Case X4
Members:KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
K.L. Beddoe (Senior Member)
The question to be decided is whether outgoings incurred by the applicant in maintaining a residence in a capital city are allowable deductions. The applicant is a medical practitioner residing at a provincial town which I shall call ``Bald Hills'', over 100 km from the capital city. These applications involve the years of income ended 30 June 1978, 1979, 1980, 1981, 1982, 1983 and 1986.
2. The amounts in dispute are as follows:
Year ended 30 June $
1978 4,079
1979 7,551
1980 7,709
1981 8,377
1982 9,447
1983 11,354
1986 7,842
The details of these claims may be summarised as follows:
Year ended 30 June 1978 1979 1980 1981 1982 1983 1986
$ $ $ $ $ $ $
Interest 3,150 6,125 5,640 5,868 6,862 8,212 6,483
Rates 559 287 639 517 1,029 1,168 717
Borrowing expenses 200 200 200 200 540 540
Power 170 354 184 280 253 243 275
Repairs and maintenance 361 893 1,325 372 284 367
Telephone 224 153 137 235 117
Cleaning 50 156
Insurance 790
3. In respect of each year the applicant's objections rely upon sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act'') without specific reference to that provision. No issue arose before the Tribunal as to the grounds of objection.
4. The applicant is a specialist radiologist with a deep professional commitment to his profession. As a consequence it has been an essential part of his professional work that he not only practise in a partnership carrying on business at Bald Hills, but that he also accept honorary appointment at leading city hospitals, that he undertake additional sessional work at the hospitals, that he be involved in teaching and that he have a direct participation in the College of Radiologists.
5. Initially he sought to maintain these activities with regular travel by road between Bald Hills and the capital city. It became apparent to the applicant in 1976 that the constant commuting constituted an unacceptable risk and that he should establish a base in the capital city.
6. The partnership conducting the practice in Bald Hills has encouraged the partners to undertake sessional appointments in hospitals outside the Bald Hills hospitals, which hospitals are the principal source of the partnership income.
7. To continue to comply with that requirement and to meet his other professional obligations, including a practice outside the partnership business involving a specialist procedure, the applicant decided that he should establish a permanent base in the capital city. Many of the patients from his own specialist practice were seen in the capital city, occasionally at his city residence but in the main at professional rooms.
8. The applicant's circumstances have changed over the years before the Tribunal; the
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main changes being the expansion of a branch of the partnership business at ``Manly'' on the outskirts of the capital city and the expansion of the applicant's practice outside the partnership. That has resulted in some changes in the usage of the city house. However those changes are of no consequence in the consideration of this matter. The applicant travelled to the capital city each week on a regular basis to attend to his work. The trips were so regular that he did not need to diarise his visits.9. He purchased the house in question in December 1977. The purchase price was $85,000 of which $45,000 was borrowed at interest. The applicant also gave evidence to the effect that the house was also used for family purposes at weekends although such use appears to have been spasmodic, averaging about four weekends per year. The applicant's wife also used the premises. The applicant was unable to supply details of such use but was able to make an estimate of use of about four weekends per year. He also had two children from a previous marriage living in an adjoining suburb who made a practice of having tea with the applicant when he was in the capital city. The house was used therefore for domestic purposes of the applicant's family as well as himself. The applicant described the house as an unexceptional terrace house of the type located in inner suburbs. The house was built as a two-bedroom house and equipped with sufficient furniture to allow the applicant's family to sleep there. The house was occasionally also used by other members of the partnership who were required to travel to the capital city for meetings. The nature of these meetings was not explained to the Tribunal but I accept, and so find, that other members of the partnership used the house from time to time when in the city on professional activities connected with the business of the partnership.
[sic] The overall picture painted by the applicant's evidence is that he was intent on creating a home away from home. He did not wish to stay in hotels and preferred to have his own premises with his own facilities, books etc. The essential character of the house was that of a second home.
10. I need consider only three decisions of the courts to determine these matters. The first is
F.C. of T. v. Green (1950) 81 C.L.R. 313, an appeal by the Commissioner against a decision of the Supreme Court of Queensland (9 A.T.D. 142). The taxpayer incurred travelling expenses travelling between Brisbane and North Queensland for the purpose, inter alia, of inspecting properties from which he derived assessable income.
11. Philp J. in the Supreme Court dealt with the claim in these words at A.T.D. p. 144:
``As to the sum of £15 15s. 6d. claimed - the appellant owned four rented shop properties in Townsville and one in Cairns. He made an annual visit to these cities combining his personal business with Church and Masonic business. So far as his personal business is concerned he allocated to it for travelling expenses the said sum of £15 15s. 6d. which would scarcely cover his train fares. The question is `Is a taxpayer who owns such a number of rented properties entitled to deduct travelling expenses to inspect them and keep in touch with his tenants'? Each case must depend upon its own circumstances and I feel that in respect of this appellant such an expenditure is something incidental and relevant to his gaining taxable income. Part of the expenses of the visit may be in the nature of a capital expenditure, i.e., insofar as the inspection is designed to protect his reversion but I think that the moderate sum of £15 15s. 6d. is allowable as a fair charge against income.''
In the High Court counsel for the Commissioner submitted that the tenants were bound to repair and it was not necessary for the taxpayer to travel to Cairns and Townsville to derive his income from those properties. Latham C.J. delivered the judgment of the Court at the hearing of the appeal. His Honour dealt with sec. 51(1) at pp. 317-318 in these words:
``It has been held in the case of
Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation (1935) 54 C.L.R. 295, that the words in the initial part of s. 51 `All losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income' mean such losses and outgoings as are incurred in the course of gaining or producing the assessable income. Further, in the case of
Ronpibon Tin No Liability and Tongkah Compound No Liability v. Federal Commissioner of Taxation (1949) 78 C.L.R. 48, at p. 56,
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it was said with reference to s. 51: `For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing an assessable income, it must be incidental and relevant to that end. The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income' and `In brief substance, to come within the initial part of the sub-section 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.' (1949) 78 C.L.R., at p. 57.It is not enough in order to establish a right to a deduction to show that it was proper or reasonable for the taxpayer to make the expenditure which he claims as a deduction. For example, it is perfectly reasonable and proper for a taxpayer to incur living expenses and many expenses of a private or domestic nature, but such expenditure is expressly excluded from deductibility by the final words of the first sub-section of s. 51. Thus, as has been stated in the course of argument, a taxpayer cannot deduct ordinary living expenses. 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.''
And later at pp. 318-319 the Chief Justice referred specifically to the travel claim in these words:
``In the third place a deduction is claimed for part of the expenses of travelling to Townsville and Cairns to inspect, supervise and generally look after the properties which the taxpayer owned there and which he had let to tenants. This was apparently an annual expenditure, a regular expenditure. Only £15 was claimed, though more was spent upon these visits, and £15, it was held by the learned judge, was barely enough to cover railway fares. Accordingly, insofar as any part of this latter expenditure could be regarded as devoted to a capital purpose in the protection of the reversion of the taxpayer in these properties, allowance has been made for that matter by the learned judge.''
12. The second decision of the High Court is
F.C. of T. v. Forsyth 81 ATC 4157. That decision involved a claim for rent paid on an office used by a barrister away from his chambers. The office was located within the family home. The difficulties arising in these types of cases are illustrated by the course of the case. The taxpayer succeeded before the Taxation Board of Review, the Commissioner's appeals to the Supreme Court and the Federal Court were dismissed and the appeal to the High Court succeeded with the High Court dividing three to two in favour of the Commissioner. Although the facts of the case make it distinguishable from the present case there is dicta of Wilson J. in the leading judgment which has application to this matter. His Honour applied the essential character test enunciated by the High Court in
Lunney v. F.C. of T. (1958) 100 C.L.R. 478 to decide that it was not open on the facts of the case to find that the outgoings in question were incurred in gaining or producing the assessable income.
13. At p. 4164 Wilson J. stated:
``As I have said, in the last resort the question is one of fact and degree. Having regard to all the circumstances, I conclude that it is not open on the facts of this case to find that the outgoings in question were incurred in gaining or producing the assessable income, or were necessarily incurred in carrying on the taxpayer's professional business. The home was not his business premises. It was not open to be described, with any show of reality, as his base, or one of his bases, of operations, to use the term adopted by the Court of Appeal in Newsom v. Robertson; cf. Lunney, [(1958) 100 C.L.R. 478] at p. 500;
Horton v. Young (1972) 1 Ch. 157. The outgoings were therefore neither incidental nor relevant to the gaining of assessable income.''
14. His Honour then turned his attention to the excluding provisions of sec. 51(1) at p. 4164 in these words:
``The relationship between the first part of sec. 51(1) and the exception of outgoings of a capital, private or domestic nature, was the subject of comment by Menzies J. in
F.C. of T. v. Hatchett 71 ATC 4184 at p. 4186; (1971) 125 C.L.R. 494 at p. 498:
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- My conclusion that the expenditure in gaining the Teacher's Higher Certificate was incurred in gaining assessable income in the circumstances carries with it the conclusion that the expenditure was not of a private nature. 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...'
With respect, I can readily accept his Honour's statement. But it will be noted that it is confined to outgoings of a private nature. It is certainly not true of outgoings of a capital nature, as his Honour recognised at ATC p. 4186; C.L.R. p. 497, when he said:
- `Section 51 does recognise that there will be outgoings incurred in gaining or producing income, or in carrying on a business to do so, that are of capital or of a capital nature. Expenditure of this sort is commonly made. Thus, for instance, a taxpayer who is a baker, who buys a van to deliver bread to his customers, makes such an outlay...'
Nor, in my opinion, should it necessarily be true of outgoings of a domestic nature. I see no reason why it would not be a proper application of sec. 51 of the Act in the present case to say that if the proper conclusion on the facts was that the rent was prima facie an outgoing incurred in gaining or producing the assessable income then the exception with respect to outgoings of a domestic nature would operate to exclude it from deductibility. The meaning of `domestic' is `of or belonging to the home, house, or household' (Shorter Oxford English Dictionary). It seems to me to be plain, as a matter of commonsense, that the taxpayer's agreement with the trustees is `of or belonging to the home, house, or household' and is therefore of a domestic nature notwithstanding that it provides for certain parts of the home to be occupied for professional purposes.''
15. Here the reasoning of Wilson J. applies, a fortiori, to the facts of the present application. It is not the evidence of the applicant that he uses the house for the purpose of seeing patients. Although he has seen a few patients at the house over the years his practice is to see them in professional rooms. The house was acquired for the purpose of providing the applicant with a home away from home. It was, therefore, acquired and used for private and domestic purposes albeit that it was acquired in connection with producing assessable income.
16. The remaining case that needs to be considered is
F.C. of T. v. Charlton 84 ATC 4415; (1984) 15 A.T.R. 711, a decision of the Supreme Court of Victoria. To understand the decision it is necessary that the facts be detailed. The facts are conveniently summarised in the [A.T.R.] headnote as follows:
``The taxpayer was a pathologist employed by a government department in charge of a laboratory in Bendigo. Whilst employed with the government department he also acted as the pathologist assisting the local coroner in the performance of autopsies, for which he was paid statutory fees. He ceased working at the laboratory in December 1977 preparatory to retiring in May 1978. He continued with his duties in the performance of autopsies in Bendigo until May 1978. Whilst employed by the government department in Bendigo the taxpayer rented a flat in that town, while his wife and children resided at the permanent family home in Melbourne, located approximately 150 kilometres away. Upon ceasing to work at the laboratory in Bendigo the taxpayer moved back to the matrimonial home, but 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 Bendigo for the purpose of carrying out autopsies. During April and May 1978 he also worked as a pathologist at the base hospital at Wangaratta. Throughout January to May 1978 he made repeated trips from both Melbourne and Wangaratta to Bendigo to carry out pathology work as required by the coroner there. These trips were mostly made late at night or in the early hours of the morning. There was evidence that there would have been difficulty in finding motel accommodation in Bendigo and the taxpayer was reluctant to make the round trip from either Melbourne or Wangaratta to Bendigo and back without rest.
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The taxpayer claimed that the rental for the period January to May 1978 was 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. The Commissioner disallowed the deduction and the matter was referred to Taxation Board of Review No. 2, which upheld the taxpayer's objection: (1983) 27 CTBR (NS) Case 3. The Commissioner appealed to the Supreme Court.''
17. Crockett J. decided, so far as is relevant, that the expenditure on the Bendigo flat was dictated by private considerations except in the month of May, when the taxpayer was required by his employment to work at both Wangaratta and Bendigo. His Honour held that the keeping of a flat in Bendigo during that month was dictated by the taxpayer's income-producing activity and was incidental to his work (at ATC pp. 4420-4421; A.T.R. p. 718). At ATC p. 4421; A.T.R. p. 719 his Honour found that the essential character of the use of the flat was for accommodation and not within the positive limbs of sec. 51(1).
18. At first blush the applicant's outgoings are more comparable with the allowed outgoings in Charlton. However, they differ as to their nature and that difference alters the essential character of the outgoings. These outgoings were incurred because the applicant decided to establish a second home. The motive for doing so is to be found in the demands made upon him by the requirements of his practice as a radiologist and his professional activities. But the outgoings were incurred for the purpose of maintaining domestic premises and do not have any relevant connection with his income-producing activities. Even if it could be shown that the outgoings were incurred for the purpose of producing assessable income, which I do not think is the case, the outgoings claimed under sec. 51(1) would be disallowed as outgoings of a private or domestic nature.
19. It is undoubtedly the case that if the applicant had adopted a different course and merely put up at a convenient hotel when in the city on business, the hotel account would fall within the positive limbs of sec. 51(1) and be allowable as a deduction, not being outgoings of a private or domestic nature.
20. The apparent anomaly is recognised. However, the Tribunal must apply the law as it has been interpreted by the courts. Having concluded that the essential character of the outgoings was private or domestic expenditure I am bound to affirm the objection decisions under review.
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