Case Q76

Judges:
KP Brady Ch
JE Stewart M
DJ Trowse M

Court:
No. 2 Board of Review

Judgment date: 18 August 1983.

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K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)

This reference relates to the 1977/78 year of income when rental of $2,340 was paid by the taxpayer, a pathologist, for a flat in a provincial town (referred to as A) located approximately 150 kilometres from the capital city, B, where he resided with his family. The taxpayer was engaged to carry out coronial post-mortem examinations, and in that capacity visited A when requested by the local authority. The flat was used by the taxpayer to provide overnight accommodation prior to returning either to his home, or place of employment. The question raised is whether the rental of the unit is a permissible deduction in terms of sec. 51(1) of the Income Tax Assessment Act.

2. The taxpayer had been employed for some ten years by the Commonwealth Health Department as a senior pathologist in charge of the laboratory at A. He ceased working at the laboratory in late December 1977 preparatory to retiring in May 1978 upon reaching the designated retiring age of 65. The intervening months were taken up with leave and furlough. Concurrently with his salaried position, he also acted as the pathologist assisting the local coroner in the performance of autopsies, and it appears that that activity continued on until 31st May 1978. It appears too that the taxpayer was paid for that work on a sessional basis, with the fees being prescribed by statute.

3. During the period to December 1977, the taxpayer rented a flat in A, whilst his wife and children resided at the family home situated at B. The taxpayer, upon ceasing work at the laboratory at A, moved back to the matrimonial home. However, he retained the tenancy of the flat for the months January to May 1978 inclusive, to ensure the availability of accommodation on those occasions when he returned to A for the purpose of carrying out coronial post-mortem

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examinations. It seems that continued demands were made on the taxpayer by the State law administration to do that work because no other doctor in A would do it.

4. It seems appropriate to add that, immediately upon his return to B, he was asked to provide assistance in the Pathology Department attached to the coroner's court in that city, and he worked there during the month of January, but on a casual basis only. Then some few months later, in April and May, he worked as a pathologist at the base hospital at C situated some 150 kilometres from A, and marginally more from the capital city of B. The taxpayer's evidence was that throughout the months of January to May he made repeated trips from both B and C to A to carry out pathology work as required by the coroner there, normally in answer to urgently worded telephone calls. Those trips, for the greater part, were made late at night or in the early hours of the morning. He considered that he performed about 115 to 120 coronial autopsies at A per annum and, whilst the work was spasmodic, the yearly average tended to remain fairly high. Invariably he would stay in the flat at A overnight. He described his modus operandi in the following terms when being cross-examined on the matter:

``Q. During that period when you were residing at [C] did you stay overnight in [A] during those times or did you return to [C]? - A. No, I would stay. Once again I cannot give a statement about everything but I can say this much, quite definitely I had to do it this way. I would be working at [C] Base Hospital essentially 9 to 5 and I know I had these autopsies to do in [A]. I would then drive in the evening over to [A]. Looking back I have got a recollection perhaps if I was not too tired I would do an autopsy but usually I would be pretty tired by the time I got over there and I would arrange with the attendant to do them in the early hours of the morning, something about 5, and leave about 7 and get back to [C]. I know that I travelled in the early hours of the morning to and fro.''

5. His purpose in renting the flat was described in the following terms in cross-examination:

``Q. The flat was maintained subsequent to your cessation of duties with the Commonwealth Health Department in order to provide you with accommodation in the instances where you were called to [A] to perform the post-mortems? - A. Yes.

Q. That was the sole reason for the maintenance of the flat? - A. Yes.''

6. The taxpayer impressed us as a witness of the highest probity. He stated, in giving his evidence, that the flat was not used for holidays or similar private purposes by himself or members of his family. He went on to say that motel accommodation at the time he was working at A was uncertain, particularly when required at short notice. In any event, because of the unusual times of the day and night that he travelled, we can envisage that checking in and out of a motel could present problems which would not be present in the case of a rented flat. We complete the factual aspects of the taxpayer's situation by stating that he ceased to conduct post-mortems at A when the State Law Department advised him (in answer to submissions made by him that the scope of his duties needed to be enlarged to make the work an economic proposition to him) that it was not prepared to extend the ambit of his duties there.

7. At the hearing, the taxpayer, through his representative, conceded that the flat had been used primarily as a second place of residence during the period 1st July to 31st December 1977, and accepted the fact that the rental covering that period was not an allowable deduction. However, he contended that the rental for the period 1st January to 31st May 1978, agreed as between the parties as amounting to $1,100, had been incurred in the production of assessable income as represented by professional fees. Alternatively, he submitted that such expenditure had been necessarily incurred in the carrying on of a business by which professional fees were received for the carrying out of coronial examinations. The Commissioner's representative, of course, took a contrary view, and made submissions that the taxpayer did not incur the rental in deriving his fee income, nor was he carrying on a business.

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8. For our part we consider that the evidence points to a finding that the taxpayer was acting in a dual capacity throughout the period January/May 1978. On the one hand he was continuing to receive income as an officer of the Commonwealth Health Department and, concurrently with that situation, it seems to us that he was acting in a purely professional capacity in carrying out post-mortems at A and in the supportive role he assumed in the Pathology Department at B. Additionally, towards the end of the above period we were told that he worked as a salaried pathologist at the hospital at C, but significantly he was, at the same time, still making trips to A to carry out post-mortems there for which he received prescribed fees. On those facts, can it be said that he was carrying on a business?

9. Whether or not a business is carried on is a question of fact (
Californian Copper Syndicate (Limited & Reduced) v. Harris (1904) 5 T.C. 159). The word ``business'' is defined in sec. 6(1) of the Assessment Act to include a profession; on the other hand, occupation as an employee is expressly excluded. We consider that the facts of the instant case point to a finding that the taxpayer was carrying on a business throughout the January/May 1978 period, thus permitting him to claim deduction of the rental outlays under what has become commonly known as the second limb of sec. 51(1). That section, to the extent it is relevant, states as follows:

``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...''

10. We are of the view that the rent of the flat was necessarily incurred by the taxpayer in carrying on his profession as pathologist for the purpose of gaining assessable income. In the case of
John Fairfax & Sons Pty. Ltd. v. F.C. of T. (1958-1959) 101 C.L.R. 30, Fullagar J. at p. 40 considered that the second limb of sec. 51(1) was:

``concerned rather with cases where, in the carrying on of a business, some abnormal event or situation leads to an expenditure which it is not desired to make, but which is made for the purposes of the business generally and is reasonably regarded as unavoidable.''

11. A year earlier, in the case of
F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 99 C.L.R. 431, the same learned Judge expressly adopted a passage contained in the late Dr. Hannan's book, Principles of Income Taxation, when he quoted at p. 443:

``The meaning of `necessarily' in that context is probably not limited to compulsion in a legal sense..., and may extend to business expenditure arising out of exigencies created by unusual or difficult circumstances.''

He went on to say at pp. 443 and 444:

``The interpretation of the word `necessarily' which is involved in this view is familiar in many similar contexts and in a variety of instruments... It means for practical purposes that, within the limits of reasonable human conduct, the man who is carrying on the business must be the judge of what is `necessary'.''

12. That the taxpayer considered the tenancy of the flat to be necessary is evident from the following exchange which took place in his cross-examination:

``Q. During the particular period from January to the end of May 1978, when you were required to carry out these coronial post-mortems in [A] would it have been possible for you to have commuted between [F, a suburb of B] and [A] and then return or were you on every occasion required to stay overnight in [A] and use the flat? - A. No,... I do not think it is possible for me to answer that question fairly for this reason. I was in the position that I could be called to [A] by the police to do autopsies. I had to do them along with an attendant who was a porter at the [A] Base Hospital and I had to fit in the work with his and he had to fit in with me. I also had to consider the possibility that although it was not likely but it was always there that the police could call me and say we want an autopsy

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ATC 386

done now because of a murder or something like that. That had occurred on occasions. They would say we want it done now, we want it done in an hour, and I would have to go although admittedly it was not a frequent occasion. It was a situation I had to confront all the time. That was a factor in keeping the flat at [A] going so that I could just go there and get the work done. If you ask me now from recollection could I have gone to [A] and come back again the answer to that is yes, at some considerable inconvenience and anxiety.

Q. It would be fair to say then that you chose to use this flat as a matter of personal convenience? - A. Well, yes, but it was for my use; not for my family. It was for me.

Q. You exercised your personal choice. Of your own volition you decided to maintain the flat and to use the flat when it would have been possible for you to travel to [A], perform your coronial duties and then return to [B]? - A. It would have been possible but I think under the circumstances it would not have been reasonable.''

13. We agree with the taxpayer's observations on the questions put to him. Bearing in mind that the trip from B to A and return would involve him in approximately five hours driving, of which half would necessarily be done after performing four or five autopsies in the one session, coupled with the fact that he was then 65 years of age, we would regard the trip as involving a fair measure of risk to life and limb. The same observations hold true for trips between A and C. We therefore regard the proposal of the Commissioner's representative that the taxpayer should commute between A and B (and by implication between A and C) as being unrealistic, and so unreasonable.

14. Paraphrasing what Fullagar J. stated at p. 444 in Snowden & Willson (supra), we would say on the facts peculiar to the instant case that the expenditure incurred by the taxpayer in renting the flat was incidental to carrying on his duties as a pathologist at A. The flat rental was necessarily incurred because the exigencies of his duties imperatively demanded that it should be incurred.

15. Finally, there remains for decision the possibility that the outgoing was of a private or domestic nature. As a starting point, it is noteworthy to observe the comments of Menzies J. in
F.C. of T. v. Hatchett 71 ATC 4184 at p. 4186:

``It must be a rare case where an outgoing incurred in gaining assessable income is also an outgoing of a private nature. In most cases the categories would seem to be exclusive.''

16. The Commissioner's representative referred our attention to the decision in the English case of
Ricketts v. Colquhoun (1925) 10 T.C. 118, and in particular to the statement made by Viscount Cave L.C. at p. 134:

``A man must eat and sleep somewhere, whether he has or has not been engaged in the administration of justice. Normally he performs those operations in his own home, and if he elects to live away from his work so that he must find board and lodgings away from home, that is by his own choice, and not by reason of any necessity arising out of his employment; nor does he, as a rule, eat or sleep in the course of performing his duties, but either before or after their performance...''

In that case, the assessment was made under r. 9 of Sch. E of the English Act, which permits a deduction for expenses incurred or defrayed out of emoluments of an office or employment wholly, exclusively and necessarily expended in the performance of the said duties. Those provisions appear by comparison narrow and rigid, and it seems to us that expenditure excluded by r. 9 may still qualify as a deduction in terms of sec. 51(1).

17. It was also submitted on behalf of the Commissioner (see para. 12 supra) that as the expenditure had been incurred as a matter of the taxpayer's own choice, and in fact could have been avoided if he had returned from A on the same day, the outgoing was private by nature. We do not agree with that hypothesis, and refer to what was said by Brennan J. in
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4549 as supporting authority:

``The taxpayer is at liberty to determine for himself what the scope and nature of his business or undertaking shall be and

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how it shall be conducted, the Act having no effect upon those matters but taking `the result of the taxpayer's activities as it finds them'.''

18. In Case E34
(1954) 5 T.B.R.D. 205, No. 1 Board, as then constituted, unanimously allowed an opera singer a deduction of the cost of her hotel accommodation when in cities away from her home in Sydney. On the question of whether that expense was of a private or domestic nature, the then Chairman, J.L. Burke, said the following at p. 211:

``... I am not satisfied that it would be correct to make a finding incorporating a principle of general application that subsistence expenses are of a private or domestic nature irrespective of the circumstances under which the expenses are incurred. In the present case, where the taxpayer maintained a domestic establishment and where her employment caused her to move away from that establishment for periods of indefinite duration, I am prepared to find that expenses incurred on hotel accommodation and meals whilst the taxpayer was absent from her headquarters, if I may use the term, were not of a private or domestic nature (see
Nolder v. Walters (1930) 15 T.C. 380). In
F.C. of T. v. Green (1950) 81 C.L.R. 313, the Full High Court, speaking of living expenses, said (at p. 318):

• `It is true that such expenses are necessarily incurred if any income is to be earned or otherwise derived but such expenses would be incurred whether income was earned or otherwise derived or not.'

In the present case the taxpayer, were she not employed as a theatrical, would, of course, have incurred some living expenses but she would not have incurred the actual expenses of hotel accommodation and meals in capital cities other than the city where she normally resided which she did incur to carry out her duties under the contract.''

19. The majority decisions of the High Court in
Handley v. F.C. of T. 81 ATC 4165 and
F.C. of T. v. Forsyth 81 ATC 4157, must also be considered when exploring the problems associated with private or domestic expenditure. Those cases involved claims related to expenses incurred in the maintaining of home offices, and it appears that some of the Judges applied what is now known as the essential character test in holding in favour of the Commissioner. It was held in Handley that the amounts claimed for mortgage interest, rates and taxes and insurance premiums were of a domestic nature, and therefore excluded from deductibility under sec. 51(1). The study, despite its business use, remained an integral part of the home, and the outgoings in question would remain the same, whether or not the taxpayer worked at home. The same principle was applied in Forsyth in deciding that rent paid for an area used as a study within the home was caught by the exclusion provision. The fact that the payment represented rent for use of part of the family home as a study did not negate the domestic nature of the expenditure. We consider that the particular facts in the present reference are substantially different from those that existed in the two quoted cases. The flat was not used in the same manner during the period January to May 1978, and for that reason we consider it inappropriate to adopt the essential character test in reaching our decision.

20. The flat was maintained and held in reserve and used solely for business purposes; it was put to actual use only when the requirements of business necessitated attention; the cost of maintaining the flat was additional expenditure over and above ``ordinary living expenses'' which, as the High Court said in Green's case (supra) at p. 318, are not deductible.

21. Our conclusion is that the rental of $1,100 was necessarily incurred by the taxpayer in the conduct of his business which was carried on for the purpose of producing assessable income, and that such outgoing is not of a private or domestic nature.

22. For the above reasons, we direct that the assessment before us be amended to allow a deduction of $1,100.

Claim allowed in part