospect and what is sought to be done by the expenditure is to maintain the source of the assessable income.

MR BLOOM:   But, your Honour, if there were a suspension or, indeed, a dismissal and the dismissal was held to be wrongful, then in those circumstances there would be restoration of the income production in the restoration of the employment.

KIEFEL J:   You might go to the second limb on that.

MR BLOOM:   No, you could never go to the second limb.

KIEFEL J:   But in relation to the first limb, we do not have that situation in any event.

MR BLOOM:   You could not go to the second limb because of the definition of “business”, which excludes “occupations” and “employee”.  So you are in the first limb whichever way one looks.  We do not say that it has to be a situation dismissal.  What we say is that when one does get to the words of the statute, one looks to necessarily that which is productive of income and that which is productive of income does not include the private conduct which is proscribed impliedly or expressly or –

KIEFEL J:   You are really defining the employment in a way, are you not, the source of the income?  You are saying it cannot be – and this is the difference - on your view it cannot be the conduct which gives rise.  In fact, you should not be paid for what you are doing is really what your argument comes down to.

MR BLOOM:   You do not get paid for misconduct.  The proscribed conduct allows you –

KIEFEL J:   You may not be paid.

MR BLOOM:   Not for that misconduct.  The proscribed conduct – if you behave yourself then you are allowed to turn up and, performing the positive acts, get paid, but if you misbehave yourself then you may not be able to get paid, even for those acts that you are supposed to do, because you will not be allowed to do them.  You will be either suspended or dismissed or there will be some other sanction, even if you dropped a band.  It comes down to identifying those things which are actually productive of the income within the employment contract and putting to the other side ‑ ‑ ‑

KIEFEL J:   But that is by way of saying that the employment has to give rise to the deduction – the employment itself has to create the deduction.  I am not putting this very well.  The actual earning of income has to involve the deduction itself.  It just elides the two, does it not?

MR BLOOM:   Well, yes.  In the terms of the section which gives you a deduction for outgoings incurred in gaining of assessable income, that is, in the course of, it necessarily directs attention to those activities which are productive of income within the employment contract.

KIEFEL J:   But is that not in the cases only by way of saying this is what produces income and here the answer is simply the employment.  You can have a look at all of the conduct in the discharge of duties which may give rise to it, but here it is a little simpler than in some other cases where discrete parts of it might be in question.  Here it is just the employment produces the income and while the employment is extant you have a source

of assessable income.  If that is your starting point, then you view the occasion of the expenditure in connection with that source.

MR BLOOM:   Your Honour, it is not the employment that produces the income.  It is the rendering of services.  It is the rendering of services as a result of the contract of employment that produces income and without the rendering of services there is no income.

KIEFEL J:   I have distracted you for too long, I think.

MR BLOOM:   If your Honour please.  Can I turn then to the capital argument.  Our learned friends relied upon what was said by Justice Drummond in Rowe at page 117 of 60 FCR 99. There his Honour referred to Phillip’s Case.  It is notable that his Honour made no reference at all to what Professor Parsons had said about structural assets.  Furthermore, Professor Parsons points out Phillip’s Case is an unusual case involving, as it did, a large number of contracts for the services of employees.

So the business of the company was providing the services of others pursuant to employment contract.  Such a business might have as revenue assets of that business the contracts of employment, but that is a very different situation from looking at just one contract of employment, which Professor Parsons would regard as structural in those circumstances.  If your Honours please, those are our submissions.

GUMMOW J:   Yes, thank you, Mr Bloom.  We will consider our decision in this matter and the Court will now adjourn until 2.15 pm tomorrow.

AT 2.26 PM THE MATTER WAS ADJOURNED