Case U134

Members:
RK Todd DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 19 June 1987.

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R.K. Todd (Deputy President)

The applicant in this review of objection decisions made by the respondent in respect of the year of income ended 30 June 1983 is a public servant who is also a director of and a shareholder in a family company. There are two issues in question in the review. The first is whether an amount claimed as depreciation of a video recorder, said to have been used in relation to the applicant's occupation as a public servant, is an allowable deduction under sec. 54 of the Income Tax Assessment Act 1936 ("the ITAA"). The second is whether certain expenses incurred by the taxpayer in his capacity as a director of a family company are deductible under sec. 51(1).

2. In a schedule to his 1983 taxation return the applicant claimed, inter alia:

"e. Taxpayer acquired a video recorder in order to monitor government advertising and news broadcasts to enable him to execute his duties as required by the position in the Department of...

      Cost 2.6.83       1250
      Depn. @ 33.3%       34 Less 50%      $17"
              

3. At the hearing, the applicant gave evidence that the video recorder had in fact been purchased in January 1983, with 2 June 1983 being the date upon which the applicant had moved to the employment for which the video was claimed to be necessary. In his written submission to the Tribunal, the applicant's representative amended the claim to cover the whole of the period from purchase until 30 June 1983. The claim was also amended by increasing the estimated

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ATC 782

percentage usage of the video recorder that was of a private nature from 50 per cent to 75 per cent. This change resulted from the applicant giving evidence that he had not taken account of his family's use of the recorder when submitting his return. The following calculation was therefore included in the submission:

                                        "$        $
      Cost - January 1983             1,250
      Depreciation at 33 1/3%
      for 6 months                      416      416
                                      -----
      W.D.V. 30th June 1983             834
                                      -----
      Less private portion 75%                   312
                                                 ---
      Adjusted claim:                            174
                                                 ---"
            

4. The Commissioner opposed the application to extend the period over which depreciation was claimed. It was submitted, inter alia:

"... that the fact that the claim made for depreciation in the taxpayer's return was identical with the date of commencement of his new duties indicates that at the time of preparation of the return in question, this date was considered to be the appropriate `acquisition' date for taxation purposes and was appropriately reflected in the use of the word `acquisition' rather than `purchase' in his return."

5. While I believe that there is a great deal of force in this submission, the finding which I have made in respect of the depreciation claim makes it unnecessary for a decision to be made on this point.

6. The applicant's evidence was that he made use of the video recorder in the following way:

"Initially it was to enable me to see documentaries and similar such programmes because it was the nature of the type of work - or part of the work that I was doing in government departments. Latterly, and perhaps more importantly when I moved to the Department of... it was because I was given responsibility for major advertising campaigns within government..., and it enabled me to view commercials that the government was involved in as well as others [that] impacted on those campaigns, and given my working hours it was often impossible to view them at the time they were screened so I recorded them on the home video for subsequent viewing."

7. Section 54(1) of the ITAA is in the following terms:

"54(1) Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction."

8. It was submitted on behalf of the Commissioner that the video was not used for producing assessable income. In support of this, a letter from the department for which the applicant worked was included in the T-documents. The department answered simply "No" in reply to the request from the Deputy Commissioner of Taxation seeking:

"Advice as to whether [the applicant's] duties necessitated or required him either as a condition of his employment or as a matter of practical necessity to incur expenditure on the purchase of a video recorder."

Incorporated into this request, however, was the concept of expenditure being "necessarily" incurred as required by sec. 51(1). The terms of sec. 54 require only that the item be "used" in the production of income, and to this extent the evidence of the applicant satisfies the Tribunal.

9. While I am satisfied that the video recorder was used for the purpose of gaining assessable income, I have had great difficulty in determining the amount of use of the recorder that should be regarded as private. Section 61 allows for apportionment of depreciation where property is not solely used for producing assessable income. However, the applicant has in my opinion failed here to discharge the onus imposed upon him by sec. 190(b). As Dr Gerber, then a Member of Taxation Board of Review No. 3, stated in Case K54,
78 ATC 523 at p. 532:

"It goes without saying that it is not the function of a Board of Review to `third guess' and supply its own calculations in the absence of any satisfactory evidence on which to base such calculations."

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ATC 783

10. The evidence before the Tribunal was that the applicant had estimated his use of the video recorder as 50 per cent business and 50 per cent private. Under cross-examination he admitted that he had not taken account of his family's use of the machine. No evidence was given of how much use they had made of it. This lack of evidence makes it impossible for the Tribunal to determine what proportion of the use can be properly described as having been incurred in gaining or producing assessable income and, having regard to the onus imposed upon the applicant by sec. 190(b), the Tribunal feels obliged to disallow the claim for depreciation.

11. The second claim by the applicant was for expenses which he incurred in relation to his duties as a director of a family company. These expenses were not reimbursed by the company nor did the applicant receive any allowance from the company in respect of his services as a director. He did receive $3,050 from the company in the form of a dividend, but this was clearly received in his capacity as a shareholder.

12. The applicant's travel to Sydney, and associated activities were, it may be accepted, such as to enable him, as the applicant's representative submitted, to carry out company business including:

• - overseeing tenancies and questions of arrears of rent
• - undertaking repairs of a minor nature
• - reviewing financial accounts
• - paying dividends
• - consulting with the company's accountant
• - consulting with other shareholders in relation to matters affecting company business and developments.

13. On behalf of the applicant it was submitted that:

"The purpose of the payment personally by the taxpayer of director's expenses was to reduce the annual expenses of the company by the same amount and thereby to increase by that amount the annual income distributable, and assessable, to the shareholders who included the taxpayer and accordingly, the taxpayer's outgoings are an allowable deduction under section 51(1)."

The duties owed to the company by its directors were also emphasised.

14. The difficulty is that the applicant is, as is stated in the submission by his representative:

"... carrying on a business within the meaning of section 51(1), his business being that of holding shares in... Investments Pty Limited in which he held a substantial interest."

However, the outgoings were incurred in his capacity as a director and are consequently not sufficiently related to the carrying on of the business of being a shareholder. Additionally, as no allowance was paid to him in his capacity as a director, it cannot be said that the expenses were incurred in gaining or producing assessable income in that capacity.

15. The applicant's representative relied on
F.C. of T. v. Total Holdings (Aust.) Pty. Ltd. 79 ATC 4279 as the principal basis of a submission that although the applicant incurred the expenses as a director, it was for the purpose of producing assessable income as a shareholder. To support the argument put for the applicant in this case would abandon the general rule that a loss or outgoing is not deductible under sec. 51(1) unless it is incurred in gaining or producing the assessable income of the person who incurs it. There is a long established line of Board of Review decisions in relation to claims to deduct travelling expenses voluntarily incurred by persons who were shareholders in, and directors of, proprietary companies, all of which in my respectful opinion were correctly decided: see for instance
1 C.T.B.R. (N.S.) Case 65;
5 C.T.B.R. (N.S.) Case 75;
7 C.T.B.R. (N.S.) Case 91;
12 C.T.B.R. (N.S.) Case 3. As was said by Dixon J. (as he then was) in
North Australian Pastoral Co. Ltd. v. F.C. of T. (1946) 71 C.L.R. 623 at p. 635: "For the companies paying the dividends are independent entities taxable as such and no deduction would be allowed in the appellant's assessment for expenses incurred by the appellant for the purpose of the earning of profits for those companies." The need remains for a sufficient nexus to exist between the expenditure and the income. Total Holdings was a case in which, given the existence of a not uncomplicated corporate and business structure, with interlocking company loans, the

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ATC 784

Court was able to discern the existence of the required nexus. It is not in my view an authority that can be made to apply in this case.

16. The Tribunal thus finds that the expenses were incurred by the applicant in his capacity as a director for the purpose of gaining or producing assessable income for the family company. As he produced no assessable income for himself in that capacity the required nexus is not established and therefore the expenses are not deductible.

17. The Commissioner also raised the question of whether sufficient proof in terms of the requirements of sec. 190(b) of the ITAA had been brought forward by the applicant. The above finding makes it unnecessary for the Tribunal to determine this point, although it must be said that the evidence before the Tribunal was relatively scant.

18. The Tribunal will affirm the objection decisions under review.