Commissioner of Taxation v Day

[2008] HCATrans 234

[2008] HCATrans 234

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S20 of 2008

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

SHANE DAY

Respondent

Application for special leave to appeal

KIRBY J
HEYDON J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 13 JUNE 2008, AT 9.25 AM

Copyright in the High Court of Australia

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

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)

KIRBY J:   Yes, Mr Bloom.

MR BLOOM:   Your Honours, the issue in this case is whether legal expenses are deductible when they are incurred in defending charges brought by an employer alleging improper conduct otherwise than in performance of the taxpayer’s ordinary income earning activities.  In the applicant’s submission, having regard to the findings of fact below, this case is a suitable vehicle to test that issue.  Your Honours should have the relevant section of the Public Service Act, section 56, as it stood at the relevant time and your Honours see that:

an officer shall be taken to have failed to fulfil his duty as an officer if and only if . . . 

(d)he engages in improper conduct as an officer;

(e)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 –

In this case the charges were all brought in reliance on (d) but the decision of the majority would say that that does not matter; it would not matter whether they were reliant on (d) or (e).  Importantly, none of the charges here related to conduct which occurred in the performance of the respondent’s income earning activities.  If I can ask your Honours to turn to the application book at page 60 and to paragraph 77 in the judgment of Justice Dowsett who dissented in the Full Court but agreed with the trial judge.

KIRBY J:   Was Justice Dowsett’s reasons for his dissent similar to the reasoning of the primary judge?

MR BLOOM:   Yes, your Honour.

KIRBY J:   So you have Justice Emmett and Justice Dowsett in your corner.

MR BLOOM:   Yes, that is correct.

KIRBY J:   And the majority of the Full Court were in the other corner.

MR BLOOM:   Yes.

KIRBY J:   I see.  And we are up in this corner.

MR BLOOM:   And, really, there is a divergence between the majority as well, a different way of getting to the same result.

KIRBY J:   Yes, all right.  You are taking us to Justice Dowsett.

MR BLOOM:   Yes, your Honour, at page 60, paragraph 77:

All of the relevant charges arose under s 61 of the Public Service Act 1922 (Cth) (“Public Service Act”). That section provides that an officer may be charged with failure to fulfil his or her duty. Section 56 gives substance to s 61 . . . The First Charge was that the taxpayer failed to fulfil his duty as an officer by engaging in improper conduct. It was alleged that he breached the Customs Code of Ethics and Conduct by using his identity card in order to obtain information from a Local Court officer regarding a search warrant executed upon his computer.

Emmett J considered that the relevant conduct had not occurred in the course of discharge of the taxpayer’s duties.  Although the alleged misconduct may have been described by reference to obligations related to his employment, it does not follow that the outgoings incurred in defending the charge arose out of conduct in the course of earning assessable income.  The taxpayer’s misuse of his identity card was unrelated to the performance of his duties.

Then, paragraph 79:

All but one of the Third Charges involved an allegation that the taxpayer had failed to fulfil his duty as an officer –

and also related to 56(d).  Then, paragraph 82 on page 61:

Some of these charges involved conduct more closely associated with the performance by the taxpayer of his duties, and therefore his derivation of income, than others . . . However it seems that the case was conducted upon the basis that all of the Third Charges should be treated uniformly.  Emmett J observed in his reasons that the taxpayer had not suggested that any of this conduct had involved the performance of his duties as a Customs officer.

And, over the page at 84:

I agree with Emmett J that none of the conduct to which the Third Charges related was performed in discharge of his duties as a Customs officer.  Indeed, all such conduct was clearly motivated by personal interest or, perhaps, a desire to obstruct Customs.  To describe such conduct as being in the course of earning assessable income is, to say the least, counterintuitive.

Then he, like Justice Emmett, went on to find that an outgoing is incurred in gaining or producing assessable income, in the context of this sort of case, if the activities to which they relate are activities in the course of gaining or producing assessable income.

KIRBY J:   Is there not a bit of a catch‑22 situation here?  It is the very fact that he is a Customs officer and steps outside the role of a Customs officer that creates the offence and, therefore, in order to try to protect himself from the consequences of that conclusion and to keep himself within the role he is entitled, or arguably entitled, to try to show that it was not within the words of the offence.

MR BLOOM:   Yes, but, your Honour, it all arises out of what is alleged to be private conduct, not income earning conduct.  If one takes the example away from Customs of a sports person who by taking drugs is found to have brought his sport or himself into disrepute, the costs of defending those charges when brought by his employer or by the sporting body would on the view of the majority in this case be deductible.

KIRBY J:   But can it be said against the Commissioner that what this Court has said in Payne lays down the general principle and that it is just inevitable that there are going to be borderline cases and those cases are going to come up, judges are going to disagree about them and that we cannot be dealing with each and every case and that normally the Court has said matters of this kind should stop at the Full Court of the Federal Court?

MR BLOOM:   Ordinarily that is right, but the importance here is the width of the result of this decision, if allowed to stand, as far as the Commissioner is concerned.  Payne certainly lays down that an outgoing to be deductible must be incurred in gaining or producing assessable income.  Justice Spender did not follow that test in this case.  He was one of the majority.  Justice Edmonds did follow it.

KIRBY J:   Did Justice Spender mention Payne?

MR BLOOM:   Yes, he did, your Honour.  I am not sure he mentioned it but he certainly did not rely upon it and applied a purposive test and each of the other members of the court disagreed with him in relation to the application of that test.  His Honour deals with that at page 45, paragraph 42:

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.  However, the incurring of the legal expenses was to protect the income of the taxpayer –

So he has adopting a purposive test.  The paragraph before, 41:

In my view, the deductibility of legal expenses by a public servant in defending charges under the Public Service Act, which, if successful, might impact on the earnings of a taxpayer, are not to be limited to where the expenses are incurred “in defending the manner of his performance of his duties.”

If I could just pause there, decisions of the Federal Court to this point had made such a distinction.  In both Schokker and in Rowe Full Courts of the Federal Court of Australia had held that legal expenses were deductible where they were incurred in defending the manner of performance of the duties and left open the question of whether expenses of this kind could also be deductible and that is why this case is of some importance.  If we turn back to page 44 in the judgment of Justice Spender:

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.

As it would with a sportsperson –

It is quite irrelevant whether the content of the charges related to activities of his employment, or were extraneous to the proper discharge of his duties.

There would be no difference if a public servant was charged with being rude to customers in answering complaints, which is conduct engaged in by the public servant in the course of his or her duties, or a charge that he or she had downloaded child pornography from his or her officer computer –

So the distinction is quite clear, but he gets there by the purposive test.  Justice Dowsett at page 58 at the end of paragraph 72, the last sentence:

With all due respect, I am concerned that a test which focuses on whether costs were incurred to defend the taxpayer from loss of employment or diminution in income is a test based on purpose, and therefore inconsistent with the decision in Payne.

Justice Edmonds says the same in the first paragraph of his Honour’s judgment, in the analysis of the judgment, paragraph 101 at page 69:

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 two members apply Payne, each reaching different results, the other member of the majority does not apply Payne in order to be part of the majority and this dichotomy ‑ ‑ ‑

KIRBY J:   The primary judge does apply Payne and comes to a conclusion that you urge on this Court.

MR BLOOM:   Yes, as does Justice Dowsett.  This dichotomy seems to have been one that has emerged from previous decisions of Full Courts of the Federal Court and it is one which has now, in effect, been wiped out by these divergent reasonings and that, with respect, is not a satisfactory position.

KIRBY J:   Payne is really simply another instance of this Court insisting on the ultimate obligation to go back to the language of the statute.

MR BLOOM:   Yes, your Honour.

KIRBY J:   In the submissions of the respondent they point to the fact that you offer the costs in this Court but you do not offer not to disturb the costs orders below.

MR BLOOM:   That has now been taken care of, your Honour.

KIRBY J:   So you are content to give the Court an undertaking that if special leave were granted, you would offer the costs in this Court, whatever the outcome, and would not the disturb the costs of the courts below?

MR BLOOM:   Quite, your Honour, yes.

KIRBY J:   Yes.  Is there anything else you wish to say?

MR BLOOM:   No, your Honour.

KIRBY J:   Yes.  What do you say, then, Mr Brabazon?

MR BRABAZON:   May it please, the Court.  Your Honour Justice Kirby asked about Payne and how it had been approached below.  Payne was not cited by either party in argument either before Justice Emmett or in the Full Court.

KIRBY J:   Why is this?  We write these things and nobody even bothers.

MR BRABAZON:   Your Honour, I suppose I can answer that.  This is a public service disciplinary proceeding and therefore not a criminal charge, so that the nexus with the employment is particularly strong.  The charges themselves arise within and out of the employment relationship and the only relevance of the alleged misconduct is its capacity as an alleged breach of the terms of the employment.  The charges are within the employment relationship and their only impact is upon the employment and, significantly, the employment income.

As far as concerns the role of Payne’s Case as it arose, your Honours, it appears that Justice Spender wrote the first judgment, Justice Edmonds then wrote a judgment and Justice Dowsett says that he had seen both of those drafts.  So the order of the writing of the judgments, as appears, is Justice Spender, first – the first paragraph of ‑ ‑ ‑

KIRBY J:   What does this matter?

MR BRABAZON:   Justice Edmonds is the first to raise Payne’s Case, the case not having been cited previously, and Justice Dowsett responds to him.  This, with respect, explains why Justice Spender does not refer to it.  Justice Spender, effectively, responds to the case as it has been decided below and argued on the appeal.  Now, my friend says that Justice Dowsett and Justice Emmett were ad idem in their approach.  With respect, we would take issue with that.

HEYDON J:   Mr Brabazon, do you take a little natural justice point that the case not having been cited by counsel and assuming a central role in the reasoning of the Full Court, there is a certain unfairness to the parties, not perhaps unfairness to the loser, principally, but unfairness to both parties?

MR BRABAZON:   I will put it in this fashion, your Honour, that it makes it difficult to say that this is a suitable vehicle for a grant of special leave to ventilate the question.

KIRBY J:   I find that a little bit difficult to grapple with.  I mean, the law is the law and if it is expounded by this Court and if it is relevant to the case, then it ought to be applied so that you cannot really say, well, nobody raised if it is in the books.

HEYDON J:   The House of Lords, I think in Rahimtoola v Nizam of Hyderabad criticised Lord Denning for relying on authority that had not been cited in argument before the House of Lords, but that was 40 or 50 years ago.

MR BRABAZON:   Yes.

KIRBY J:   But does not the point that you are now raising simply make Mr Bloom’s point good, that is to say, there seems to be some question in the Federal Court as to whether Payne applies to a case such as this.  There is a difference in the Full Court itself on that question.  Justice Spender, who was one of the majority, does not refer to Payne at all and therefore the matter is, as it were, left open and may therefore be an exception where this Court should look at the matter to make it clear for Full Courts because this is not a unique factual situation.

MR BRABAZON:   Your Honour, what Justice Spender did was consistent with Payne and that can be seen from two things; first, from the purposive analysis, and Payne does not say that purpose is irrelevant.  What Payne effectively says is that you engage in a characterisation approach and the authorities established clearly the objective purpose, particularly objective purpose, is central to that analysis.  Then his Honour says at paragraph 34 of his judgment on page 44 of the application book:

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 what the consequences of those charges would be if they were not resisted by him and he says:

It is quite irrelevant whether the content of the charges related to activities of his employment, or were extraneous to the proper discharge of his duties.

With respect, what his Honour means by that is further amplified in the next paragraph because it is clear that the conduct he refers to, such as viewing pornography on a work computer, is not unconnected with the employment, but it is not in the proper discharge of the positive activities of the employment.

KIRBY J:   The thought behind that is similar to what I called the catch‑22 idea that I was expressing to Mr Bloom, and you might ultimately succeed, but the fact is we have differences between the members of the majority, we have a difference between the primary judge and the dissentient in the Full Court, we have an offer to pay your costs and, as you requested, not to disturb the costs orders below.  The matter is of some general significance.  Payne was not referred to by one member of the majority or, I think, by the primary judge.

MR BRABAZON:   It was not referred to by the primary judge, your Honour.

KIRBY J:   So the question is therefore whether this is an occasion departing from the general principle that these matters are left in the Full Court to make it clear because of the commonality of the fact situation that arises here.  I am surprised you are resisting the grant of special leave.

MR BRABAZON:   Your Honour, from a self‑interested point of view I am in a win/win situation, your Honour, but, of course, that is probably not a great deal of comfort for my client.

KIRBY J:   No.  You are putting the client’s viewpoint and your client wants to finish it now, but it does seem a little unsatisfactory that there are these differences in the Full Court and it is really only the Commissioner’s application because the numbers fell out in your favour in the Full Court.

MR BRABAZON:   Your Honour, we would say that, with the greatest of respect to Justice Dowsett, what Justice Edmonds did in applying Payne was orthodox and correct.  He focused upon that which occasioned the outlaying of the legal expenses which was the defence of the taxpayer against a public service charge.  Indeed, the nexus with the employment was particularly strong because of those circumstances.

Now, that is, the offence was misconduct as an officer.  Whether one puts it under (d) or (e), in fact it was done under (d) and he had two ways to defend it.  One was to say, “Well, what I did was not as an officer”, or if it had been under (e) it did not impact upon the service.  He says it was not misconduct and he succeeded on that in respect of the first charge.  In respect of the third charges, as far as the evidence before the court is concerned, all we have are the charges and not what the actual conduct was.  Justice Dowsett’s approach would effectively invite the Commissioner, and the tribunals or courts that hear appeals from the Commissioner, to go back

into the original underlying facts.  This appears from paragraph 75 of his Honour’s judgment at page 59 of the application book.

That, with respect, we would say is an indication of the soundness of the approach taken by the majority and of why the outcome reached was clearly correct, because it has been consistently maintained that the outcome of proceedings in which legal expenses are incurred is not a material consideration.  Whether you win or lose you are entitled to defend yourself and if the objective nexus with the income earning is established, that is the end of it as far as the deductibility question is concerned.

The point that my friend makes is that the alleged conduct was not in the ordinary functions of the employee, but Justice Edmonds makes the point that there can be no material distinction between a duty of performance and one of observance between positive acts directed to carrying out the employer’s proper purposes and allegations that the employee has departed from those standards, whether by an act or omission, whether in the way that they are carried out or by doing something that he ought not have done.

Bearing in mind that the only relevance of the conduct for the purpose of this type of proceeding was that this is a public service disciplinary appeal and when one takes those matters into account, in my respectful submission, the orthodoxy of the outcome is clear and whilst it might be an interesting question, this is, with respect, not the proper case to resolve it because the question in principle does not or does not clearly resolve the deductibility in this case.  May it please the Court.

KIRBY J:   Yes, thank you, Mr Brabazon.  Is there anything in reply, Mr Bloom?

MR BLOOM:   Just very briefly on Payne, your Honours.  It is the latest decision in over 70 years of decisions by this Court on the question of what is incurred in gaining or producing assessable income and, indeed, to get to the result that they get to in Payne, they apply a decision in Ronpibon Tin and the words from Ronpibon Tin (1949) 78 CLR 47. So, it is not something new. Furthermore, one of the majority who found in favour of my learned friend’s client actually applied Payne to do so, so, with respect, there is no denial of any sort of fairness, in our respectful submission, in the way in which it took place.  If your Honours please.

KIRBY J:   There will be a grant of special leave in this matter, the Court noting the undertakings by the Commissioner that the Commissioner will pay the costs of the respondent of the appeal and not disturb the decisions in the courts below.

AT 9.49 AM THE MATTER WAS CONCLUDED