CASE 9/96

Members:
BM Forrest DP

Tribunal:
Administrative Appeals Tribunal

Decision date: 19 January 1996

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BM Forrest (Deputy President)

This is an application by the taxpayer for review of a decision of the respondent to disallow an objection against an amended income tax assessment for the year of income ended 30 June 1993. The taxpayer had claimed a deduction under s. 51(1) of the Income Tax Assessment Act 1936 (``the Act'') of $7,596.00 for the cost of meals purchased in the course of his employment as a driver of an articulated vehicle.

In response to a request by the respondent for documentary evidence to substantiate the claim the taxpayer provided a diary for the relevant period providing details of the date, location and price of meals claimed and authorised log books, providing the date, route and time of each day's work journey. The respondent disallowed the claim on the ground the entries in the diary did not satisfy the substantiation provisions: s. 82KU(1).

The assessment was amended, the taxpayer objected and on 17 November 1994 he was notified that his objection was disallowed and that a penalty had been imposed under s. 226G.

The deductibility of the cost of the meals under s. 51(1), the application of the substantiation requirements and the imposition of the penalty are all in issue.

At the hearing the taxpayer was represented by Mr Searle of counsel and the respondent by Ms Sloss of counsel. The Tribunal had before it the documents furnished by the Commissioner pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975. Log books and a diary covering the relevant period were tendered in evidence. The taxpayer gave evidence.

Section 51(1) provides:

``51(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.''

The taxpayer resides with his wife in a provincial city in Victoria and worked from his employer's base located in the same city. He usually worked Monday to Friday and the occasional Saturday driving an articulated vehicle to Melbourne and return.

Normally he would leave his employer's depot at about 5 or 5.30 am, would stop along the way for a cooked breakfast and then travel to the particular destination in Melbourne where the semi-trailer was to be unloaded. Including waiting time, unloading would usually take about two hours. Lunch was usually hamburgers, steak sandwiches, roast chicken or a grill. He would then proceed to the Melbourne depot of his employer or some other pick up point for the load for the return journey. On the way home he would stop for a ``road house'' meal, before arriving back at the home depot at about 7.30 pm.

The taxpayer is paid on a hourly rate; the first 8 hours on normal time, the next 2 hours, time and a half and thereafter double time. He is not paid an overtime meal allowance.

A summary of the taxpayer's journeys, based on the taxpayer's log books prepared by Ms Sloss, noted that the duration of the 208 journeys in the 1993 year varied between 7.75 hours and 18.75 hours. Six journeys were of 18 hours or more, the average was 13 hours and the most common journey time was between 12 and 13 hours. All of the journeys were intrastate and did not require overnight stops away from home. The taxpayer explained that the log books were not an entirely accurate picture of

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his hours of work as they did not record the time he spent in the depot before a journey commenced and after his return, although as I understood the evidence these periods were not substantial as the taxpayer was not required to load or unload the trailers.

In evidence the taxpayer said that irrespective of the duration of the trip, he invariably ate three meals away from home at a total daily cost of around $36-$38, with each meal costing in the $9-$12 range. It appeared to be a pattern that the taxpayer, through the course of his usual working day, would eat breakfast, lunch and often a third meal; sometimes stopping for the third meal when he had as little as half an hour travelling time left before reaching the home depot.

In
FC of T v Cooper 91 ATC 4396; (1991) 29 FCR 177 the Full Federal Court considered whether the cost of additional food and drink, that is, over and above mere sustenance, that a professional rugby league player consumed at the direction of his coach in order to build up his weight, was deductible under s. 51(1). The majority, Lockhart and Hill JJ. in separate judgments, held that the expenditure was not deductible either because it was not expenditure incurred in gaining assessable income or alternatively that it was expenditure of a private nature.

Lockhart J. referred to the test to be applied at ATC 4400; FCR 181:

``For expenditure to be an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end: see [
Ronpibon Tin NL and Tongkah Compound NL v FC of Taxation (1949) 8 ATD 431 at 435; (1949) 78 CLR 47 at 56]. This test of deductibility has been explained in subsequent judgments of the High Court, so that to be deductible the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income.... The essential character test is also applied to determine if the expenditure is of a capital, private or domestic nature as these cases illustrate.''

and at ATC 4401-4402; FCR 184:

``The question whether the additional expenditure of the taxpayer is deductible under s. 51(1) cannot be answered simply by a process of reasoning that, because expenditure of this kind is a prerequisite to the earning of the taxpayer's assessable income (in the sense that it is necessary if assessable income is to be derived), it must be incidental and relevant to the derivation of income. It does not follow that such expenditure is incurred in or in the course of gaining or producing the income. The deductibility of the expenditure depends upon determining the essential character of the expenditure itself and not upon the fact that, unless it is incurred, the taxpayer will not be able to engage in the activity from which his income is derived.''

His Honour pointed out that the essential character test had also to be applied in determining if the expenditure is of a private or domestic nature. He also observed that deductibility of expenditure on certain items including food, poses difficult questions (at ATC 4401; FCR 183,184):

``In one sense expenditure on food is always relevant to the derivation of income because a person must eat to enable him to live and therefore to work. Obviously that alone is not a sufficient connection with the earning of assessable income to permit a deduction. On the other hand a person whose business is the publication of a food guide may buy and taste food in the course of his business, so there is a clear nexus between the expenditure and the derivation of income. The cases that lie in between the two extremities give rise to the difficulty and this case is one of them.''

Hill J. concluded that the connection between food, even this ``additional food'', and the income-producing activities of playing football or training were too remote. On the question of whether the expenditure was private His Honour remarked (ATC 4415; FCR 201):

``Food and drink are ordinarily private matters, and the essential character of expenditure on food and drink will ordinarily be private rather than having the character of a working or business expense. However, the occasion of the outgoing may operate to give to expenditure on food and drink the essential character of a working expense in cases such as those illustrated of work-related entertainment or expenditure

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incurred while away from home. No such circumstance, however, intervenes here.''

In submissions Mr Searle referred to Case U148,
87 ATC 868 and Taxation Ruling IT 2579, which followed that decision. IT 2579 accepted that meal expenses are deductible where the driver has been away for a period sufficient to require the taking of three meals and that, in those circumstances, the total cost of all meals while away will be deductible subject to compliance with the substantiation provisions. I note that IT 2579 was withdrawn and replaced by Taxation Ruling TR 94/18 which was stated to apply to the years commencing prior to its date of issue, 23 June 1994.

TR 94/18 provided that ``deductions'' are allowable against reasonable overtime meal allowances paid under an Industrial Award.

In Case U148 (supra) the Tribunal (Senior Member Roach) considered the situation of a truck driver in somewhat similar circumstances to the taxpayer. The test that the Tribunal there applied was whether the degree of departure from the norm or commonplace was sufficient to displace the finding to be ordinarily made, namely, that meals are ``private'' in nature. The Tribunal decided that a distinction was to be drawn between ``ordinary'' days, no less than 12 hours long, and those days upon which the taxpayer's working day would take him away from his home-district for so long as to give rise to a need, or perceived need, for three meals; that is, when the working day was to stretch out to 18 consecutive hours. For the latter days and those days only, he allowed the deduction claimed.

In Case U212,
87 ATC 1195 the Tribunal (Deputy President Todd) allowed a claim for a proportion of meal expenses incurred by an employee undertaking further study. Evidence before the Tribunal showed that it would have been impractical for the taxpayer to eat at home on the nights claimed. As the claim was limited to the excess above what eating at home would cost, and as it was incurred in pursuing a course of study, other expenses of which were conceded to be in the course of the production of assessable income, the Tribunal concluded that the amount claimed for meals was allowable under s. 51(1).

In Case Y8,
91 ATC 166, the Tribunal (Deputy President Gerber) rejected a claim for a deduction for the cost of meals by a police officer on duties away from home for up to 18 hours at a time.

He disagreed with the ``reasonableness'' approach to the expenditure in Case U148:

``To the extent that Senior Member Roach allowed the expenditure on meals taken `on the road' on the basis that they were `not unreasonable', I must regretfully part company with him. `Reasonableness' has not yet, as far as I am aware, been used as a litmus test to determine `the extent to which (expenditures) are incurred in gaining or producing the assessable income' or were of a private or domestic nature. Catching a bus to work is not `unreasonable', but it does not make the busfare an allowable deduction (
Lunney v FC of T [(1958) 11 ATD 404;] (1957-1958) 100 CLR 478). It is also `reasonable' for working mothers to engage babysitters. However the sitters fee's thus incurred are not deductible (
Lodge v FC of T 72 ATC 4174).''

and with the process of apportionment in Case U212 (supra):

``... I have some conceptual difficulties in apportioning a meal to the extent it is claimed to be consumed in earning assessable income and to the extent it is said to be `private or domestic'. Thus, while one can readily undertake such arithmetic with motor vehicles or lawnmowers, such a task strikes me as insuperable when applied to meals. I suspect the expenditure is either deductible in full or not at all.''

In a recent matter heard in public,
Carlaw and Commissioner of Taxation (Decision Number 10,363, unreported), the Tribunal (Deputy President McMahon) considered whether a deduction was allowable in terms of s. 51(1) for meals purchased by the taxpayer, Mr Carlaw, a truck driver. Mr Carlaw worked 12-18 hour days on deliveries from a metropolitan distribution centre to Coles stores located in northern and western New South Wales towns and in the Sydney and Newcastle metropolitan areas. The award under which the taxpayer worked provided that where overtime was required, the worker was to be paid a meal allowance. In recognition of this, the Commissioner allowed from the initial claim of $4,480, the sum of $871 pursuant to s 51AE(5)(j). The Tribunal refused a claim for a deduction under s. 51(1) for the balance of the amount expended on the basis the expenditure

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formed part of the ordinary cost of living. The Tribunal rejected the reasonableness categorisation of the expenditure in Case U148 and on the question of apportionment, after referring to
FC of T v Edwards 94 ATC 4255, found that there was no basis for regarding any part of the total expenditure claimed as work related.

(I) Allowable deductions - s. 51(1)

The taxpayer's claim for a deduction for the whole of the expenditure on meals in so far as it was based on Case U148 must necessarily fail. On the facts of the present case the journeys for which the whole of the meal expenditure was claimed ranged in duration from 7.75 hours to 18.75 hours. If the 18 hour test enunciated in Case U148 were to be applied, only a limited number of the journeys would qualify. Mr Searle sought to overcome that obstacle by submitting that the deduction is applicable irrespective of the number of hours worked. I am unable to accept that submission, which would necessarily involve an acceptance of the proposition that the whole of the expenditure on meals was incurred in the gaining of assessable income and therefore has the essential character of a working expense. There are to my knowledge no authorities which would support this.

Mr Searle also sought to rely on the Road Safety Regulations governing hours of driving and requiring periodical rest and refreshment breaks. In my opinion these requirements, designed for road safety, do not of themselves provide a sufficient nexus between the actual income earning activities of the taxpayer and the consumption of meals.

In the present case the claim made represented the total cost of meals purchased by the taxpayer on the various trips made on behalf of his employer. The difficulty in maintaining such a claim is in withstanding the general rule that the cost of meals is not a business expense but a private activity. That is not to say that expenditure on food is never a deductible business expense as in some circumstances it clearly is deductible. As a general rule the cost of meals will not be a business expense but there is no absolute principle of law that expenditure on food is a non deductible private expense. The cost of meals incurred by a business person while away from his home on business or by a public servant away from home (not necessarily overnight) come readily to mind as examples of expenditure on food which is deductible.

On one view the essential character of the expenditure on meals is that it is incurred for the sustenance of the taxpayer and as such is of a private nature. Thus seen, the expenditure, incurred for the purpose of enabling the taxpayer to earn assessable income, does not have its character determined by the fact that it is incurred while driving, the activity by which the taxpayer derives his assessable income.

However, if eating three substantial meals during the course of the working day enables the taxpayer to engage in the activity of a long distance truck driver, the occasion or setting in which the expenditure is incurred can be considered in the same light as the occasion of the expenditure on food by the business person or public servant and provides a nexus which gives that expenditure character as a working expense. Further, if the expense is incurred in gaining assessable income, it being an outgoing of a private character will not necessarily be fatal to a claim for deductibility:
John v FC of T 89 ATC 4101 at 4108; (1988-1989) 166 CLR 417 at 431. Whether the occasion of the expenditure characterises a particular expenditure as satisfying the employment nexus of s. 51(1) involves questions of fact and degree. Is it therefore appropriate to regard the whole of the expenditure on meals as failing the essential character test?

Where an overtime meal allowance is paid the approach which the Commissioner is permitted to take involves the concept of reasonableness. A deduction is allowed against an overtime meal allowance which the Commissioner considers reasonable, provided it does not exceed the amount of the allowance: s 82KZ(4). For the 1992-1993 income year the respondent ruled that up to $15 per overtime meal was considered reasonable: See Taxation Ruling IT 2686. In the same ruling, the guidelines for claims for expenditure on food and drink by long distance truck drivers were the rates of the Australian Public Service travel allowances which the Commissioner considered to be reasonable. It is also noted that the Transport Workers Award 1983 provided that an employee required to work overtime for two hours or more be paid $8.10 for each meal required to be taken.

Ms Sloss contended that the taxpayer is not a long distance truck driver, no doubt in an

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endeavour to blunt the significance of the reference to long distance truck drivers. In so far as it may be relevant to do so I would have little difficulty in accepting that the taxpayer, who in a normal work day travels in excess of 500 kilometres, is a long distance truck driver. On this point I note that the Interstate Road Transport Act 1985 uses a minimum of 100 kilometres for the purpose of defining certain long distance activities.

The process of apportionment is a question to which only passing reference was made. The taxpayer's case was a claim for a deduction for the whole of the expenditure and as already explained that cannot succeed. That said, I think the facts in the case raise the question of apportionment of the expenditure rather than a total exclusion from deductibility. The test of deductibility is not whether a taxpayer is in receipt of an overtime meal allowance, yet in Carlaw (supra) where Mr Carlaw was paid a meal allowance under an award, the Commissioner allowed as deductible expenditure that portion of the claim which represented the meal allowance, namely $871. Presumably here, if an overtime meal allowance were to be paid, which the Commissioner considered reasonable, that portion of the expenditure on meals not exceeding the allowance would be treated in a similar fashion.

This is not a case where there is a claim for the cost of additional food as in Cooper (supra) or clothing additional to the taxpayer's ordinary requirements as in Edwards (supra). The evidence generally pointed to the ordinary requirements of the taxpayer. I acknowledge the difficulty in attempting to identify the additional expenditure on food occasioned by the taxpayer while on the road performing his duties and gaining assessable income. But as Stephen J. remarked in
Handley v FC of T 81 ATC 4165 at 4171; (1980-1981) 148 CLR 182 at 193 any apportionment of the kind contemplated by s. 51(1) must necessarily often be a rough and ready process.

However, in this instance, there was insufficient evidence to satisfy the burden of proof cast upon the taxpayer for the basis of any apportionment contemplated by s. 51(1) to be further considered.

(II) Substantiation

In deference to the submissions I proceed to consider this question. It was common ground that the taxpayer's meal expenses be deemed to be an undocumentable expense: s. 82KU(8). In that event s. 82KU(6) applies to require the taxpayer, in order to satisfy the substantiation requirements, to record in a diary or similar document in respect of each meal purchased:

• • the date of purchase
• • the cost
• • the meal purchased
• • the name or business name of the supplier
• • the date the diary entry was made and to sign each such entry.

As observed earlier the taxpayer is not paid a meal allowance by his employer and consequently cannot take advantage of the provisions of s 82RZ(4). He must substantiate his claim for an expense item for it to be allowable as a deduction.

No record was kept of the name of the supplier or the date the diary entry was made. In this respect the taxpayer did not satisfy the requirements of s. 82KU(6); although each diary entry was not signed, the taxpayer's log book entries were signed each day and Ms Sloss did not press that point.

The question remains whether the taxpayer is entitled to a favourable exercise of the discretion contained in s. 82KZAA not to apply the substantiation requirements where the requirements would otherwise operate to deny a deduction for the particular expense.

``82KZAA(1) Where:

• (a) a taxpayer claims to have incurred an expense during a year of income; and
• (b) having regard to:
  • (i) the nature and quality of evidence that the taxpayer had available to substantiate the claim; and
  • (ii) special circumstances affecting the taxpayer, including, but not limited to, the following;
    • (A) the extent to which the taxpayer attempted to comply with the substantiation sections;
    • (B) whether the taxpayers failure to comply with the substantiation sections was inadvertent or deliberate;
• the Commissioner, in the course of reviewing the claim after the making of the assessment of the taxpayers taxable

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  income of the year of income, is satisfied that:
  • (iii) the expense was incurred by the taxpayer during the year of income; and
  • (iv) it would be unreasonable for the substantiation sections to apply in relation to the taxpayer in relation to the expense; and
• (c) the Commissioner's review is undertaken:
  • (i) of the Commissioner's own motion; or
  • (ii) in considering an objection against the assessment of the taxpayers taxable income of the year of income; or
  • (iii) in considering whether to make an amendment of the assessment of the taxpayer's taxable income of the year of income in response to a request made by the taxpayer before the commencement of this section;

the substantiation sections do not apply in relation to the taxpayer in relation to the expense.''

I accept that the taxpayer has attempted to comply with the substantiation requirements by providing a diary with details of the dates, locations and cost of meals for which a deduction is claimed. These dates coincide with the log book entries which he has signed recording each journey. The failure to strictly comply with the substantiation provision was inadvertent and not deliberate and I accept that he had a reasonably held belief that he was generally acting in accordance with the substantiation provisions, having been subject to an audit previously and the respondent being, at that time, satisfied with a diary maintained in the same format. Whilst no question of estoppel arises against the Commissioner, in considering the question of special circumstances regard may be had to the taxpayer's previous audit experience with the tax office. I also accept that the amounts claimed to be expended were in fact incurred.

Having regard to the foregoing matters and taking into account the degree of compliance with the substantiation provisions evidenced by the details supplied, it would in my opinion be unreasonable for the substantiation requirements to apply in relation to the meal expenses. The Commissioner's discretion therefore ought to be exercised in the taxpayer's favour.

(III) Penalty

The taxpayer's tax shortfall, as calculated by the respondent, is $3,288.47. Where it is demonstrated that the tax shortfall or part thereof was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with the Act or Regulations, s. 226G imposes a liability on the taxpayer to pay, by way of penalty, additional tax equal to 25% of the shortfall or part.

Ms Sloss submittd that in this case there was a failure by the taxpayer's agent to take reasonable care, as it would have been apparent to them that meal expenses were not deductible or at the very least that the deductibility of the expenditure was extremely dubious.

In the present circumstances I am satisfied that both the taxpayer and his tax adviser have taken reasonable care. The position taken by the taxpayer and his tax adviser is reasonably arguable. It does not lead to a finding that reasonable care was lacking in the preparation of the taxpayer's return. The taxpayer acted pursuant to the professional advice he sought and the claim that was made by him could not be said to exhibit a failure on his part to take reasonable care. In my opinion the penalty should in the circumstances be reduced to nil.