Flegg and Commissioner of Taxation
[2007] AATA 1336
•18 May 2007
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 1336
ADMINISTRATIVE APPEALS TRIBUNAL )
) No QT200600194, QT200600256
TAXATION APPEALS DIVISION ) Re BRUCE FLEGG Applicant
And
COMMISSIONER OF TAXATION
Respondent
DECISION
Tribunal Deputy President P E Hack SC Date18 May 2007
PlaceBrisbane
Decision The Tribunal affirms the decision under review.
...........Signed..............
Deputy President
CATCHWORDS
TAXATION – income tax – deductibility of election expenses – legal expenses incurred in defending a pre-selection challenge - whether incurred in contesting an election – requirement that expenditure be incurred in the course of the election
WORDS & PHRASES – “in contesting an election”
Income Tax Assessment Act 1997 s 25-60(1)
Income Tax Assessment Act 1936 s 74(1)
Galt & Anor v Flegg & Ors [2003] QSC 290
Federal Commissioner of Taxation v Wilcox (1982) 63 FLR 210
Case N80 81 ATC 408
Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478
W. Nevill & Co. Ltd. v Federal Commissioner of Taxation (1937) 56 CLR 290
Federal Commissioner of Taxation v Payne (2001) 202 CLR 93
Day v Federal Commissioner of Taxation (2006) 62 ATR 530
REASONS FOR DECISION
18 May 2007 Deputy President P E Hack SC Introduction
1.The applicant, Dr Bruce Flegg, is a member of the Queensland Legislative Assembly. In each of the 2003 and 2004 income years he incurred legal expenses in connection with a challenge to his pre-selection as his party’s candidate for election to parliament.
2.Those legal expenses, he says, are allowable deductions from his assessable income by virtue of s 25-60(1) of the Income Tax Assessment Act 1997 (“ITAA 1997”). That sub-section allows as deductions “expenditure you incur in contesting an election for membership” of the parliament.
3.The respondent, the Commissioner of Taxation, does not dispute that the expenditure on the legal expenses was incurred. But, he says, they are not deductible under this sub-section because they were not incurred “in contesting an election”; they were incurred in connection with matters internal to the applicant’s political party.
4.It is not suggested that the expenses are deductible under any other head.
Background
5.There is no controversy regarding the facts. On 12 April 2003 Dr Flegg was endorsed in a pre-selection plebiscite to contest the seat of Moggill in the Queensland Parliament on behalf of the Liberal Party of Australia (Queensland Branch). The seat was, at that time, held by a member of the Liberal Party who had announced that he did not intend to seek re-election.
6.Following his pre-selection Dr Flegg set about his campaign even though the election had not been called. He started campaigning, he established an office within the electorate, he hired staff and generally made himself known in the electorate.
7.Then, on 29 July 2003, Mr Russell Galt and Mr Michael Watson commenced proceedings in the Supreme Court of Queensland against Dr Flegg and the 46 persons who were the members of the State Branch of the Liberal Party[1]. Mr Galt had been an unsuccessful candidate for pre-selection for the seat who had been defeated by Dr Flegg. The other applicant, Mr Watson, was the chairman of a local branch of the Liberal Party. In these proceedings they sought declarations that Dr Flegg had not been endorsed as the Party’s candidate for Moggill and that the pre-selection plebiscite held on 12 April 2003 was void.
[1]The Liberal Party (Queensland Branch) is an unincorporated association and thus is not capable of being sued in its own name.
8.Prior to the commencement of the litigation, but in anticipation of it, Dr Flegg engaged solicitors to act for him in the litigation. Dr Flegg was represented in the Supreme Court by senior and junior counsel. The matter was heard by Moynihan J. In his judgement his Honour described the argument for Mr Galt and Mr Watson in this way[2]:
“Put shortly, the Applicants complain that, in contravention of the State Constitution of the Liberal Party … eligible preselectors entitled to vote at the plebiscite were precluded from voting and that persons ineligible to vote in fact did so.”
[2] Galt & Anor v Flegg & Ors [2003] QSC 290 at [5].
9.On 4 September 2003 his Honour dismissed the application, essentially on the footing that the Party Rules required an objection to the constitution of a plebiscite to be taken before the conduct of the plebiscite and precluded an objection to the constitution of it thereafter. Neither Mr Galt nor Mr Watson had objected when objections had been sought by the Chairman of the meeting.
10.The general election was held on 7 February 2004 and Dr Flegg was elected to the parliament.
11.Dr Flegg sought a private ruling from the Commissioner in relation to the costs said to be deductible however the Commissioner made his assessments for relevant the two years on the basis that the amounts claimed were not deductible. Dr Flegg objected to the assessments but the Commissioner disallowed the objection.
12.It is accepted by the Commissioner that, in contemplation of, or in connection with, the Supreme Court proceedings Dr Flegg incurred expenditure of $4,328 in the year ended 30 June 2003 and $41,758 in the year ended 30 June 2004. Whilst, at earlier times in the objection and review process, different amounts were claimed as being deductible, Dr Flegg’s case is advanced only on the basis of these sums.
The Applicable Principles
13.Section 25-60 of ITAA 1997 is a rewritten provision which replaces the now repealed s 74(1) of the Income Tax Assessment Act 1936 (“ITAA 1936”). Because of that, and the operation of s 3-1 of ITAA 1997, the task of construing s 25-60 is aided by the jurisprudence in relation to its predecessor in ITAA 1936.
14.There are many decisions of the Boards of Review that deal with s 74(1) of ITAA 1936, however it is necessary to consider only Case N80[3] where Dr Gerber gave what was effectively the decision of Board of Review No 3. Dr Gerber considered, but declined to follow, earlier Board decisions that had held that a temporal connection was required between the time of the expenditure and the time of the election. Dr Gerber, in somewhat colourful language, came to the conclusion that an election begins for the purposes of s 74(1):
“when a candidate throws – depending on party affiliations – his cap or glove into the ring. The expenses incurred thereafter, provided they are incurred for the purposes of the contest, are allowable deductions.”
[3] 81 ATC 408.
15.An appeal by the Commissioner from that decision was dismissed by the Supreme Court of Queensland[4] and a further appeal was dismissed by the Full Court of the Federal Court[5]. In each of the appeals the principal focus of the Commissioner’s attack was on the issue of timing, that is, whether or not the expenditure was incurred too early to be deductible[6]. Toohey and Fitzgerald JJ. said[7]:
“It is the received view that if a loss or outgoing is to be deductible under s 51(1) of [ITAA 1936] as ‘incurred in gaining or producing … assessable income’, it must be incurred in the course of doing so: see, for example, Amalgamated Zinc (De Bavay’s) Ltd v. Federal Commissioner of Taxation (1935) 54 CLR 295 at 303, 309 and Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56-7. We accept the Commissioner’s submission that equally expenditure must have been incurred in the course of contesting an election if, in the present circumstances, it is to be deductible under s 74 (1) of the Act.”
[4]Federal Commissioner of Taxation v Wilcox (1982) 13 Atr 395 (Sheahan J.)
[5](1982) 63 FLR 210 (Fox, Toohey and Fitzgerald JJ.).
[6] (1982) 63 FLR at p. 213.
[7] (1982) 63 FLR at p. 213.
16.Their Honours went on to reject the Commissioner’s submission that commencement of an election was marked by the nomination of the candidate after the election had been called. That temporal aspect is not in issue here; the Commissioner does not submit that the expenditure here was “too early” in the electoral process.
17.Both parties made reference to the decision of the High Court in Lunney v Federal Commissioner of Taxation[8]. The question in issue in that case was the deductibility of fares to travel to and from the taxpayers’ places of employment. Lunney is authority for the proposition that it is not sufficient to show that the expenditure was an essential prerequisite to the derivation of income. An expenditure is not “incidental and relevant”, the expression used in W. Nevill & Co. Ltd. v Federal Commissioner of Taxation[9], merely because the expenditure was necessary in a “but for” sense. The judgement of Williams, Kitto and Taylor JJ. expressed the matter in this way[10]:
“But to say that expenditure on fares is a prerequisite to the earning of a taxpayer’s income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective activities are derived.”
[8] (1958) 100 CLR 478.
[9] (1937) 56 CLR 290 at p. 305.
[10] (1958) 100 CLR 478 at p. 499.
18.The principle to be applied here is one that limits deductibility to expenditure to that incurred in the course of the election; it is not enough that the expenditure be incurred for the purpose of the election[11].
[11] Federal Commissioner of Taxation v Payne (2001) 202 CLR 93 at p. 102, [16].
19.Because the particular expenditure in question here is on legal expenses it is useful to have regard to the following remarks of Emmett J. in Day v Federal Commissioner of Taxation[12] where his Honour said:
“The proper characterisation of legal expenses depends upon the circumstances with which the proceedings in relation to which the expenses were incurred were concerned. It is not sufficient to limit the question to the object or purpose, whether subjective or objective, that the proceedings themselves were intended or were hoped to achieve. A distinction must be drawn between the immediate object sought to be achieved by the particular proceedings in which the legal expenses are incurred and the situation that impelled the Taxpayer to undertake them.”
[12] (2006) 62 ATR 530 at p. 538, [35].
Application of the principles
20.The argument for Dr Flegg, adapting the words of Ronpibon, was that it was “both sufficient and necessary that the occasion of the expense should be found in whatever is required to contest the election and, if the election is not won, would be expected to influence a vote for the candidate in that election”. And, it is said, he contested the election only by retaining his status as the endorsed candidate of his party – the expenses were required in order to retain that status and to contest the election.
21.I accept, as Dr Flegg said in his evidence, that without the benefit of the pre-selection that he gained on 12 April 2003 he would not have been successful in the election. He put that on the basis that he would not have been chosen had another pre-selection plebiscite been required as a consequence of the Supreme Court proceedings and that he would not have been elected had he stood for election as anything other than the Liberal Party candidate.
22.But the flaw in the argument seems to me that it adopts a “but for” test. It may have been necessary in the sense of being required however it seems to me that that is not sufficient to allow a conclusion that it was incurred “in contesting” the election; it was incurred in a contest that was merely incidental to the election. The Supreme Court proceedings were the by-product of internal conflict in the Liberal Party. They were connected to the election because they were a consequence of a step in the process that lead up to the election but, in reality, the proceedings were quite removed from the election.
23.To reject the claim for deductibility on this basis is not to re-impose the temporal requirement favoured by the Commissioner at an earlier time; rather it is to rely upon the purposive element required by the sub-section. As Ms Brennan, counsel for the Commissioner put it, the expenditure on legal fees was related directly to Dr Flegg’s pre-selection and the protection of his status as the Liberal Party candidate but it was not otherwise related to the election contest.
24.Whilst party endorsement or pre-selection may, in a practical sense, be required for election it is, as a matter of law, irrelevant to what Toohey and Fitzgerald JJ. in Wilcox described as the “central feature” of an election, the voting at the poll. Dr Flegg was not engaged with the electors, seeking their votes either directly or indirectly, when engaged in the internal machinations of the Liberal Party. The legal expenses in issue here were concerned with matters internal to the political party; they were not concerned with matters referable to the electoral process. They were thus not incurred in contesting an election.
25.Mr Rigney, the solicitor who appeared for Dr Flegg, also relied upon some remarks of Dr Gerber in Wilcox as providing support for the proposition that the judgement of the candidate on what was necessary expenditure provided a sufficient connection with the election. And, it was said, his findings were accepted by the Full Court. Dr Gerber, having considered the temporal issue, dealt with particular challenges by the Commissioner to the deductibility of the expenses claimed. In the passage relied upon by the applicant he said[13]:
“The Commissioner’s representative, in her address, submitted that if we were against her on the major premise, we should only allow those amounts for functions which were geographically located within the electorate. No attempt was made in cross-examination to challenge the nexus of attending the impugned function with ‘contesting an election’. In the circumstances, the taxpayer’s broad assertion that he considered them relevant cannot be denied. In any event, I would be reluctant to substitute my judgment of ‘relevance’ in a State campaign for that of this seasoned campaigner …”
[13] 81 ATC 408 at p. 413-4.
26.I do not read Dr Gerber’s remarks as suggesting that the judgement of a candidate provided a universal nexus between expenditure and the election; rather I regard what he decided as no more than that once a determination had been made that expenses were incurred in contesting the election it was not for the Commissioner (or the Tribunal) to dictate how a candidate should incur election expenses in contesting the election.
27.It follows that I would affirm the objection decision.
I certify that the 27 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC
Signed: ....................Signed...............................................
Eleanor O’Gorman, AssociateDate of Hearing 30 April 2007
Date of Decision 18 May 2007
Solicitor for the Applicant Mr H Rigney
Counsel for the Respondent Ms M Brennan
Solicitors for the Respondent Australian Taxation Office Legal Practice
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