Federal Commissioner of Taxation v. Forsyth.

Judges:
Northrop J

Court:
Federal Court

Judgment date: Judgment handed down 2 November 1979.

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Northrop J.: There are before the Court two applications by the Commissioner of Taxation of the Commonwealth, hereinafter called ``the Commissioner'', for leave to appeal from those parts of the judgment of the Supreme Court of Victoria constituted by a single Judge given on 18 September 1979, whereby it was ordered that the appeal of the Commissioner against the decision of the Commonwealth Taxation Board of Review determining that the assessment by the Commissioner of Neil Harry Mark Forsyth, hereinafter called ``the taxpayer'', for the years of income ended 30 June 1974 and 30 June 1975 be amended by allowing as a deduction $840 and $1,040 respectively for rent be dismissed. The applications, by agreement, were heard together. The facts upon which the deduction was claimed are similar with respect to each year of income, the difference in the amounts claimed resulting from the fact that for the year ended 30 June 1974, the deduction was claimed for part of the year only. The quantum of the deductions claimed is not in dispute. For the purposes of this judgment reference need be made to one year of income only.

The facts are not in dispute. In April 1973 a dwelling house was purchased by a trust of which at that time, the taxpayer and his wife were trustees. The beneficiaries of the trust are, in general terms, the taxpayer's family. Prior to moving into residence of the premises, the trustees resolved that they would permit the taxpayer to keep one room of the premises as a study together with such ancillary space and facilities as he might reasonably require from time to time for the purpose of his professional practice and that he pay for that use $20 per week or such other sum as might be mutually agreed upon. The remainder of the premises were occupied by the taxpayer and his family as a residence. The only point at issue is whether the rent of $20 per week as paid by the taxpayer was an outgoing incurred in gaining or producing the taxpayer's assessable income and if so, was it an outgoing of a capital, private or domestic nature, see sec. 51(1) Income Tax Assessment Act 1936, as amended, hereinafter called ``the Act''.

The Supreme Court found that the room in question was not part of the taxpayer's residence but formed a discrete unit within the same building. The Court found that the payment of rent for the room was an outgoing incurred by the taxpayer in gaining or producing the taxpayer's assessable income and was not an outgoing of a capital, private or domestic nature. The Commissioner seeks leave to appeal from that decision.

The applications for leave to appeal are made under sec. 196(5) of the Act. Section 196(4) provides that except as provided by subsec. (5) an appeal does not lie from a decision of the Supreme Court exercising the federal jurisdiction conferred by sec. 196. Section 196(5) provides:

``The Commissioner or the taxpayer may appeal against a decision of a Supreme Court on an appeal or reference under this section -

• (a) by leave of the Federal Court of Australia, to that Court; or
• (b) by special leave of the High Court, to that Court.''

The Federal Court of Australia Act 1976, as amended, by sec. 24(1)(c) confers jurisdiction on the Federal Court to hear and determine:

``(c) in such cases as are provided by any other Act, appeals from judgments of a

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ATC 4578

court of a State, other than a Full Court of the Supreme Court of a State, exercising federal jurisdiction.''

By sec. 25 of that Act, the appellate jurisdiction of the Federal Court is, subject to that section, exercised by a Full Court but sec. 25(2) provides that applications for leave or special leave to appeal to the Federal Court may be heard and determined by a single Judge or by a Full Court. Where the application comes before the Federal Court constituted by a single Judge, of necessity inhibitions are placed on the matters that may be considered in determining whether leave be granted and in particular whether the decision challenged is correct or not. In this respect I agree with the views expressed by Toohey J. in
Lombardo v. F.C. of T. 79 ATC 4079 and Lockhart J. in
F.C. of T. v. Nixon 79 ATC 4512. At the same time these inhibitions prevent the Court from becoming involved in the problem of hearing argument on the merits of the decision from which leave to appeal is sought, a problem similar to that discussed by the Full Court of the Supreme Court of Victoria in
Niemann v. Electronic Industries Ltd. (1978) V.R. 431.

The early history of sec. 196 of the Act is discussed in
Watson v. F.C. of T. (1952-1953) 87 C.L.R. 353 at pp. 369-374. In its then form sec. 196 permitted an appeal from a decision of a Board of Review to the High Court but sec. 196(3) then provided that the decision of the High Court on such appeal ``shall be final and conclusive''. This provision prevented an appeal from a decision of the High Court constituted by a single Justice to the Full Court of the High Court. The basis for the provision could be assumed that the Legislature intended that the parties should not be exposed to too many legal proceedings. Watson v. F.C. of T. was followed by the High Court in
Point v. F.C. of T. 71 ATC 4014; (1971) 124 C.L.R. 669. The provisions of sec. 196 of the Act may be compared with the complementary provisions of the Act where, under sec. 187(c), the objection by a taxpayer is forwarded to the Supreme Court, or formerly the High Court or to the Supreme Court of a State and the right of appeal applicable thereto, see sec. 197, 199 and 200 of the Act.

An appeal under sec. 196 of the Act was first granted by the Income Tax Assessment (No. 3) Act 1973 when the Commissioner or the taxpayer could by leave of the High Court appeal to the High Court. Under the current provisions an appeal may be taken by leave to the Federal Court or by special leave to the High Court. Any appeal from the Federal Court to the High Court is subject to special leave being granted by the High Court, sec. 200A of the Act, sec. 33 Federal Court of Australia Act.

Section 196 of the Act recognises the distinction between leave and special leave. The amendments made in 1973 constitute a departure from the earlier policy of the Act not to allow any appeal in the strict sense from a decision of the Supreme Court of a State constituted by a single Judge or the High Court constituted by a single Justice. Having regard to the amendments, the Court should not be astute to refuse to grant leave where under the circumstances it is reasonable that the Commissioner or a taxpayer desires to appeal. What is reasonable must, of necessity, vary from case to case. It is impossible to state principles of general application. To attempt to do so would restrict the general discretion conferred by sec. 196(5)(a). A reference to the many cases where leave to appeal has been considered supports this view. It is sufficient that the discretion is exercised judicially in the sense expounded in the well known passage from
House v. King (1936) 55 C.L.R. 499 at p. 505.

In the present case most of the reasons why leave to appeal should be given, as appearing in the affidavit supporting the application, O.52 r.4, relate to the correctness or otherwise of the decision of the Supreme Court. I rejected the matters set out in para. 5(6) of the affidavit. In the course of submissions it became clear that the real issue was whether, on the undisputed facts and upon the correct application of legal principles, the room in question was not part of the taxpayer's residence but formed a discrete unit within the residence so that the rent paid for it did not amount to an outgoing incurred in gaining or producing the taxpayer's assessable income or that in any event whether the rent was an outgoing of a capital, private or domestic nature. In support of his submission counsel for the Commissioner referred to decisions containing expressions of opinion relating to

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ATC 4579

similar types of problems and in particular he referred to
Thomas v. F.C. of T. 72 ATC 4094,
F.C. of T. v. Faichney 72 ATC 4245; (1972) 129 C.L.R. 38 and
F.C. of T. v. McCloy 75 ATC 4079, the last decision being by the Supreme Court of N.S.W. Each of these cases involved the application of sec. 51 of the Act.

Counsel for the taxpayer submitted that leave to appeal should not be granted. He contended that the decision in the present case was a decision which did not raise any general question, it depended upon its own particular facts and could not give rise to any question of principle of general application.

In my opinion there is a substantial or real question to be answered on the appeal. Insofar as it does not raise the correctness or otherwise of the decision of the Supreme Court of Victoria, in my opinion the appeal raises an arguable question, but in this respect I prefer to base my decision in part on the existence of a substantial or real question to be answered. Although the amounts involved cannot be said to be large, they are of a recurring kind. I was not referred to any decision where a Supreme Court has had to consider the application of sec. 51 of the Act to facts similar to those of the present cases. The Commissioner should have the opportunity to test this matter in an appellate court exercising federal jurisdiction. If leave to appeal is not granted, the decision of the Supreme Court would become the accepted precedent to be applied to facts similar to those in the present case. As time passed, the Commissioner would find it increasingly difficult to test that principle in an appellate court. In all the circumstances it is reasonable that leave to appeal should be granted.

During the course of submissions Counsel for the Commissioner announced that the Commissioner was prepared to pay the reasonable costs of the appeal irrespective of the result. In my opinion, this was a reasonable attitude to be taken by the Commissioner. Accordingly, leave to appeal is granted on condition that the Commissioner pay the taxpayer's costs of the appeal in any event. It is further ordered that the Commissioner pay the taxpayer's costs of these applications.

ORDER:

Appeal VG No. 42 of 1979

1. that leave be granted to the Commissioner of Taxation to appeal from a decision of the Supreme Court of Victoria given on 18 September 1979 dismissing the Commissioner's appeal from a decision of the Commonwealth Taxation Board of Review amending the Commissioner's assessment of income tax in respect of the year of income ended 30 June 1974 ON CONDITION that the Commissioner pay the taxpayer's costs of the appeal in any event.

2. that the Commissioner pay the taxpayer's costs of this application.

ORDER:

Appeal VG No. 43 of 1979

1. that leave be granted to the Commissioner of Taxation to appeal from a decision of the Supreme Court of Victoria given on 18 September 1979 dismissing the Commissioner's appeal from a decision of the Commonwealth Taxation Board of Review amending the Commissioner's assessment of income tax in respect of the year of income ended 30 June 1975 ON CONDITION that the Commissioner pay the taxpayer's costs of the appeal in any event.

2. that the Commissioner pay the taxpayer's costs of this application.