Case X3

Members:
RA Balmford SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 21 December 1989.

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R.A. Balmford (Senior Member)

This is an application for review of a decision of the respondent made on 18 January 1984 disallowing an objection by the applicant to the inclusion in the respondent's assessment of his income for the year ended 30 June 1982 of certain amounts claimed as deductions pursuant to subsec. 51(1) of the Income Tax Assessment Act 1936 (``the Act'').

2. The applicant, on 9 March 1984, requested that the matter be referred to a Board of Review, and it appears that that request was complied with by the respondent. By virtue of sec. 223(1) of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 and subsec. 189(2) of the Act that referral of the decision on the applicant's objection is deemed to constitute the making by the applicant of an application to the Tribunal for review of the decision.

3. The Tribunal had before it the documents lodged by the respondent pursuant to sec. 37 of the Administrative Appeals Tribunal Act 1975 as modified by sec. 14ZG of the Taxation Administration Act 1953 and numbered as folios 1-8, together with other documents lodged at the hearing. Evidence was given by the applicant, who was unrepresented. The respondent was represented by an officer of the Australian Taxation Office.

4. On the basis of documents before the Tribunal and the evidence of the applicant, which I accept, I find the facts to be as set out in this and the following two paragraphs. In May 1980 the applicant and a friend entered

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ATC 115

into a two-year lease of a shop, together with certain enumerated fittings, the rent being payable monthly. They conducted, in partnership, a butcher's business on the premises until December 1980, deriving income from the business during that time. However, the venture was not successful, and the partners terminated the business and both returned to their previous employment.

5. They sought to dispose of the premises, and, in circumstances which were explained at the hearing, but which it is not necessary to set out here, handed over the key of the shop to a person who subsequently disappeared. Certain of the fittings were removed, presumably by that person. The partners paid the rent on the premises until the expiry of the lease in May 1982. Prior to that time they purchased and installed fittings to replace those which had been removed. They obtained legal advice as to their position in respect of both the disappearing purchaser and the landlord.

6. The partnership claimed as deductions in the financial year 1981-1982 the following sums, all of which were expended in that year:

                              $
      Rent                  5,200
      Cost of fittings      1,510
      Legal fees              410
                           ------
                           $7,120
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Of the legal fees, $260 related to the consideration of possible legal proceedings against the disappearing purchaser, and $150 to the termination of the lease.

7. Those claims were disallowed. The applicant's objection related to the sum of $3,560, being his half share of the total of $7,120.

8. The submission of the respondent was that there was an insufficient nexus between the expenditure and the conduct of the business for the sums claimed to be deductible under either limb of subsec. 51(1) of the Act. In any event, the expenditure on fittings and on legal expenses was of a capital nature: and in the absence of a sufficient nexus, the legal expenses were not saved by sec. 64A of the Act.

9. I accept the submission that the expenditure on fittings and the legal fees were of a capital nature, and thus not allowable as deductions under subsec. 51(1).

10. The authorities on the question of whether an expenditure or outgoing, incidental and relevant to the gaining of assessable income in an earlier year, is thereby precluded from being an allowable deduction under subsec. 51(1) in a later year, were considered by Deputy President Nicholson (as he then was) in Case U177,
87 ATC 1020. I do not propose to recapitulate his extensive and careful discussion. He concluded that the effect of the authorities is that, where a business has ceased, the second limb of subsec. 51(1) has no application: and (at pp. 1026-1027)

``whether the first limb of sec. 51(1) then applies requires an examination of all the circumstances of the matter to determine the degree of proximity between the claimed expenditures and the earlier operation of the business and whether as a question of fact there is the connection made necessary by sec. 51(1) pursuant to which the deduction is sought. The question is whether the discontinuity of business has alone broken the nexus between derivation and outgoing or whether that nexus, in the context of particular facts, endures;.''

11. In the absence of authority, I might have formed the view that, the lease having been entered into for the purpose of conducting the business on the leased premises, the cessation of the business in December 1980 did not break the nexus thereby created between the derivation of income from the business on the one hand, and on the other hand, the payment of rent under the lease which continued to bind the partners despite the cessation of the business.

12. However, in Case S30,
85 ATC 280 the No. 3 Board of Review, constituted by Mr Hogan, Dr Beck and Dr Gerber, was concerned with a claim for deduction of rent paid in circumstances which I find to be indistinguishable from those presently before me. Dr Gerber, with whom the other two members of the Board agreed, said at pp. 283-284:

``In the instant case I find that there was a complete cessation of the business when the taxpayer closed the door of his shop. The payments required under the lease in the 1981 and 1982 years did not arise out of any operations conducted by the taxpayer for the gaining or producing of assessable income,

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nor did they have their origins in the operations of the business whilst it was still being conducted for the purpose of obtaining assessable income. The occasion of the payments, was, in fact, the convenants in the lease agreement, which the taxpayer had to continue to observe despite the fact that the business conducted from the premises had ceased. In the circumstances I am satisfied that the claimed deductions cannot be supported. In the circumstances I have no alternative but to uphold the Commissioner's decision on the objections.''

13. On the basis of that authority, I find that the claimed deductions for rent cannot be allowed under subsec. 51(1).

14. There remains for consideration the possible applicability of sec. 64A of the Act to the legal fees. In the absence of any other amount allowable as a deduction under subsec. 51(1) in respect of legal expenses, sec. 64A provides for a deduction of $50 in respect of ``legal expenses incurred in the year of income in carrying on a business for the purpose of gaining or producing assessable income... except to the extent that they are expenses of a private or domestic nature''.

15. The language of that provision is so close to that of the second limb of subsec. 51(1) as to render it, in my view, liable to be interpreted (leaving on one side the exceptions to both provisions) in accordance with the same principles. Accordingly, on the basis of the authorities above cited, I find that the deduction similarly cannot be allowed.

16. For the reasons given, the objection decision under review will be affirmed.