Editors --- "Carer payment: calculation of 'ordinary income'; whether legal costs are an allowable deduction from income derived from a business" [2013] SocSecRpr 23; (2013) 15(3) Social Security Reporter, Article 8

• YCWS and SECRETARY TO THE DFHCSIA
• Background
• Legislation
• Consideration
• Decision

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Carer payment: calculation of ‘ordinary income’; whether legal costs are an allowable deduction from income derived from a business

YCWS and SECRETARY TO THE DFHCSIA

(2013/0444)

Decided: 23rd June 2013 by A.K. Britton

Background

YCWS cared for her husband. She had been in receipt of carer payment since 2006. She also owned a taxi licence and received business income through leasing the taxi.

YCWS received a reduced amount of carer payment in the 2011 tax year on the basis of Centrelink’s assessment of her business income.

YCWS originally argued to Centrelink that she should be allowed to claim income deductions of just under $20,000 for business losses and stamp duty. She also sought to claim legal expenses as an allowable deduction. The legal expenses related to proceedings in the NSW Supreme Court about the sale of the taxi licence, taxi registration plates and a taxi vehicle to YCWS. One of the former owners of the taxi licence and vehicle sought orders to set aside the sale to YCWS. The plaintiff in those proceedings was unsuccessful in his application to the Supreme Court. The legal costs incurred by YCWS in defending the application were just over $12,000.

The Social Security Appeals Tribunal rejected the arguments put forward by YCWS that the business losses, stamp duty and legal costs should be treated as allowable deductions.

YCWS appealed to the AAT (the Tribunal). In her appeal to the Tribunal YCWS conceded that she was not entitled to the deductions on the basis of the business losses and stamp duty. The sole issue to be determined was whether the legal expenses constituted an allowable deduction for the purpose of s.1075(1) of the Act.

Legislation

The ‘Pension Rate Calculator’ in s.1064 sets out the method for calculating a person’s entitlement to carer payment. Section 1064 states that a person’s rate of carer payment is affected by, among other things, their ‘ordinary income’.

Section 1072 of The Act provides:

General meaning of ordinary income

A reference in this Act to a person's ordinary income for a period is a reference to the person's gross ordinary income

from all sources for the period calculated without any reduction, other than a reduction under Division 1A.

Section 1075(1), which is contained in Division 1A, states:

Permissible reductions of business income

Subject to subsection (2), if a person carries on a business, the person’s ordinary income from the business is to be reduced by:

losses and outgoings that relate to the business and are allowable deductions for the purposes of section 8-1 of the Income Tax Assessment Act 1997;...

Section 8-1 of the Income Tax Assessment Act 1997 (Cth) relevantly provides:

General deductions

You can deduct from your assessable income any loss or outgoing to the extent that:

it is incurred in gaining or producing your assessable income; or

it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.

...

However, you cannot deduct a loss or outgoing under this section to the extent that: it is a loss or outgoing of capital, or of a capital nature...

Consideration

The only issue for determination before the Tribunal was whether the legal expenses claimed by YCWS constituted an allowable deduction for the purposes of s.8-1 of the Income Tax Assessment Act.

It was clear from the facts that YCWS derived income from the lease of the taxi in the relevant tax year (2011). The Tribunal also accepted that she incurred legal costs of just over $12,000 in that year and that it was necessary for her to defend the Supreme Court application. The issue between the parties was whether those costs constitute an outgoing of a capital nature.

The Tribunal referred to numerous taxation decisions which considered the definition of outgoings of a capital nature. The Tribunal stated (at para. 13):

In general terms, expenses incurred in preserving, protecting or enhancing a profityielding asset will be regarded as capital expenditure: Sun Newspapers; Smithkline Beecham Laboratories (Australia) Ltd v Federal Commissioner of Taxation (1993)

[1993] FCA 389; 26 ATR 260; Broken Hill Theatres Pty Ltd v Federal Commissioner of Taxation [1952] HCA 75; (1952) 85 CLR 423. In the present case, the applicant incurred legal costs in defending her rights to enjoy a profit-yielding asset. Once achieved, this advantage would remain until circumstances altered materially by, for example, choosing to divest herself of this asset. These costs were a one-off, not recurrent, expenditure. In obtaining judgment in her favour, she preserved her interest in the asset.

Although the Tribunal identified some ‘inconsistencies’ in the caselaw on this point, it nevertheless decided that the weight of the authority was that legal costs incurred in preserving of profit-yielding asset are ‘expenditure of a capital nature’.

The Tribunal did not place any weight on the fact that the Australian Taxation Office appeared to have accepted YCWS’s claim that legal expenses be accepted as allowable deductions. It stated that, absent a private ruling, the Australian Taxation Office’s treatment of the claim was not determinative.

The Tribunal, in deciding that the claimed legal costs were of a capital nature, found that they were not an allowable

deduction under s.1075(1) of the Act and could not be deducted from YCWS’s ordinary income for that tax year.

Decision

The decision of the SSAT was affirmed.

[D.A.]