Case N50

Judges:
KP Brady Ch
LC Voumard M
JE Stewart M

Court:
No. 2 Board of Review

Judgment date: 30 June 1981.

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

The taxpayer in this reference is an architect who retired from service as an employee with the... State Government in April 1977. He was then 72 years of age. Subsequent to that retirement, the taxpayer contends that he has been in practice as an architect on his own account.

2. In the year of income ended 30 June 1980, he incurred expenditures on subscriptions to professional journals, and travelling and accommodation expenses, also depreciation on his professional and technical library, amounting in all to $142. He claimed these as deductions against his assessable income for that year as constituted by age pension and superannuation receipts. There was no income from the practice of his profession in that year, nor has there been in any prior year.

3. The Commissioner disallowed the above expenditures on the basis that they were not incurred in the gaining of assessable income as required by sec. 51(1). He also disallowed the depreciation claim on the somewhat wider grounds stipulated by sec. 54(1) that the professional library was not used by the taxpayer during the year of income for the purpose of producing assessable income, and was not installed ready for use for that purpose and held in reserve during that year. It is the disallowance of those claims and the taxpayer's subsequent objection that is now before us.

4. At the hearing the taxpayer appeared in person and gave evidence. He was not represented.

5. In giving his evidence, the taxpayer stated that he came to Australia in 1962 when he was recruited from East Africa by the Commonwealth Department of Works, and became a salaried employee working in that Department. (It would seem that at that time the Australian Government was actively recruiting in Africa for architects, quantity surveyors and engineers.) At the time of his retirement he was still working as a salaried employee, but with the... State National Parks and Wildlife Service. At no time since arriving in Australia did he derive income from the practice of his profession other than as a salaried employee.

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ATC 247

6. In his return of income for the year of income ended 30 June 1980, he claimed the following expenses as deductions:

Under sec. 73:

Fees to the following professional bodies--


      Royal Australian Institute of
         Architects ....................... $92
      Royal Institute of British
         Architects .......................  17
      Architects Registration Board of
         X State ..........................  12
      Architects Registration Board of
         Y State ..........................  20
                                           ----
                                           $141
                                           ----
    

Under sec. 51(1):

      Subscriptions to technical and
         professional journals ............$ 30
      Typewriter .......................... 175
      Printing of professional business
         cards ............................  35
      Travel to and accommodation at L as
         member of the committee on the
         Architects Registration Board, and
         council meeting of the Royal
         Australian Institute of Architects. 88
                                           ----
                                           $328
                                           ----
    

Under sec. 54(1):

      Depreciation on library of
         professional and technical books.  $24
                                           ----
                             Total:        $493
                                           ====
    

7. In preparing the taxpayer's assessment, the Commissioner disallowed all of the above claims other than fees paid to the two Architects Registration Boards and to the Royal Institute of British Architects. Also he allowed $42 only of the fee paid to the R.A.I.A. under the terms of sec. 73(2). At the hearing, the taxpayer did not contest that latter disallowance nor the disallowance of the typewriter and the business cards. Accordingly, the matters that remained in issue were the subscriptions to the journals and the travel and accommodation expenses, also the depreciation claim.

8. As these three items involve two separate provisions of the Assessment Act, it is convenient to deal first with the claims made for the subscriptions to the journals, and travel and accommodation expenses, and secondly with the depreciation claim for the library.

9. In order that the taxpayer can obtain deductions for the former items, he must show that the outgoings were incurred in gaining his assessable income or were necessarily incurred in carrying on a business for the purpose of gaining such income, and were not outgoings of a capital, private or domestic nature.

10. In his submissions, the taxpayer contended that, whilst he did not derive income from his profession of architect in the year of income in issue, he was registered as an architect with the Royal Australian Institute of Architects in that year (as indeed he had been in previous years) and he regarded himself as being in business as an architect. He averred to the fact that his name was published each year in the Government Gazette which lists all registered architects, and that the list could be referred to by any member of the public seeking an architect. Also he had circularised a letter to a number of municipal bodies advising them that he had retired from the... State Government Department and was available for consultancy work. It seemed that the taxpayer had a keen interest in the restoration of old buildings, and he considered that his knowledge in that area could be used by municipal councils having historic buildings within their boundaries. In point of fact, the taxpayer did some minor consultancy work on an honorary basis in the year of income for the National Trust and also gave advice on renovation work required to house handicapped people, but again for no fee.

11. The taxpayer stated that he subscribed to the journals Architecture Australia and Building Materials and Equipment, because from time to time they contained articles on such matters as prevention of damp in buildings, measures to curb deterioration of stone work in old buildings and other aspects of preventive maintenance in which he had a close interest. He went on to say that he had subscribed to them for over five years. He continued to pay his subscriptions, even though he had no work on hand, because he believed that he would shortly obtain assignments and it would be futile to cancel subscriptions and then have to renew them following upon the receipt of work.

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ATC 248

12. The taxpayer did not have an office separate and apart from his home, but kept his reference books in his bedroom together with his drawing board and drawing instruments. He made the point that in the event of obtaining work he would probably perform the assignment in his bedroom as it was a large room, and the type of consultancy he would be involved in, for example, techniques for restoring old buildings, would not probably require anything more extensive or sophisticated than what he presently had.

13. We now turn to a number of cases, most decided by the High Court, to assist us in determining the validity, or otherwise, of the taxpayer's claims.

14. In the case of
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295, the taxpayer company carried on a business of treating ore and producing zinc concentrates at Broken Hill. It employed workers in respect of whom it was obliged to contribute to a compensation fund to cover the incidence of pneumoconiosis and tuberculosis, those types of illness then being prevalent amongst miners. The company discontinued its business but remained liable to make, and in fact did make, payments to the fund in subsequen' years. In its returns of income for the years 1933 and 1934, it sought to deduct the amounts of such payments from its assessable income which consisted solely of dividends and interest from investments. It was held by the High Court that the company was not entitled to the deduction as the amount paid was not an outgoing ``actually incurred in gaining or producing the assessable income''. As was stated by Starke J., ``the expenditure had nothing whatever to do with the appellant's income in the years in question''.

15. Likewise in the instant case there was an entire lack of connection between the taxpayer's assessable income as represented by his pension and superannuation receipts, and the amounts expended on the subscriptions to the journals and the travelling expenses, also the depreciation charge. If there were no other factor involved, the taxpayer's claim would fail through the insufficiency of nexus required by the first limb of sec. 51(1).

16. However, the taxpayer contends that he was in practice as an architect in the year of income, and argues that his claims are properly deductible, even though he derived no income from that pursuit in that year, because the outlays were incurred to derive income in the future. It has been confirmed by the courts as recently as
F.C. of T. v. White 75 ATC 4018 at p. 4020, that outgoings need not be related to the income of the tax year in question to secure deductibility under sec. 51(1), and this is so whether the income is derived from carrying on a business or is earned by an employee.

17. In the instant case, the taxpayer was not an employee in the year of income, but was he carrying on a business?

18. Section 6(1) of the Assessment Act defines ``business'' as including ``any profession, trade, employment, vocation or calling, but does not include occupation as an employee''. The question whether a particular taxpayer is carrying on a trade or business or a profession is one of degree and always one of fact (see
Currie v. I.R. Commrs. (1921) 2 K.B. 332 at p. 341).

19. The fact that the taxpayer did not derive assessable income as an architect in the year in issue is not conclusive of the fact that he was not in business, Sheppard J. stating in
Inglis v. F.C. of T. 77 ATC 4305 at pp. 4307-4308 that:

``It is perfectly true, of course, that a business may be being carried on and yet no income whatsoever may be earned from it in a particular year, and it is also true that expenditure incurred at a point of time after it may be said that the business has ceased to be carried on may sometimes be deducted in later years if it relates to the carrying on of the business in prior years.''

20. Also, an activity may amount to a business even though carried on in a small way (
Thomas v. F.C. of T. 72 ATC 4094).

21. Furthermore, it is not essential to the carrying on of a business that a taxpayer should make a profit. In the case of
Tweddle v. F.C. of T. (1942) 7 A.T.D. 186, which came before the High Court in 1942 and dealt with the deductibility of losses incurred by a taxpayer in carrying on farming operations on two country properties in

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ATC 249

Victoria, namely ``Wonga'' situated near Colac, and ``Winlaton'' near Shepparton, Williams J. stated at p. 190:

``It is not suggested that it is the function of income tax Acts or of those who administer them to dictate to taxpayers in what business they shall engage or how to run their business profitably or economically. The Act must operate upon the result of a taxpayer's activities as it finds them. If a taxpayer is in fact engaged in two businesses, one profitable and the other showing a loss, the Commissioner is not entitled to say he must close down the unprofitable business and cut his losses even if it might be better in his own interests and although it certainly would be better in the interests of the Commissioner if he did so... I am satisfied that the appellant is seeking to establish himself at Winlaton as a recognised breeder of high class stud stock, and that while he is prepared to make losses to achieve this ambition he has a genuine belief that he will be able eventually to make the business pay.''

22. In the case now before us, the taxpayer was qualified to carry on the practice of an architect and was registered as such with the controlling body. Also it was his intention to make profits and he was available to accept assignments if such came his way. Furthermore, in the year of income he gave advice gratuitously to people who were at least potential clients, but nothing further eventuated. We cannot, however, regard these various facets as amounting to the carrying on of a business. It would seem to us there was almost an entire lack of activity on the taxpayer's part due to the lack of demand for his services; and in the final analysis we regard the degree of activity as the primary determinant as to whether a taxpayer is carrying on a business. As was said by Brennan J. in
Inglis v. F.C. of T. 80 ATC 4001 at p. 4005:

``At the end of the day, the extent of activity determines whether the business is being carried on. That is a question of fact and degree.''

See also
Cooper v. Stubbs (1925) 2 K.B. 753 at p. 764.

23. In his evidence, the taxpayer placed considerable stress on the fact that being qualified as an architect, such qualification did not cease because he was not earning income, and it seemed that he invited a finding from us that he was therefore carrying on a business. But the courts have held (see Currie v. I.R. Commrs., supra) that the fact that a taxpayer is a member of an organised professional body with a recognised standard of ability enforced before he or she can enter it, and a recognised standard of conduct enforced while he or she is practising, is only one of the factors that should be taken into account in considering whether the particular person is carrying on a profession; in themselves those sorts of considerations are far from conclusive of the matter.

24. Furthermore, we are unable to see that the degree of the taxpayer's likely activity will increase in the future. We base this view only minimally upon the taxpayer's age (currently 76), because he impressed us as being mentally alert and extremely fit and energetic, but more because of the circumstance that, up to the time of his retirement at the age of 72, he had never practised as an architect on his own account. Accordingly, at a late stage in life he is faced with the problem of establishing a practice with his home as his base, and securing clients. This can be a most daunting task. Endorsement of the problem is reflected in the fact that in the three years he has been in practice on his own account he has not yet secured a paying client, nor has he currently any work on hand. It is true that enquiries on technical matters were made of him in the year in issue, but we regard these as nothing more than the kind of advantage that is taken of a considerable number of professional people by various members of the public at one time or another. For all of the above reasons, we find as a fact that the taxpayer was not carrying on a business in the year of income and therefore we consider that the claim that subscriptions to various journals constitute deductions under sec. 51(1) must fail.

25. We also consider that the taxpayer's claim for deduction of the travelling and accommodation expenses incurred as a member of a committee dealing with revisions to the Architects Act of 1970 must also fail. He derived no income from that position, and as has already been stated he was not carrying on business as an architect at the time he incurred the expenditures.

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ATC 250

26. Finally, we do not consider that the taxpayer can succeed with his claim for depreciation on his library. With respect, we would concur with the view expressed by the Chairman of the No. 3 Board in Case L47,
79 ATC 303 at p. 305, that the words contained in sec. 54(1) ``used by him during that year for the purpose of producing assessable income'' mean ``used by him (in the course of operations carried on) for the purpose of producing assessable income''. We have stated our view that no operations were carried on by the taxpayer in the year of income, and so whatever the use made of the library by the taxpayer in the year of income, it was not the use required by the section (ref.
F.C. of T. v. Faichney 72 ATC 4245 at p. 4250). Consistent with that view, we consider that the library could not be said to be held in reserve for the purpose of producing assessable income.

27. Accordingly, the Commissioner's decision on the objection must be upheld and his assessment confirmed.

Claim disallowed