Case M96

Judges:
KP Brady Ch
LC Voumard M
JE Stewart M

Court:
No. 2 Board of Review

Judgment date: 9 December 1980.

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K.P. Brady (Chairman); L.C. Voumard and J.E. Stewart (Members)

The present reference arises from a claim made by the taxpayer to deduct from the amount returned as assessable income for the year ended 30 June 1979, comprising salary as a bank clerk and weekly receipts of board from a lodger in his home, the expenses incurred in providing board and accommodation for that lodger.

2. The taxpayer, a bachelor, had been employed as a clerk with the X Bank for many years and in fact was due to retire in the short term future. He lived in a relatively old house left to him by his parents in a large capital city. The house was divided into two flats which were rated separately by the local council. The taxpayer lived in one flat and the other had been occupied on several occasions over the previous three years by various young people who either had suffered an unhappy home life or had incurred difficulty in securing good accommodation because of racial prejudice.

3. The taxpayer was substantially involved in working on an honorary basis for various charitable organisations, and his charge for board and accommodation was based upon the lodger's domestic situation and capacity to pay, rather than what he (the taxpayer) could secure as determined by market rates. Additional to making a cash payment, the lodger was expected to help the taxpayer with household chores, also with his charitable activities.

4. The taxpayer's lodger in the year of income under review was a young person who came from a broken home in another State. An amount of $20 per week was paid by him in that year for full board and accommodation and had been agreed at that low figure to permit him to travel to his home State at intervals during the year to see his parents. When he first took up lodging with the taxpayer in 1977 the charge had been agreed at $22 per week but had subsequently been reduced in recognition of the fact that he was sharing certain facilities, such as the television, with another lodger. (The latter lodger's board was fixed at $15 per week because he had problems ``with a difficult father''.).

5. The taxpayer, in his return of income for the year ended 30 June 1979, included as assessable income an amount of $960, being board receipts at the rate of $20 per week for 48 weeks. He claimed as deductions against that income the following charges, being one-half of the total amounts incurred:

                                                          $
      Rates ......................................       247
      Insurance on buildings and
      contents ...................................        74
      Workers' compensation
      premium ....................................         4
      Painting of fences, garages,
      laundry and toilet .........................       228
      Repairs to television and
      lawn mower .................................        33
      Interest on housing loan ...................       269
      Electricity and gas ........................       192
      Telephone rental ...........................        43
      Replacement of linen and
      crockery ...................................        49
      Depreciation on furniture
      and fittings and other
      household durable items ....................       102
                                                      ------
                                                      $1,241
                                                      ------
      

6. Additionally, the taxpayer claimed deduction for the whole of the under-mentioned expenditures:

                                                            $
      Curtains for the lodger's
        flat .........................................      44

      Depreciation on consumer
      durables used wholly by
      the lodger .....................................     168

      Toothpaste, soap and other
      personal requisites used
      wholly by the lodger ...........................      53
      

Provision of meals for the lodger as follows -

        (i) Monday to Friday inclusive:

                                                             $
             Breakfast ..............................       0.35
             Evening meal ...........................       2.70
             Supper .................................       0.15
                                                           -----
                                                           $3.20
                                                           -----

        (ii) Saturday/Sunday inclusive:
                                                             $
             Breakfast ..............................       0.35
             Lunch ..................................       1.35
             Evening meal ...........................       2.50
             Supper .................................       0.15
                                                           -----
                                                           $4.35



                      -----

             Total per week comprising -

                 5 days @ $3.20 and
                 2 days @ $4.35       = $24.70

             Total for year = $24.70 for 48 weeks          1,186
                                                          ------
                                                          $1,451
                                                          ------
      

(The above meal costs were based on a detailed costing of the various items consumed at each meal.)

7. The Commissioner issued an amended assessment in which he eliminated from income the amount of $960 on the basis that it did not constitute assessable income, and disallowed the deductions totalling $2,692 (viz. $1,241 and $1,451), contending that no such deductions were allowable under either sec. 51, 53, 54 or 72 of the Income Tax Assessment Act. The taxpayer objected to the Commissioner's action, and upon the Commissioner disallowing the objection he requested the matter to be referred to this Board.

8. The nub of the issue is whether the regular receipts of cash from the lodger constitute income. In the case
Scott v. C. of T. (N.S.W.) (1935) 3 A.T.D. 142, Jordan C.J. at p. 144 had cause to say:

``The word `Income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind...''

9. It has been contended that the term ``ordinary concepts and usages of mankind'' would include these types of receipts: income by way of remuneration for personal services, income from property, and income from carrying on a business (Manual of the Law of Income Tax in Australia by K.W. Ryan, 4th ed., p. 14). In seeking to ascertain into which of the above categories, if any, the taxpayer's receipts of board might belong, it appears prudent to examine how the taxpayer himself regarded them. In his evidence he agreed that the weekly payment of $20 was to defray the cost of the food consumed by the lodger, and was based (albeit inaccurately) on his estimate of the food costs. When he discovered it was inadequate to cover such costs, he increased it as from 1 July 1979 to $25. However, whilst it was not the taxpayer's intention to make a profit from taking in a lodger, it was also not his intention to incur a loss, and he had it in his mind that the shortfall would be matched by the help provided by the lodger around the house. He said:

``I was getting help in the way of physical work and help around the house, and took that as part payment, a square-off...''

10. Further evidence as to the lack of a profit-making purpose was reflected in the fact that the lodger's weekly rate of board had been reduced in 1977 by $2 per week at a time when food prices were rapidly increasing. Also the taxpayer did not attempt to charge the going rate for board and lodgings, but in fixing the rate for the particular lodger he took account of such non-commercial considerations as the lodger's own financial situation and family background. He said:

``I do not know what a determined figure or market value is, but the fact is that two particular lads as I say had been separated, they were quite homeloving lads, one was in a more difficult situation than the other, and for that if I had charged them a very heavy rate they would not be able to go back and see their respective parents. I was lenient from that point of view.''

11. Based on the taxpayer's costs of providing board and accommodation as detailed, supra, he would have needed to charge the lodger in the year under review $54 if only to cover his outlays. A similar set of circumstances to the taxpayer's came before this Board, as then constituted, in Case H87
(1957) 8 T.B.R.D. 399. There, the taxpayer made her farm property available from time to time for use as a camping site and holiday home by certain religious and charitable organisations. These organisations usually paid a small per capita charge towards the expenses of the camp. The taxpayer did not expect nor did she desire to make a profit from the camping activities upon the property. Her object was to perform a service to the community. She claimed as a deduction from her assessable income the losses incurred in assisting with the camp. It was held that the losses were not incurred in gaining or producing assessable income, nor were they necessarily incurred in

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ATC 686

carrying on a business for the purpose of gaining or producing such income within the terms of sec. 51. There, the taxpayer's attitude as to profit making as regards the camp activity was similar to the taxpayer's in the case now before us. She said:

``It was my wish to do this as my service to the community, so I did not want to really charge them for it beyond just a nominal amount which went towards expenses while they were in residence at [the property] such as light and wood for fires etc., the arrangement being that they paid their own food expenses.''

12. Relevant also to the instant case is the case of
The Religious Tract and Book Society of Scotland v. Forbes (1896) 3 T.C. 415. The Society in that case had been founded for the diffusion of religious literature. In the course of these activities it sold bibles through two shops, one in Edinburgh and one in Belfast. It also effected sales through cottage missionaries whose activities, called colportage, consisted of praying with sick persons, reading the Scriptures, and conversing with them on spiritual matters. That part of the Society's activities could not by itself have been carried on at a profit as a commercial undertaking, and required the aid of subscriptions. On the other hand, the Edinburgh shop operated at a profit and the Belfast depot at a loss. The Society maintained that the loss on its missionary activities should be deductible for income tax purposes from the Edinburgh profit in the same way as was the loss occasioned in the Belfast bookshop. The Inland Revenue Commissioners rejected the claim, and the matter came before the Court of Exchequer (Scotland). There it was unanimously held that the colportage activity was not a trade and that the loss could not for income tax purposes be set against the profits from the bookseller's business carried on at the shop. The Lord President stated at pp. 418-419:

``When we turn to the methods of the colportage it appears that they are not commercial methods, that is to say, that the business carried on is not purely that of pushing the sale of their goods, but that on the contrary the duty of the salesman is to dwell over the purchase and make it the occasion of administering religious advice and counsel. Now, under these conditions it seems to me to be impossible to hold that this is a business, trade, or adventure, which is unfortunately resulting in loss. It is really a charitable mission in which the sale of the Scriptures is made the occasion for doing something more than merely effect the sale of books.''

13. In a somewhat similar case,
Grove v. Young Men's Christian Association (1903) 4 T.C. 613, the presiding Judge applied the decision in The Religious Tract and Book Society of Scotland v. Forbes (supra) to make the profits of a restaurant conducted by that Association taxable, and to refuse a deduction for expenses claimed in respect of the Association's Educational Classes Gymnasium & Publications Department. As was said in Case H87 (supra) at p. 402, the presiding Judge's observations at p. 617 were apposite to that hearing, and no less relevant are they to the hearing now before us:

``The law seems to be that if you carry on a trade you are not to take off the losses connected with something else you do, however philanthropic and however desirable.''

14. In the case before us the taxpayer was not engaged in carrying on a trade but was employed as a bank clerk. However, the dictum remains valid for the taxpayer's situation. The loss incurred on his charitable work is not deductible as an expense against his salary income. We use the expression ``charitable work'' because we consider that the taking in by the taxpayer of a lodger into his home and the charging by him of an inadequate amount for board so that he could travel to his home interstate at regular intervals to see his parents, was merely an extension of his charitable activities. Accordingly, we view the receipts of board totalling $960 in the year of income under review neither as income by way of remuneration for personal services supplied to the lodger, nor as rent, but simply as a partial recoupment of private expenditures. Also, for the reasons detailed above, we find as a fact that the taxpayer was not carrying on a business.

15. Hence it follows that the expenditures are not allowable deductions under sec. 51, 53, 54 and 72 of the Income Tax Assessment Act. We would therefore confirm the Commissioner's assessment.

Claim disallowed