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The Full Federal Court (Spender, Dowsett and Edmonds JJ) has, by majority, allowed a taxpayer's appeal against the decision of Emmett J, who had held that legal expenses incurred by the taxpayer (a Customs officer) in defending 2 of 3 sets of disciplinary charges were not deductible.

Spender J found for the taxpayer on the basis that, in successfully defending the charges, the taxpayer's expenditure on the legal expenses was "productive of assessable income, in that it restored to the taxpayer that income which had been deducted from his leave entitlements during the period of his suspension".

Edmonds J also found for the taxpayer, but for different reasons. His Honour rejected the notion that the deductibility of the expenditure was dependent upon whether or not the taxpayer was successful in defending the charges brought against him. Rather, his Honour held that the occasion of the expenditure was the taxpayer's employment, which was productive of assessable income. His Honour said, at para 101:

"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 - 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 gaining or producing the assessable income, in the sense that the occasion of the expenditure is to be found in what is productive of assessable income."

Dowsett J (dissenting) held that the expenditure was not deductible, as the conduct the subject of the charges was not performed by the taxpayer in performance of his duties as a Customs officer, but for other reasons.

FCT v Day [2007] FCAFC 193 (Full Federal Court; Spender, Dowsett and Edmonds JJ; 21 December 2007).

For a copy of the decision, go here

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