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TaxTalk – Electronic Bulletin of Australian Tax Developments
decision of the High Court would need
to be carefully considered by employees
seeking to claim deductions for legal fees
relating to disputes with their employer.
The High Court has now handed down its
decision in that case (see Commissioner
of Taxation v Day [2008] HCA 53.
By majority (Justice Kirby dissenting),
the Court has upheld the decision of
the Full Federal Court and has held that
a deduction was allowable for legal costs
incurred by an employee in defending
charges of improper conduct.
In the case (which was featured in
more detail in our February 2008
edition of TaxTalk), the individual had
incurred legal fees in defending charges
brought against him by his employer
for failure to observe standards of
conduct as required under the Public
Service Act 1922 (Cth). The individual
was a senior compliance officer with
the Australian Customs Service. The
Commissioner had disallowed the
claim for deduction in respect of the
legal fees incurred by the employee on
the grounds that the legal expenses
were incurred in defending charges of
conduct extraneous to the performance
of the respondent’s income-producing
activities, and therefore it could not be
said that the expenses were incurred
in the course of gaining or producing
assessable income.
In rejecting the Commissioner’s
submissions and finding in favour of
the taxpayer, the majority expressed
the view that “[w]hat was productive
of his income by way of salary is to be
found in all the incidents of his office in
the Service to which the Act referred,
including his obligation to observe
standards of conduct, breach of which
might entail disciplinary charges. The
respondent’s outgoings, by way of legal
expenses, followed upon the bringing
of the charges with respect to his
conduct, or misconduct, as an officer.
He was exposed to those charges and
consequential expenses, by reason of his
office. The charges cannot be considered
as remote from his office, in the way that
private conduct giving rise to criminal or
other sanctions may be”.
According to the majority, it was
necessary for the taxpayer “to obtain
legal advice and representation in order
to answer the charges and to preserve
his position.....Whether the charges were
well-founded, a fact which had not been
established by the time the Full Court
determined this matter, is not relevant
to the question of deductibility”.
While the decision is welcome news
for taxpayers, the following part of the
majority’s judgement will need to be
taken into consideration by all employees
seeking to claim a deduction for legal
costs incurred in disputes with their
employer – “[t]he incurring of expenditure
by an employee to defend a charge
because it may result in his or her
dismissal may not itself be sufficient in
every case to establish the necessary
connection to the employment or service
which is productive of income. Much
will depend upon what is entailed in
the employment and the duties which
it imposes upon an employee”. Earlier,
as mentioned above, the majority of the
Court had said that “the charges cannot
be considered as remote from his office,
in the way that private conduct giving
rise to criminal or other sanctions may
be”. Based on this comment by the High
Court, legal expenditure incurred by
an individual to prevent the individual’s
employment being terminated because of
conduct not directly associated with the
workplace will likely be non-deductible.
For further information, please contact your
usual PricewaterhouseCoopers adviser, or:
Neil Napper, Partner
(02) 8266 6647
neil.napper@au.pwc.com
Paul Brassil, Partner
(02) 8266 2964
paul.brassil@au.pwc.com
Glen Frost, Partner
(02) 8266 2266
glen.frost@au.pwc.com
Paul O’Brien, Partner
(03) 8603 4182
paul.obrien@au.pwc.com
The Commissioner’s view on
issues relevant to SMSFs
Draft Self Managed Superannuation
Funds Ruling SMSFR 2008/D5, issued
on 5 November 2008, sets out the
Commissioner’s preliminary views on the
meaning of ‘asset’, ‘loan’, ‘investment
in’, ‘lease’ and ‘lease arrangement’
being the core concepts in the definition
of ‘in-house asset’ of a self managed
superannuation fund (SMSF) as
defined in the Superannuation Industry
(Supervision) Act 1993 (SISA).
By way of background, the ‘in-house
asset’ rules in the SISA ensure the
investment practices of superannuation
funds are consistent with the
Government’s retirement incomes policy,
being that superannuation savings
should be invested prudently for the
purpose of providing retirement income.
The ‘in-house asset’ rule prevents the
investment in or holding of ‘in-house
assets’ which have market value
exceeding 5 per cent of the value of fund
assets. If the ‘in-house’ limit is breached,
then the fund trustees must reduce the
level of ‘in-house assets’ within twelve
months. Furthermore, an ‘in-house asset’
cannot be acquired by a SMSF if the
acquisition will cause the 5 per cent limit
to be exceeded.
‘In-house asset’ is defined in the SISA as
“an asset of the fund that is a loan to, or
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