VT93/124 and 125 and Commissioner of Taxation [1994] AATA 127; (1994) 28 ATR 1125; 94 ATC 252 (6 May 1994)

Administrative Appeals Tribunal

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VT93/124 and 125 and Commissioner of Taxation [1994] AATA 127 (6 May 1994); (1994) 28 ATR 1125; 94 ATC 252

Last Updated: 15 May 2009

INCOME TAX - Allowable deductions - Whether legal expenses incurred in relation to actions to obtain employment with Ambulance Service are deductible given concession that as a result of pursuing those actions the applicant tax officer improved his knowledge and understanding of the legal system and equal employment opportunity principles - Income Tax Assessment Act 1936, ss 51(1) and 64A.

FCT v Finn [1961] HCA 61; (1961-1962) 106 CLR 60
FCT v Maddalena 71 ATC 4161
Case P124, 82 ATC 629
Wilkinson 83 ATC 4295
Fletcher v FCT 91 ATC 4950
FCT v Studdert 91 ATC 5006
FCT v MI Roberts 92 ATC 4787
Smithkline Beecham Laboratories (Aust) Ltd v FCT 93 ATC 4629
AAT No 9457
DECISION AND REASONS

ADMINISTRATIVE APPEALS TRIBUNAL )
) VT93/124&125
TAXATION APPEALS DIVISION )

Re: APPLICANT

And: COMMISSIONER OF TAXATION RESPONDENT

Tribunal: Dr P Gerber (Deputy President)

Date: 6 May 1994

Place: Melbourne

Decision: The Tribunal affirms the decisions under review.

(Sgd) Dr P Gerber
DEPUTY PRESIDENT
REASONS FOR DECISION

1. In an attachment dated 15 July 1991 to his income tax return for the 1991 year of income (exh A, T3, p 5), the applicant taxpayer ("T") advised that:

In 1990/91, I sued the Metropolitan Ambulance Service in the Equal Opportunity Board of Victoria and then in the Supreme Court of Victoria. The amount of $4,701.60 has been paid by me to my solicitors, [firm name], for legal fees and legal costs. I claim this amount pursuant to Section 51 Subsection 1 of the Income Tax Assessment Act 1936.

Should this deduction of $4,701.60 be disallowed, I will follow the normal objection procedures.

2. On 1 August 1991, the respondent issued a Notice of Assessment (exh A, T4, p 9) to the applicant in respect of his 1991 year of income, assessing him as returned.

3. In an attachment dated 2 November 1992 to his income tax return for the 1992 year of income (exh A, T8, p 17), T made the same claim as he had in his 1991 return, except that the amount in this year was $10,938.27.

4. On 16 December 1992, the respondent issued a Notice of Assessment (exh A, T9, p 21) in respect of T's 1992 year of income which denied his claim of $10,938.

5. By a Notice of Objection dated 12 February 1993, T objected against that assessment (exh A, T10, pp 23 & 24).

6. On 2 March 1993, the respondent issued to T a Notice of Amended Assessment in respect of his 1991 year of income, denying his deduction claim of $4,702 for legal costs in that year.

7. By a Notice of Objection dated 25 March 1993, T objected against that amended assessment (exh A, T6, pp 11 & 12).

8. By virtually identical letters dated 6 May 1993 (exh A, T7, p 13, and T11, p 25), the respondent advised T that the abovementioned objections had "been considered and disallowed for the following reasons":

The costs of obtaining employment does not form an outgoing incurred in the course of earning assessable income in the form of wages from that employment. In view of the fact that you were not employed by the Metropolitan Ambulance Service when you applied for the position and when you undertook action in the Equal Opportunity Board of Victoria and the Supreme Court of Victoria the legal costs are not deductable under section 51(1).

You are referred to the Full High Court case of FCT v Maddalena 71 ATC 4161 where it was held that the expenditure (legal fees) incurred by an employee in changing jobs or securing new employment is neither incurred in gaining or producing assessable income. In the words of Menzies J at 4163:

The expenditure would have been incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income.

Further support for the view that it is not enough to show the expenditure is an essential prerequisite to the derivation [of] assessable income can be found in other leading cases including Lunney v FCT, Hayley v FCT (1958) CLR 478, Lodge v FCT (1972) ATC 4174 and Softwood Pulp and Paper Ltd v FCT 76 ATC 4439.

9. Being dissatisfied with those decisions, T applied to this Tribunal.

10. At the hearing of these applications, T represented himself, and the respondent was represented by an officer of the ATO.

11. T gave the only oral evidence at the hearing. The "section 37 documents" became exhibit A, and a document headed "Particulars of Complaint" became exhibit 1. A Statement of Facts agreed between the parties was also provided to the Tribunal. It states:

1. An advertisement appeared in the "Age" newspaper on 4 June 1988 for the position of Ambulance Officer with the Metropolitan Ambulance Service (MAS).

2. The taxpayer who was then a student and a part time taxi driver applied on 9 June 1988 for the above position.

3. On 28 June 1988, by letter, the MAS indicated to the taxpayer that he had been unsuccessful in regard to the application. The taxpayer has at no stage been gainfully employed by the MAS in any capacity.

4. On 1 June 1989 the taxpayer commenced action against the Metropolitan Ambulance Service by writing a complaint to the Commissioner for Equal Opportunity; the complaint was made pursuant to the Equal Opportunity Act (1984).

5. On 30 May 1990 the Applicant in the particulars of complaint claimed:

damages,
punitive damages,
interest,
costs,

and an order that the MAS employ the applicant.

6. The matter was heard before the Equal Opportunity Board ("EOB") on 27 August 1990.

7. On 11 September 1990 an order was made by the EOB that the complaint was to be dismissed. The reasons for this dismissal can be summarised as being that the complaint documents did not reveal in them a political activity or belief alleged by the complainant which raised the question of possible discrimination of a kind which would bring the matter within the Board's jurisdiction.

8. On 5 October 1990 the taxpayer gave a notice of intention to appeal to the Supreme Court of Victoria.

9. On 9 October 1990 Master Wheeler gave a general form of order by the Court that the appeal is not allowed.

10. On 18 March 1991, a decision of Gobbo J in the Supreme Court of Victoria and known as [T] v President and Members of the Equal Opportunity Board & Anor dismissed the application and the Appeal from the Master.

11. The applicant represented himself in a preliminary conference [before the EOB] held on 30 April 1990. After this conference the taxpayer engaged the solicitors [firm name] and then subsequently a barrister.

12. The taxpayer incurred substantial costs in relation to these proceedings. They were fully paid by him and were claimed as tax deductions in the relevant years in which they were incurred.

1991 $ 4702
1992 $10938

13. None of these costs were incurred in relation to any formal course of study or formal course of training.

14. Whilst the applicant's complaint was before the Commissioner for Equal Opportunity (but before the applicant required the Commissioner of Equal Opportunity to refer the matter to the EOB by letter dated 1 March 1990), the taxpayer commenced employment with the Australian Taxation Office (ATO) on 30 January 1990 as a Graduate Taxation Officer.

15. The Applicant was a participant in the Taxation Officer Development (TOD) programme. Included in the training course was a "non technical subject", dealing with EEO issues.

16. The taxpayer is currently employed by the ATO as an Administrative Services Officer (ASO) Class 4. Such officers are graded from 1 to 6 and are ranked below Senior Officers grades, C, B and A who are in turn ranked below Senior Executive Service Officers.

17. 73%* of all ATO staff are employed at the level of ASO Class 4 or below.

*(Source: The 1990/91 Annual Report to the Treasurer by the Commissioner of Taxation, page 171)

18. The ATO requires of all employees an awareness of and/or commitment to Equal Employment Opportunity ("EEO"), Industrial Democracy (ID) and Occupational Health and Safety (OH&S).

19. The four EEO groups identified by the ATO are:

Women,

Aboriginal and Torres Strait Islander people,

People of Non English Speaking background,

People with disabilities.

20. All ATO employees have access to an EEO adviser. This person is specifically employed by the ATO to assist in any enquiries which employees may have.

21. The ATO has available literature on EEO and regular information sheets are also available.

22. There is no requirement for an employee to undertake any external courses or additional training of any kind whatever in relation to EEO.

23. There is no prerequisite course of study or training in order to qualify for the position the taxpayer currently holds in the ATO.

12. The further factual background (as far as is relevant) can be briefly set out.

13. In 1986, T was awarded the degree of Bachelor of Behavioural Science, and in 1991 he received a Graduate Diploma in Economic and Accounting Studies, both from La Trobe University. He has also completed a Graduate Diploma of Education at La Trobe University in 1990, but, for reasons which do not concern me, the Diploma has not yet been awarded ("which is sort of up in the air, it is still in the process of being sorted out").

14. It seems that as early as 1981, T had a special interest in Victoria's ambulance services. Thus, in his evidence-in-chief, he stated that he had been engaged in activities aimed at reforming ambulance services "since, really, going back to 1981" (tr p 5):

I knew a great deal about ambulance services, and I was sort of on the lookout for an advertisement. I always looked in the Saturday's Age to see if there were advertisements for ambulance officers.

15. It is T's belief that his failure to obtain the position of Ambulance Officer with the MAS was due to discrimination "on the basis of my lawful political activities and/or lawful political beliefs." (tr p 5) In support for this belief, T instanced an occasion in 1984, when he appeared before the Public Bodies Review Committee of the Victorian Parliament to criticise the MAS "in the sense that it was an inefficient organisation and people's lives were being put at risk." (tr p 5)

16. On 1 June 1989, i.e. nearly a year after T's job application to the MAS had been rejected and before he joined the Australian Taxation Office ("ATO"), he lodged a complaint with the Commissioner of Equal Opportunity, asserting that the MAS had discriminated against him as a result of his political activities and/or beliefs (a copy of this complaint is not included in the "T" documents). That Commissioner is said to have subsequently advised T that she found no evidence that he had been discriminated against. At T's request that Commissioner then referred his complaint to the Equal Opportunity Board. His complaint was heard by that Board on 27 August 1990 and on 11 September 1990 the Board gave reasons for dismissing that complaint on technical grounds going to jurisdiction. From that point on, the matter gained its own momentum, T appealing the Board's decision to the Supreme Court of Victoria. Master Wheeler dismissed that appeal on 9 October 1990 on the ground that no arguable question of law was demonstrated. Undeterred, T appealed the matter further and the complaint was finally laid to rest when on 18 March 1991, Gobbo J, dismissed the appeal with costs, concluding:

...that the nature of the applicant's beliefs and/or activities in seeking reform of the Ambulance Service and the content of his complaint was not capable of supporting the existence of political activity for the purpose of enabling the Board to find the jurisdiction was made out. (exh A, T15, p 44)

Thus T failed at every turn, poorer, albeit, so it is said, wiser for the experience.

17. In the meantime, T had worked in several areas of the ATO as part of that office's TOD programme and was promoted on appeal by a Promotion Appeal Committee to an ASO4 Training Officer's position on 7 January 1991.

18. The relief T claimed in his Particulars of Complaint to the Equal Opportunity Board are set out below:

1. Damages.

2. Punitive damages.

3. Interest.

4. Costs.

5. An order that:

(1) the Respondent employ the Complainant as an Ambulance Officer Grade 1 forthwith upon the usual terms and conditions including the salary applicable to the position

(2) the Respondent admit the Complainant to the Respondent's superannuation scheme backdated to the date of the first intake after 4 June 1988 (being the date of the advertisement) ("the date of the first intake")

(3) that the Respondent pay the Complainant arrears of salary calculated on the following basis:

(i) that the Complainant was employed on and from the date of the first intake;

(ii) that the Respondent would have promoted the Complainant at least in line with promotions generally obtained by those officers who joined the Respondent on the date of the first intake;

(4) the Respondent refrain from discriminating against the Complainant by reason of his private life.

19. At the conclusion of T's evidence-in-chief, only one aspect was explored in cross-examination, viz whether the purpose of his legal actions was to obtain the abovementioned relief. T replied that:

well, certainly I was claiming all those, there is no doubt about that. But when you talk about ---

At that point the Commissioner's representative interrupted him with the usual forensic "answer `yes' or `no'". T replied:

It was. Those were the claims; they weren't necessarily the purpose."
The matter was left there.

20. I am satisfied on all the evidence, particularly having observed T whilst giving evidence, and having examined the material relating to his actions against the MAS, that T's employment with the ATO at no stage deflected his attempts to become an ambulance officer.

21. T submitted that:

I believe that I have shown the nexus with efficiency, the nexus between my job and efficiency. I believe that I have shown that because of my experience in these equal opportunity matters that I have become better equipped to do my own job [as an ATO officer], notwithstanding the fact that I may not necessarily be promoted immediately because of it. (tr p 13)

Indeed, early in the proceedings the Commissioner's representative stated:

Basically what the Commissioner is saying is that we are not going to argue against T's opinion that he was made more efficient as a result of these legal actions against the Metropolitan Ambulance Service in how they assisted him in his employment with the Australian Taxation Office in gaining more knowledge of legal aspects and improvement in knowledge of equal employment opportunity. (tr p.3)

I was also informed that the quantum of the claims was not in dispute.

22. I am satisfied on the evidence that (i) T's attempt to become an ambulance officer was frustrated by what he saw as political victimisation, (ii) he was prepared to go to great lengths to secure that position, and (iii) as stated above, his employment with the ATO at no stage deflected his attempts to become an ambulance officer. Thus, in no sense can it be said that he undertook his foray into the courts for the purpose of improving his skills to better perform his duties as a tax officer. On the contrary, I find that his sole purpose was to obtain employment with the MAS, with the remainder of the claims in his Particulars of Complaint being no more than the usual form of pleadings. It follows that:

The expenditure would have been incurred in getting, not doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income. (per Menzies J, FCT v Maddalena 71 ATC 4161 at 4163. See also FCT v MI Roberts 92 ATC 4787.)

23. On that finding, I am satisfied that T cannot succeed under the first limb of sub-s 51(1) of the Income Tax Assessment Act 1936 ("the Act"). However, in deference to the careful and plausible argument T presented, I will deal with his submission that it is sufficient for him to succeed to show that the experience he gained by his forensic forays through the courts has resulted in him being more efficient in his job as a tax officer. In support for that proposition, T cited a number of authorities, including FCT v Finn [1961] HCA 61; (1961-1962) 106 CLR 60, and one of the more recent judicial pronouncements in this area in FCT v Studdert 91 ATC 5006.

24. In essence, I ask myself: Is the price paid in the acquisition of knowledge which increases efficiency in one's job an allowable deduction when it can be shown that that knowledge was acquired as an unintended and incidental "spin-off", having no direct relationship with the production of assessable income? Put in those terms I have concluded that the answer is a firm "no".

25. The facts in Finn are too well known to require recapitulation. Suffice it for present purposes that the evidence the Court accepted was to the effect that the purpose of Finn's study tour overseas was to gain the extra knowledge that would give him an advantage for promotion to Principle Architect, the present incumbent being shortly due to retire. In passing, Dixon CJ noted:

If the point be whether the money claimed as a deduction were laid out for the improvement of his capacity to do the work for which he was paid, there could be no doubt that the whole expenditure was directed to that purpose. (at p 65)

Later, his Honour was to observe that:

...so far as motive or purpose is material, advancement in grade and salary formed a real and substantial element in the combination of motives which led to [Finn] going abroad. (at p 67)

26. True it is the courts were slow to articulate that the purpose for which a claimed expenditure was outlaid had a rôle in determining its deductibility pursuant to the first limb of sub-s 51(1) of the Act. However, it seems to me that the purpose in incurring an expenditure which is claimed to be relevant and incidental to the derivation of assessable income has always lain sub silentio in the decided cases dealing with sub-s 51(1) deductions, albeit only recently clearly and fully articulated in Fletcher v FCT 91 ATC 4950. In that case, the Full High Court, after noting that the test for deductibility under the first limb of sub-s 51(1) demands that it is both sufficient and necessary that the occasion of the outgoing should be found in whatever is productive of the assessable income, added:

So to say is not, however, to exclude the motive of the taxpayer in making the outgoing as a possibly relevant factor in characterisation for the first limb of sec 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 characterisation of either the whole or part of the outgoing for purposes of the subsection. (at p 4957)

27. The above view of the law was echoed by Hill J in Smithkline Beecham Laboratories (Aust) Ltd v FCT 93 ATC 4629, where, at 4633, the judge noted:

The parties are in agreement that in determining the deductibility of legal expenses, regard must be had to the purpose (my italics) for which those expenses were incurred. Where the expenditure sought to be deducted is expenditure incurred in the course of litigation, that requires consideration to be given of the purpose of the taxpayer in undertaking that litigation. As was said by Dixon J in Hallstroms Pty Ltd v FC of T [1946] HCA 34; (1946) 8 ATD 190 at 195; [1946] HCA 34; (1946) 72 CLR 634 at 647:

"We are, therefore, remitted to a consideration of the object in view when the legal proceedings were undertaken, or of the situation which impelled the taxpayer to undertake them."

28. Applied to this case, where the litigation was undertaken for the purpose of securing employment as an ambulance officer, it seems to me to be impossible to characterise the expenditure as having any connection with the derivation of T's assessable income as a tax officer.

29. For the sake of completeness I turn to the decision in Wilkinson 83 ATC 4295, a case involving an air traffic controller who sought to deduct from his assessable income the cost of qualifying himself as a pilot. He succeeded both before a Board of Review (Case P124, 82 ATC 629) and on appeal to the Supreme Court. It was "indisputable" on the evidence that being qualified as a pilot made an air traffic controller more efficient and the advancement in the service more certain. Like Finn, it was a material fact that Wilkinson:

incurred the expenditure in question in order to better equip himself to fulfil his responsibilities as an air traffic controller. (at p 4303)

30. T placed considerable reliance on the decision of Hill J in Studdert, which, on one view, might lend support for his submission (cf para 23 above). The case itself involved, like Wilkinson, the claimed deduction of the cost of flying lessons, undertaken by a Flight Engineer who had given evidence that "flying lessons assisted him in his duties as a Flight Engineer in carrying out the duties" set out in his duty statement (91 ATC at 2008). In analysing the decision in Wilkinson as applying to the case before him, Hill J stated at 5015-6:

Although the two matters of promotion and efficiency were both present in that case and in combination enabled his Honour to reach the factual conclusion that he did, it does not follow from this that a factual finding that undertaking the course better equipped the taxpayer to perform his job was not, of itself, sufficient to enable a conclusion in favour of deductibility to be reached in that case. Particularly so, where, as here, it was also found as a fact that a motivation for undertaking the course was the gaining of that proficiency. (my emphasis)

31. I am satisfied that much of what was said in Studdert must be seen against the background of the facts of the case, involving as it did, a Flight Engineer who was motivated to undertake additional training to gain greater proficiency in his job. Any other view would be difficult to reconcile with the statements of the High Court in Fletcher, particularly that set out above.

32. T also submitted that the second limb of sub-s 51(1) and/or s 64A of the Act provided a basis for deductibility of the amounts claimed. Both are predicated upon the existence of a business being carried on for the purpose of gaining or producing assessable income. T submitted that he went into "the business of gambling" when he commenced the abovementioned legal actions: "when you engage in law suits you realise they are a gamble in a layman's terms". Meaning no disrespect to T, I agree with the respondent's representative's description of that argument as "fanciful". I consider I need say no more about the argument than to note that I have not been satisfied on the evidence that T was carrying on any business.

33. For the above reasons, the decisions under review are affirmed.

This is to certify that this and the preceding 12 pages are a true copy of the decision and reasons for decision herein of Deputy President Dr P Gerber.

..............................
Associate