SUPREME COURT OF NEW ZEALAND
INLAND REVENUE COMMISSIONER (NZ) v CASTLE
Beattie, J.
28 June, 23 July 1971 - Wellington
Beattie, J This is an appeal from the determination of the Board in respect of a case stated by the Commissioner of Inland Revenue following upon an objection by the respondent to the appellant's assessment of the respondent's assessable income for the years ended 31 March 1968 (hereinafter called "the 1968 year") and 31 March 1969 (hereinafter called "the 1969 year") respectively under the Land and Income Tax Act 1954 (NZ).
In calculating his assessable income for the purposes of completing returns (such assessable income being the respondent's share of profits derived from a partnership of which he was a member and which practices at Wellington as barristers and solicitors), the respondent sought to deduct as expenditure or loss exclusively incurred in the production of his assessable income for the 1968 year, and as expenditure or loss in gaining or producing assessable income for the 1969 year, the sums of $300 in respect of each of the said years. These sums were a proportion of outgoings and depreciation for each of such years at a residence jointly owned by the respondent and his wife, and occupied by them and members of their family.
The appellant did not consider the respondent was entitled to make such deductions and the question for the Board's determination was whether the appellant had acted incorrectly in disallowing the said deductions. After the matter was heard before the Board on 20 October 1970 it reserved its decision.
At the hearing of the case stated, the following facts were proved or admitted or agreed:-
1 At all material times the respondent was engaged in the practice of a barrister and solicitor at Wellington in partnership with certain other persons.
2 In furnishing to the appellant for income tax purposes an amended return of income for the 1968 year and a return of income for the 1969 year, the respondent claimed deductions of $300 in respect of use made, for the purpose of his profession in each of the said years, of a dining room (hereinafter called "the dining room") in the residence.
3 The residence was settled as a joint family home under the provisions of the Joint Family Homes Act 1964, having been so settled by the respondent.
4 The said sum of $300 represented approximately one-sixth of the following total annual sums:-
(a) Interest on mortgage, rates and fire insurance premium in respect of the residence.
(b) Interest on that part of the respondent's bank overdraft which was originally borrowed to provide part of the respondent's equity in the residence.
(c) Interest on a loan on the respondent's life policies which loan was originally used to provide part of the respondent's equity in the residence.
(d) Depreciation on the structure of the residence at two and one-half per cent.
The respondent alone paid all such sums.
5 The respondent used the dining room in the residence for the purposes of the practice of his profession to the extent and in the manner detailed in subparagraph 8 hereof.
6 The dining room was furnished with a dining table, six dining chairs and a sideboard. It had no other furniture or books of reference which in any way altered, so far as appearances were concerned, its essential character as a dining room. The dining room was used for entertaining the respondent's guests on no more than six occasions in each year.
7 Apart from service rooms and passages there were six rooms in the residence including the dining room. The total area of these six rooms was 1,093 square feet and of the dining room 168 square feet.
8 The general nature of the professional work performed by the respondent in the dining room was as follows:-
(a) The perusal of documents on behalf of an insurance company, for which the said partnership acted, which had a substantial mortgage business; matters of complexity and work connected with flat-owning companies and overseas takeovers.
(b) On a few occasions the interviewing of clients and land agents.
Such use was mainly in the evenings and not more than 36 occasions in each year.
9 The principal actual use to which the dining room was put in the relevant years was the use to which the respondent put it for professional work.
10 The amount of the expenditure referred to in subparagraph (4) above had not been increased by reason of the fact that the respondent used the dining room for the purpose of his profession.
By a written decision dated 10 November 1970, the Board directed that for each of the two years concerned the respondent should be allowed a deduction of $100. The questions for determination by this Court are as follows:-
1 Was the determination of the Board, directing that the appellant's assessment of income tax payable by the respondent for the 1968 year be altered to allow for a deduction of $100 in respect of the respondent's use of the residence wrong and, if so, in what respects?
2 Was the determination of the Board, directing that the appellant's assessment of the amount of income tax payable by the respondent for the 1968 year be altered to allow for a deduction of $100 in respect of the respondent's use of the residence wrong and, if so, in what respects?
On appeal, the Commissioner submits that the Board was wrong in allowing any deduction. This is the first time, I am informed, that this particular type of case has come before the Court since the 1968 amendment which amended s 111 of the Land and Income Tax Act 1954, to bring it into line with the Australian statutory provisions. Section 31(1) of the Australian statute is similar, although there are differences. It is necessary to consider the 1968 and 1969 years separately because of differing statutory provisions. In the course of giving its reasons, the Board referred to the comparable statutory provisions in the United Kingdom and Australia, but it drew attention to the differences in the statutory language and also stressed that a decision may often be read only by having regard specifically to the facts of a particular case. So far as the 1968 year is concerned, the Board said it did not propose to traverse again the authorities on the former s 111 of the Act considered by it on previous occasions. It adverted to a practice adopted by the Inland Revenue Department in relation to the use of dwellings for business purposes as stated in certain departmental publications produced at the hearing. It also referred to the Department's attitude in the present case by quoting from letters addressed by the Department to the respondent. In considering the facts, the Board made it clear that the respondent had not over-emphasized the extent of the work which he found it necessary to perform at his home, going on to say that such work was not performed merely to meet his personal convenience but was necessarily performed in the carrying out of, and because of, the exigencies of the duties devolving upon him as a member of the partnership to which he belonged. Its conclusions, so far as the 1968 year was concerned, were that although the respondent had not set apart and made use of the room in his residence exclusively for purposes connected with the practice of his profession, he had, nevertheless, from time to time made use of the dining room to such an extent as warranted acceptance of the view that part of the expenditure incurred in relation to that room was exclusively incurred in the production of his assessable income for such income year.
With reference to the 1969 year, the Board stated that the new s 111 of the Act and the addition to s 112 of paragraph (i) thereof had resulted in the introduction of a new concept in New Zealand as to the expenditure and loss which would henceforth be allowable as deductions in the administration of tax law. Of some importance was the Board's consideration that, although many of the cases of the type with which it was dealing still fell to be disposed of according to their own particular facts, reported Australian decisions would probably assume greater relevance than was formerly the case. As I have mentioned, it is necessary to decide the questions by reference to the differing statutory provisions applicable in each of the years concerned. In the 1968 year, s 111 of the said Act as then enacted was as follows:-
"111. Expenditure or loss exclusively incurred in production of assessable income-
(1) In calculating the assessable income of any person deriving assessable income from one source only, any expenditure or loss exclusively incurred in the production of the assessable income for any income year may, except as otherwise provided in this Act, be deducted from the total income derived for that year.
(2) In calculating the assessable income of any person deriving assessable income from two or more sources, any expenditure or loss exclusively incurred in the production of assessable income for any income year may, except as otherwise provided in this Act, be deducted from the total income derived by the taxpayer for that year from all such sources as aforesaid."
By s 12 of the Land and Income Tax Amendment Act 1968 the following section was substituted for s 111 above so that, for the 1969 year, s 111 of the said Act was as follows:-
"111. Expenditure or loss incurred in production of assessable income -In calculating the assessable income of any taxpayer, any expenditure or loss to the extent to which it-
(a) is incurred in gaining or producing the assessable income for any income year; or
(b) is necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income for any income year- may, except as otherwise provided in this Act, be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss is incurred."
In considering s 111 for the 1969 year, it is also necessary to consider the relevant parts of s 112 of the said Act which were as follows:-
"112. Certain deductions not permitted-Notwithstanding anything to the contrary in
section 111 of this Act, in calculating the assessable income derived by any person from any source, no deduction shall, except as expressly provided in this Act, be made in respect of any of the following sums or matters: …
(i) Any expenditure or loss to the extent to which it is of a private or domestic nature."
It therefore seems there are two matters for consideration on appeal. The first is one of principle, as to whether the respondent is entitled to any deduction in calculating his assessable income in respect of the specified outgoings and depreciation on the house property and, secondly, the quantum if the answer to the first issue is "Yes". The Board found for the respondent on the first issue but on the second it did not wholly accept the submissions of either party. Before the Board, the appellant submitted that if there was to be any deduction it should approximate only one-tenth of the amount claimed, and the respondent while submitting the Board was correct in rejecting the appellant's submission now contends that the Board should have gone further and accepted the respondent's figure of $300 for each year and by not doing so it erred in law. I intend to deal first with the 1969 year.
Our new s 111 is substantially similar to s 51(1) of the Income Tax Assessment Act 1936-1969 in Australia, which reads:-
"51. Losses and outgoings-(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.
(2) Expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature …"
In essential tests under (a) and (b) of our statute, it seems the language is virtually identical. The only reported New Zealand decision as to the interpretation of the new s 111 is Tout v Inland Revenue Commissioner (NZ) (1970), 1 ATR 705. The appellant in this case was an Inspector (employed by the Inland Revenue Department) who claimed a deduction for expenses relating to education and books in connexion with a course of lectures and for travelling expenses said to be in connexion with his work. Moller, J., was concerned with the effect of s 111(a). In upholding the appellant, he said, at p 712: "As I have already said there are numerous authorities in Australia to which one can refer in the hope of getting guidance in matters of this kind. But a perusal of them (and I believe that I have perused them all) serves to emphasize two points: The first is that the decision in each case must eventually depend upon the totality of facts accepted by the tribunal in that particular instance; and the second is that the line dividing the cases in which it is refused is not only thin to the point of its approaching obliteration, but it is also inclined to be so wavy and irregular in its form that it is very difficult indeed to place with certainty one case on one side of it and another case on the other. This is particularly brought home to the reader when he finds dissenting opinions being expressed by experienced members of Boards of Review, or, if not dissenting opinions, agreement with the majority being reached only after considerable hesitation. …" I have, like Moller, J., read a large number of reported Australian decisions and, with respect, I intend to follow that judge when he said, at p 707: "Throughout these judgments one finds constant reminders that each case of this sort must depend on its own facts."
In considering s 111(a), it appears to me that deductibility depends on the character of the expenditure or loss in the sense of it being incidental or relevant to the gaining or producing of assessable income. Like our Board of Review, I have had regard to the judgment delivered by the High Court of Australia in Lunney v Federal Commissioner of Taxation: Hayley v Federal Commissioner of Taxation (1958), 100 CLR 478; 7 AITR 166, where, in a joint judgment (100 CLR, at pp 495, et seq.; 7 AITR, at p 177) Williams, Kitto and Taylor, JJ., said: "The fact that s 51 was intended to deal with a great variety of items of expenditure made it inevitable that it should be couched in general terms and both that section and its immediate predecessor have been the subject of judicial consideration on a number of occasions. In terms, the section provides that all losses and outgoings to the extent to which they are incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature. The language is simple enough and, in the main, little difficulty is encountered in recognizing those items of business expenditure which qualify as deductions. But in the nature of things it has been impossible to devise, as a substitute for the words of the section, a simple formula which will readily and precisely mark the limits of the operation of the section. Yet, in the course of dealing with individual cases, it has been necessary to devote particular attention to the words 'in gaining or producing the assessable income' and 'incurred in carrying on a business for the purpose of gaining or producing such income' and to attempt to express precisely what those words mean.
"For the purpose of advancing the appellants' cases counsel, naturally enough, seized upon observations which have been used from time to time in attempts to elucidate the meaning of these expressions. In particular, it was said, expenditure is invested with the requisite character if it may properly be regarded as 'incidental or relevant' to the derivation of assessable income. This expression has been used in a variety of cases where it has been necessary to deal with problems arising under the section. For instance, in dealing with the immediate predecessor of s 51 in Amalgamated Zinc (de Bavay's) Ltd v Federal Commissioner of Taxation (1935), 54 CLR 295, it was said: 'The expression "in gaining or producing" has the force of "in the course of gaining or producing" and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself.'
"In dealing with the same section in W. Nevill & Co Ltd v Federal Commissioner of Taxation (1937), 56 CLR 290, at p 305; 1 AITR 67, at p 75, it was said that: '… it is necessary that the expenditure should have been incurred in gaining or producing the assessable income, that is, the assessable income of the given financial year or accounting period. This means that it must have been incurred in the course of gaining or producing the assessable income. It does not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income.'
"The same expression was again used in Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949), 78 CLR 47; 4 AITR 236, when it became necessary to solve a problem arising under s 51. In that case it was said that: 'For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end.'
"This passage was repeated in Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956), 95 CLR 344; 6 AITR 379. Examination of these cases, however, readily shows that the expression 'incidental and relevant' was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section. That this is so appears from some of the brief passages already quoted and is made quite clear by consideration of the reasons in the cases referred to. In Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation, supra, at CLR pp 56, 57, the passage quoted above was immediately followed by the observation: 'The words "incurred in gaining or producing the assessable income" mean in the course of gaining or producing such income.' Thereafter, it was said: 'In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.'
"In the context in which they have been used, the expressions relied upon by the appellants have been intended as a reference, not necessarily to the purpose for which an item of expenditure has been incurred, but, rather, to the essential character of the expenditure itself. In each of the cases except the last the expenditure in question was essentially expenditure of a business character but the question was whether it was expenditure 'incurred in gaining or producing the assessable income' or necessarily 'incurred in carrying on a business for the purpose of gaining or producing such income' whilst in the last-mentioned case the occasion of the loss in question was properly regarded as an 'incident' of the carrying on of the business which produced the taxpayer's assessable income."
The test referred to in that long passage was applied by Moller, J., in Tout's Case when he said (1 ATR, at p 712): "… I find that the course of study undertaken by the appellant was of a character which was relevant and incidental to the gaining of his assessable income, and that it was incurred wholly in achieving that end. This means that I do not have to make any apportionment to meet the requirements of s 112(i) ." That observation was made by Moller, J., after a very extensive review of the dicta in the Australian cases. I place some emphasis on the expression "as of a character which was relevant to and incidental to the gaining of his assessable income".
The third matter for consideration relates to s 111(b) which, in its terms, applies to taxpayers engaged in business, such as this respondent. The High Court of Australia, in Ronpibon Tin NL v Federal Commissioner of Taxation (1949), 4 AITR 236, at p 244; 78 CLR 47, at p 56, considered the word "necessarily" in s 111(b) and the effect of that section is as follows: "The word 'necessarily' no doubt limits the operation of the alternative, but probably it is intended to mean no more than 'clearly appropriate or adapted for' (cf. per Higgins, J., in Commonwealth v Progress Advertising & Press Agency Co Pty Ltd (1910), 10 CLR 457, at 469). The word 'business' is defined by s 6(1) to include profession, trade, employment, vocation or calling, but not occupation as an employee. The alternative in s 51(1) therefore covers a wide description of activities. But in actual working it can add but little to the operation of the leading words, 'losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income'. No doubt the expression 'in carrying on a business for the purposes of gaining or producing' lays down a test that is different from that implied by the words 'in gaining or producing'. But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative."
In considering the alternative, it is clear that the definition of 'business' in the New Zealand statute is as extensive as in the Australian Act to which the Australian High Court referred. Secondly, the close relationship between the two limbs of s 111 is shown by the use in s 111(b) of the vital words in s 111(a) namely, "gaining or producing the assessable income". With regard to the expression "carrying on a business", I consider that it means "in the course of carrying on a business". In doing this, I applied the same interpretation given to the word "in" in its context "in gaining or producing" where the High Court in Lunney's Case , supra, says it is the force of "in the course of gaining or producing".
The appellant contended that the deduction claimed by the respondent for the 1969 year could only be under s 111(a) on the basis that he has already had his profit from the business he has carried on as a solicitor, and that this particular deduction claimed is a personal one much the same as the deduction claimed on behalf of his children. Such submission, in my view, overlooks the finding of fact by the Board of Review, supra, that such work was not performed at the respondent's dwelling merely to meet his personal convenience, but was necessarily performed in the carrying out of and because of the exigencies of the duties devolving on him as a member of the partnership to which he belongs. The next matter for consideration relates to apportionment. In my opinion, s 111 in its terms clearly allows for apportionment of expenditure and losses to provide for the deduction of part and the disallowance of part. One looks at s 111 where the words "to the extent to which …" are used. Then there is further reference in s 110A where there is a specific reference to apportionment and, again, in s 112(i) and (j) where the phraseology is governed by the words "to the extent to which". The High Court of Australia put the matter thus at p 58(78 CLR) of Ronpibon's Case, supra,: "The question is: how far was it incurred in the course of, how far was it relevant to or incidental to, gaining or producing assessable income?"
Again, at p 59, the High Court said: "It is perhaps desirable to remark that there are at least two kinds of items of expenditure that require apportionment. One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently. Of this directors' fees may be an example. With the latter kind there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income. It is an indiscriminate sum apportionable, but hardly capable of arithmetical or ratable division because it is common to both objects."
The next principle which I follow from Mr Richardson's argument is that s 111 must be applied to the taxpayer's actual income-earning activity and is not to be based on a hypothesis as to how he might have organized his affairs. In Europa Oil (NZ) Ltd v Inland Revenue Commissioner (NZ) (1970), 1 ATR 737; [1971] NZLR 641, in the majority judgment delivered by Lord Wilberforce in the Privy Council (1 ATR, at p 744; [1971] NZLR, at p 648) his Lordship said: "In any question as to the legitimacy of a reduction claimed, two points must be borne in mind. First the Crown is not bound by the taxpayer's statement of account, or by the heading under which expenditure is placed. It is entitled to ascertain for what the expenditure was in reality incurred. This is clearly the basis upon which the Board dealt with the two New Zealand cases of Ward & Co Ltd v Commissioner of Taxes, [1922] NZ PCC 625; [1923] AC 143, and Aspro Ltd v Commissioner of Taxes, [1932] NZ PCC 630; [1932] AC 683. The High Court of Australia took a similar approach in Ronpibon Tin NL v Federal Commissioner of Taxation (1949), 78 CLR 47; 4 AITR 236. It is, moreover, clear that the form of the New Zealand s 111 entitles the Commissioner to apportion expenditure between what is exclusively incurred in the production of assessable income and what is not. But secondly, a trader is entitled to conduct his business and to acquire his trading stock in his own way. It is not for the Crown to say that he might have acquired his stock at a lesser price and to deny him any deduction above what it considers he should have paid. This was the basis, as their Lordships understand it, of the decision of the High Court of Australia in Cecil Bros. Pty Ltd v Federal Commissioner of Taxation (1962), 111 CLR 430; 8 AITR 523. The proposition that 'it is not for the Court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent', was one which the High Court considered to be soundly based on authority and with which their Lordships fully agree. Although s 111 differs from the relevant Australian section, this makes no difference to the application of the principle."
I therefore reject the argument on behalf of the Commissioner that the taxpayer could have earned this practice income without using his home.
Having stated these various principles, I will now endeavour to apply them to the facts of this case. I have already set out the specific findings of fact, and I emphasize the finding that the respondent used the dining room in the residence for the purposes of the practice of his profession to the extent and in the manner detailed in subparagraph 8 of the proved facts. The nature of the work carried out directly produced professional income as distinct from, for example, keeping up with law reports and reading of journals, etc. In my view, the vital finding of fact in this case was that the principal use to which the dining room was put in the relevant years was for professional purposes. The Board of Review, in its judgment, concluded in its findings as to the business use that respondent's expenditure in relation to his residence for the 1969 year was not wholly of a private or domestic nature as contemplated by s 112(i) of the Act, but was in part incurred in gaining or producing his assessable income for that year. The non-business use was found to be very limited, namely, no more than six occasions in each year. Accordingly, with this limited non-business use, the room was available for professional purposes whenever the respondent required it.
I turn, therefore, to the respondent's position under s 111(a) and, applying the test stated in Tout's Case, supra, as to whether the particular activity (namely, the use of the house) was of a character which was relevant to and incidental to the gaining of assessable income, in my opinion the Board of Review has not erred in law either by a misconstruction of the statutory language or reaching a finding of fact inconsistent with the application of proper legal tests. In Inland Revenue Commissioner (NZ) v Walker (1962), 9 AITR 18; [1963] NZLR 339, a case which related to the question of gains on land transactions, Gresson, P. (9 AITR, at p 20; [1963] NZLR, at p 353), said: "It was contended that as the judgment appealed from amounted to findings of fact or inferences of fact, it was as such unassailable upon an appeal in law. I do not accept that contention since the proper construction of the statute is involved which is necessarily a matter of law."
I am, of course, reminded (in the judgment of Gresson, P. (NZLR), at p 353, and of North, J., as he then was, at p 360) that the appellate Court's jurisdiction to intervene can only arise if the lower Court has misunderstood the statutory language or made a finding itself inconsistent with the evidence and contradictory to it. For my part, by the excerpts I have given, in my opinion there was proper evidence to support the Board's findings of fact and there was no misconstruction of the statutory provision. In the first place the use of the property was in part for the carrying out of professional work producing directly assessable income to the partnership in the legal firm. So far as s 111(b) is concerned, the Board has made specific findings of fact couched in the language of s 111(b). Nevertheless, while the appellant submitted that the respondent's working at his home should be regarded as a domestic or private matter, such submission disregards the finding of fact of the Board of Review and, consequently, the argument does not raise a question of law. In any event, the submission, in my opinion, overlooks the law relating to the wisdom of expenditure that I have endeavoured to set out earlier in this judgment. The Commissioner endeavours to draw a distinction between the taxpayer who has specifically set aside a room as a study or office, and one who has not done so but, to my mind, the important question is: what was the use of the particular room? It, surely, cannot turn on a mere name given to the room and, in this particular case, makes no difference in my opinion if the family called the room "the study"-nor can the conclusion be affected if law books were placed in the dining room to give it some semblance of a study. The room suits the respondent for the work he does and the primary use is for that purpose.
Mr Blank submitted that the facts point to a conclusion that the nature of the one-sixth part of the expenditure was the same as the other five-sixths, namely, of a private or domestic nature, and that the mere fact that the room was used on 36 occasions mainly in the evenings over a period of a year cannot alter the nature of this expenditure. He submitted that the theme of the Australian authorities is that expenditure must be incidental to or relevant to the derivation of an assessable income. In submitting this, he emphasized the difference between living expenses and business expenses. In Lunney's Case, supra, it is true that the Court rejected the notion that expenditure incurred by a taxpayer in order to travel from his home to his place of business is, in any sense, a business expenditure incurred in the course of earning assessable income. Mr Blank submitted that here the taxpayer would incur the same expenditure whether or not he worked at home. He drew on two decisions reported in the Commonwealth Taxation Board of Review Decisions (16 CTBR (NS) Cases 1 and 2) to support this argument. Both these cases were heard in August 1970. Case 1 involved a senior lecturer at a university who maintained an extensive library and study facilities at the homes he occupied. He claimed, as certain deductions, proportions of outgoings with respect to the homes. The Commissioner allowed a small sum for insurance and a very small sum in respect of the other expenditure, but disallowed the rest of the claims. The Board of Review (by a majority confirming the assessment) considered that the claims deductions did not have a character which would bring them within the provision of s 51. The Board decided that the taxpayer elected to do a considerable part of his university work in the more congenial environs of his own home, this involving some modification of domestic arrangements; the family was denied the full enjoyment of the room he used as a study while he was working; but the character of the costs involved was not changed in any way. One member of the Board said: "… that if one were to adopt the view that a professional man should make some use of his home for the contemplative aspects of his profession, if he were entitled per se to a deduction of the outgoings, that could lead to some modern Archimedes making a claim connected with his bathtub, or a second Churchill bringing his bed under consideration." I merely quote this excerpt to show that that judgment refers to the contemplative aspects.
Case 2 concerned a medical practitioner who, while a member of a partnership, maintained a portion of his home to see special patients and attend to emergency cases. He claimed a deduction of one-third of certain outgoings. The Commissioner allowed a deduction of one-tenth and that decision was upheld by the Board of Review. There the Board, in its judgment, found no problem concerning the room being exclusively set aside for use in the taxpayer's practice, but otherwise with those parts of the house which were used incidentally in connexion with the practice.
Holding as I do that s 111 is applicable to this particular case, Mr Blank nevertheless adopted the reasoning in these cases being referable to domestic or private use. I rather think that submission is answered by my earlier indication that there is a finding of fact by the Board that the use by Mr Castle of this room was not an incidental one-it was primary-and the principal purpose is a finding of fact which I consider is justified on the evidence.
I next consider the matter of apportionment or quantum under s 111. Little guidance seems to be derived from the notion as to how apportionment in these classes of cases is to be fixed. In Ronpibon's Case the High Court remitted the matter for quantification by the judge of the deduction and gave a direction that the judge should decide, as a matter of fact, what part or proportion of the expenditure in respect of which the deduction was claimed was fairly and properly attributable to gaining the assessable income. Mr Richardson submitted that a fair and proper deduction should relate to the part of the respondent's house the predominant use of which was for professional work, determined on the basis of how the particular rooms were used and available for use. Mr Blank, however, contended that if the Court upheld the Board in permitting some deduction, the proper basis would be a daily one, namely, 36 occasions over 365 days; equals one-tenth. This relates, of course, primarily to the outgoings. Counsel for the respondent submitted the fact that a room is in actual use for part only of the time is not necessarily a ground for refusing the full deduction. The crucial matter is its use and availability for use for business purposes. He instanced that most office buildings are in use about 50 hours a week-and it has never been suggested by the Department that the deductions claimed for outgoings should be 50/168 to reflect that position. Again, it is true that some buildings are only in part use for certain times of the year, yet full deductions have been properly allowed.
In Westcott v Bryan (1969), 45 TC 476, the Court of Appeal was considering a case where the respondent, the managing director of a pottery company, which exported 60 per cent of its production to the USA and elsewhere, was required by his company to occupy a house near the factory at which he could entertain customers. He paid the company a rental and a sum for services. He also paid the rates, the company paying other outgoings such as gas, electricity, insurance, telephones and so on. Guests were entertained on 72 days including 25 where the guests stayed overnight. The Court of Appeal held that since part of the expense in question, even though not a severable part was for the benefit of the company and not the respondent, and apportionment was required. The case turned on certain statutory provisions. In the Chancery Division, Pennycuick, J., in dealing with the question of apportionment (at p 487) said:-
"It is, I think, common ground between Counsel that the broad basis of apportionment is to see what shares of the total expenses are fairly attributable to the use of the house by Mr Bryan and the company respectively. The difficulty lies in working out that proportion. It is really impossible, in a case of this kind, to prescribe any precise formula. Mr Phillips did not wish to present a formula. He said, however, that if one had to have a formula one should apportion the expense in the ratio that the area occupied by the guests multiplied by the hours in which the area was so occupied bears to the area of the whole building multiplied by the hours in the year of assessment. Mr Rees, likewise, did not wish to have any precise formula adopted, but he said that if a precise formula is to be adopted then he would wish to go back to the floor space formula which was advanced before the General Commissioners.
"So far as I am concerned, I do not think it would be right to attempt to lay down any precise formula applicable even to this case. Still less is it remotely practicable to lay down a formula applicable to all cases. Every case must plainly depend on the particular circumstances of that case. What I have to do is to endeavour as best I can to say what proportion of the total expenses is fairly attributable to the use of the house by Mr Bryan as his home and what proportion is fairly attributable to the use, or availability for use, of the house by the company. I insert that word 'availability' because Mr Rees, in an argument which impressed me, pointed out that this is not merely a matter of saying to what extent the house was actually used by the company's invitees; one must also bear in mind that the house had to be kept in a state of availability for such invitees, whether they came or not.
"It is only possible to reach this conclusion on a rough and ready basis."
The case went to the Court of Appeal but there was no discussion on the apportionment question. The Board of Review, in this case, had in mind that decision when giving judgment.
I again repeat that the Board has found, as a fact, that there was only a small non-business use of this room and the respondent had the use of it for professional purposes whenever required. The respondent, having satisfied both the Board and myself that the principal use of the room was for professional use, to what extent should the quantum of deduction be affected by the occasional use for other purposes? Mr Richardson submitted the occasions were so few that they should be disregarded or, alternatively, that if this was too significant a matter to be put to one side, then there should be a mathematical calculation as to time, namely, of using the fraction 36/42 and thus allowing six-sevenths of the expenditure calculated on a space basis. On a space basis apportionment the respondent claimed one-sixth but conceded that if a space and time basis was proper it should be six-sevenths of one-sixth, which equals one-seventh, and the deduction allowed by the Board should be increased accordingly by this Court.
Turning to certain specific items, I refer, first, to the interest payments mentioned in paragraph (4) of the proved facts. Such expenditure may fall for consideration under s 112(g). Mr Blank, however, submitted that the fact that the Commissioner refused to allow the deduction on that issue indicates he was not satisfied that it was payable on capital employed in the deduction of the assessable income as that expression is used in s 112(g). I would be closing my eyes to events as they happened if I considered this was the way the Commissioner had approached the matter. The correspondence annexed to the case stated, particularly the letters from the respondent dated 4 March 1969 and 24 April 1969, together with the Commissioner's practice, indicates to me that he has always viewed globally the question of interest under s 111 and not under ss 112and 113. The correspondence I have referred to treats the matter globally as involving one question as to whether the room was used predominantly for business purposes.
In a letter dated 15 May 1969 one of the appellant's examiners said: "I am sorry if my letter of 31 March gave you the impression that an allowance could be made for partial use of your home for business purposes. This is not so, as the District Commissioner considers that since solicitors maintain a place of business, the costs of which are deductible for tax purposes, it is not reasonable that they should need to use their private homes for this purpose. If this house is, in fact, used, this would be done to suit the convenience of the practitioner and would not qualify as a deductible item." Again, by a letter dated 15 July 1969, the respondent put his case on a global basis to the Commissioner and, by a further letter dated 14 August 1969, the Department replied: "As the room used in your home was set aside as a dining room and not as a study, expenses incurred cannot be allowed as a deduction, even though you use this room to do work at home. The fact remains that it is furnished and remains set aside as a dining room."
I should mention that only a small portion of the $300 expenditure relates strictly to items falling under s 111. Some 80 per cent of the expenditure relates to interest and depreciation. It is clear to me, as it was to the Board, that both the appellant and the respondent had in mind there was only one question and not three separate issues arising under the Act, as contended for by Mr Blank. He argued that the $300 claimed can be divided into three types of expenditure, namely, rates and fire insurance premiums; secondly, interest on mortgage and overdraft interest, and interest on loans on life policies; and thirdly, depreciation. Apart from the correspondence, the way the Commissioner viewed the matter appears to be borne out by his practice which is referred to in the judgment of the Board where it sets out references from three different departmental publications, being Bulletin No. 15 of October 1964, No. 22 of May 1965 and a further publication of March 1970. Some examples from those publications include the following statements:-
Bulletin No. 15, dated October 1964:
"Depreciation allowed on dwelling used for business purposes: If you are in business you may claim a deduction for part of the depreciation and other expenses on your residence if:-
a specific portion is set aside as a study or business office, and work is carried out there.
"This deduction will be allowed even if you have an official place of business elsewhere. You should make your claim to your local tax office and show:-
(1) Amount of depreciation you are claiming and how it is arrived at.
(2) Other outgoings and amounts. (3) Number of rooms set aside for office or study. (4) Total number of rooms in your residence.
In Bulletin No. 22 of May 1965 there is a further paragraph which reads:-
"Residence used for business purposes-allowance extended. In Public Information Bulletin No. 15 we say that if you are in business you may claim part of the depreciation and outgoings on your residence if:-
a specific part is set aside as a study or business office, and work is carried out there.
"However, we realize that there are taxpayers whose home is the sole place of business but a specific part is not set aside for business use. If this is so in your case an allowance may still be made for depreciation and outgoings on your residence for the part that is used for business purposes. These claims will be considered on the facts of each case."
In a further departmental publication dated March 1970, indicating to salary and wage earners the nature of the expenses they might claim in their tax returns, there appears under the heading of "Use of your Home" the following statement:-
"If you have set aside part of your home wholly for your work and are using it to help produce your income, you may claim the expenses involved. Expenses-rent or interest, rates, insurance, depreciation and repairs-may be split in the proportion which the rooms used bear to the whole area of your home.
"No deduction is allowable when only part of a room is set aside.
"
Allowable To Room used for storage Representative Study School teacher Dark room Photographer
In my opinion, the correspondence therefore is in accord with the departmental practice of treating all deductible items on a global basis. In any event, with regard to the Commissioner's submissions that the respondent, so far as interest is concerned, is not within s 112(g), I consider that to the extent to which the house is used for professional purposes, the borrowed capital is employed in the assessment of assessable income. In saying this, I rely on the finding of fact by the Board which I have repeated on two earlier occasions, that the use of the property in this way was necessary in the carrying out by the respondent of his duties as a member of the partnership. In my view, therefore apportionment should take place on the same basis as under s 111. Likewise, with depreciation, Mr Blank submitted the Commissioner had exercised his discretion under s 113(2) against the respondent and that no allowance for depreciation should be made on the basis that the Commissioner was not satisfied that complete and satisfactory accounts had been kept by or on behalf of the taxpayer. That submission also, I think, is answered not only by a review of the correspondence and the departmental practice appearing from the various bulletins, but as a matter of record the Commissioner never adverted to a decision, if it was made, relating to the exercise of this discretion, and I would have expected that the matter would have been raised during the course of the hearing. Secondly, had he taken that view, it seems to me that it would have been contrary to his own practice.
In Cunningham and Thompson's Taxation Laws of New Zealand, Vol. II, there is a section called "Notes on Practice" which I was informed, were prepared by a departmental officer employed by the appellant. At p 2059 there is an exception made for "single" assets and depreciation on a "single asset" basis will be allowed to individual partners using assets in the partnership business. The notes reveal that all individual taxpayers with depreciable income-producing assets may claim depreciation on any one asset they may select without the need to furnish double-entry accounts. At p 2062 there is a provision that where an asset is used partly for private purposes and partly for business purposes, apportionment will be made to allow that portion applicable to business use. It seems to me unlikely the Commissioner, therefore, would have acted under subsection (2) of s 113 in this particular case and, in any event, he is not obliged to so act. He did not call for accounts. In Commissioner of Inland Revenue v Walker, supra, North, J., as he then was, dealt with the manner in which that case was stated as contrasted with the nature and scope of the scheme later contended for by the Commissioner. He said: "Nothing turns on this omission for no objection was taken, either in the Court below or here, but I draw attention to the matter, for a taxpayer is surely entitled to know precisely the grounds or ground upon which the assessment is based." I cannot find, therefore, that the Commissioner exercised his discretion against the respondent under s 113(2). Mr Blank then argued that if the respondent was entitled to a deduction for depreciation, he should be allowed only one-half of what would be appropriate because the property concerned was a joint family home. Section 113, as I read it, does not expressly require that the premises be owned solely by the taxpayer to justify a full deduction for depreciation.
Section 9(1)(b) of the Joint Family Homes Act 1964 (NZ) makes the husband and wife the legal and the beneficial owners of the settled property subject to all mortgages etc. then affecting the same; s 19(c) provides that outgoings are to be the joint and several responsibility of each joint tenant. The respondent, as a joint tenant is, in my view, entitled to all the property and not part thereof. In Fadden v Deputy Federal Commissioner of Taxation (1943), 68 CLR 76, Williams, J., cites from the speech of Lord Selborne quoted in Hansen's Death Duties, 7th ed., p 436, and referred to by Lord Hatherley in Earl of Zetland v Lord Advocate, [1878] 3 AC 505, at p 516: "Technically joint tenants are originally entitled to all which they ever have; and when one joint tenant dies, the other does not succeed to his interest by devolution of law, but remains the sole owner, the property being discharged from the control of the other. It is incident to the very nature of a joint tenancy that until it is severed, the right of survivorship is a part of the original estate; it is not that the survivor succeeds to anything from the other." At p 85, Williams, J., said: "Each joint tenant holds the whole and holds nothing, that is, he holds the whole jointly and nothing separately: See Halsbury's Laws of England, 2nd ed., Vol. 27, p 659, note c, citing Coke on Littleton, 186(a), where it is pointed out that for many purposes this is equivalent to a moiety at law."
It seems to me, therefore, that if depreciation affected one-sixth of the property, it would be illogical to allow only one-twelfth.
1968 Year
The crucial words are "expenditure or loss exclusively incurred in production of assessable income". The words "in production of assessable income" are the same as those used in the new s 112(g). I have considered the careful and detailed arguments submitted by Mr Blank under the 1968 year, but in my opinion, from a factual point of view, similar considerations apply as under the new s 111. In the first place, it seems clear that apportionment is permissible under the old section. Harley and Williams v Inland Revenue Commissioner (NZ) (1970), 2 ATR 103; [1971] NZLR 482, and Europa Oil (NZ) Ltd v Inland Revenue Commissioner (NZ) (1970), 1 ATR 737; [1971] NZLR 641, where, at p 649 in the majority judgment, it was stated: "It is, moreover, clear that the form of the New Zealand s 111 entitles the Commissioner to apportion expenditure between what is exclusively incurred in the production of assessable income and what is not."
Secondly, Mr Richardson's argument as to the wisdom of expenditure and the judgment of the Privy Council in the Europa Case, supra, also obtains. Thirdly, the presence of the word "exclusively" in the old section does not, in my opinion, preclude apportionment in this type of case. In Korner v Inland Revenue Commissioners, [1969] 1 All ER 679; 45 TC 287, the House of Lords, affirming a decision of the Court of Sessions where the word "exclusively" was used in a taxing statute (though with different wording from s 111), underlined in obiter dicta the concept of apportionment, first through Lord Upjohn (45 TC, at p 297) where he said: "Thus speaking generally, the grocer living above his shop, the doctor who has a surgery in his house and the barrister who works in his house where he keeps or brings his law books and works on his briefs in the evenings and at weekends is allowed by the Crown a reasonable sum in respect of the necessary upkeep of his dwelling as being properly attributable to his trading or professional activities."
Lord Donovan, at p 300, said: "I also agree that the present case is in a different category from those cases where professional men may use part of their homes to do their professional work and may be allowed a proportionate part of the expenses of the home in consequence."
It follows that I consider the important matter is the use of the taxpayer's house for professional purposes. Accordingly, in my opinion, the Board of Review correctly directed itself both on the old s 111 and the new s 111 and correctly applied those sections to the facts.
I finally consider the question of quantification. As earlier mentioned, the Commissioner submits that if anything is allowed it should be one-tenth of the $300 but the Act does not envisage such small amounts, so therefore there should be no deduction, whereas the respondent contends for, variously, one-sixth or one-seventh of the total expenditure amounting, in each year, to approximately $300.
The Board on this aspect, following Pennycuick, J., in Westcott v Bryan, supra, when he said that he did not think it would be right to attempt to lay down any precise formula when dealing with apportionment, mentioned that judge's observation that what he had to do was to endeavour as best he could to say what proportion of the total expenses was fairly attributable to the use of the house by the occupier thereof as his home, and what proportion was fairly attributable as its use for professional purposes. The Board then fixed the figure of $100 for each year, without stating precisely how it arrived at that calculation.
Here, of course, the various charges accrue for the 365 days in the year. I consider it would be unrealistic to treat them as purely covering 42 days for both the professional and domestic use.
Approaching the problem of quantum, I ask whether the sums fixed by the Board are reasonable deductions, having regard to the facts. These include:-
(a) $300 is one-sixth of the total annual expenditure including interest on a bank overdraft, on a loan on life policies, and on a mortgage. These are payments very much under the control of a taxpayer as contrasted with, say, rates or insurance or electricity or telephone rentals.
(b) For a large part of the year the room concerned is not used at all, as contrasted with other family rooms where undoubtedly the wear and tear would be greater.
(c) The room is also used for dining purposes while the professional use is restricted to less than once a week.
Having given the question careful consideration and particularly bearing in mind the nature of certain of the expenditure incurred, I am unable to say that the Board erred in not making a greater deduction than that already allowed.
I therefore answer both questions posed "No". The appeal is dismissed.
Costs to respondent $100 and disbursements.
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