Case P34

Judges:
KP Brady Ch
LC Voumard M
JE Stewart M

Court:
No. 2 Board of Review

Judgment date: 7 May 1982.

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

These two references, which arose out of the Commissioner's disallowance of claims made by the taxpayer, raise for our decision the questions of whether the amounts of $2,140 and $2,101 are deductible pursuant to the provisions of sec. 51(1) of the Act in respect of the years of income ended 30th June, 1979 and 1980 respectively. Those amounts were expended by the taxpayer on account of two overseas trips which were undertaken by his wife in those years. Although the taxpayer accompanied his wife on the trips, his expenses were not in issue before us.

2. The taxpayer qualified as a medical practitioner in 1958 and pursued his profession in a partnership of general practitioners until approximately 1974. In or about that year his association with the partnership was discontinued, after which he continued in practice alone in separate premises (and in due course in premises owned by his family company) but with a growing emphasis being given to the use of acupuncture. Within a short time his professional activities were devoted mainly to acupuncture and to the provision for his patients of various treatments which largely excluded the use of drugs and concerned the

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control of diet and the control of stress through meditation and relaxation techniques. In the years in issue the taxpayer's gross fees, to the extent of about three-quarters, were derived from the conduct of his practice, and to the extent of about one-quarter were derived from an annual retainer which he received from a company (herein referred to as Y) for undertaking duties as its medical officer. About half of his professional time was devoted to the conduct of his practice and about half of it to visiting company-owned factories where he concerned himself with treating and monitoring the health of its employees.

3. In or about 1974, and at or about the time that he began to conduct his own practice, the taxpayer commenced to employ his wife on a full time basis as his receptionist, telephonist, office manager and as a (partly-qualified) nurse. That arrangement continued until some time before the commencement of the first of the two years in issue when, following upon the formation of the family company referred to above and a family trust (both of which were brought into existence for the financial benefit of the taxpayer, his wife and children), his wife ceased to be his employee. However, under an agreement between the family company in its capacity as trustee of the family trust and the taxpayer (whether it was in writing was not disclosed in evidence), the trust provided the taxpayer with, inter alia, the secretarial-receptionist services of his wife during the years in issue. The fees payable by the taxpayer for those services and claimed by him as deductions were said to have been calculated on the basis of a mark-up of 40% on the gross wages paid to his wife. It was not clearly established what salary payments were made to the wife in the relevant years nor how those amounts were calculated. However, it appears from the wife's evidence that they were probably calculated with reference to hourly rates payable at the relevant times to casual employees in the same or similar occupations.

4. Apart from a relatively short period subsequent to the years in issue (which does not appear to be important for present purposes), the taxpayer's wife was the only person to assist him in his practice. It appears that during the years in issue his wife carried out receptionist and similar duties and other duties of a specialised kind which became possible because of personal experiences which went back some nine years. It appears that, following upon a health crisis in or about 1972, his wife went through a spiritual awakening which gave rise to her acceptance of a new philosophy of life and through it the attainment of personal serenity and calm without recourse to normal drug therapy and medication. The achievement and maintenance of that condition, which in turn led to her continuing general wellbeing, was assisted by spiritual vitality and meditation and the exercise of self-discipline in the control of diet and of stress. It was said that because of the knowledge gained through the experiences mentioned and through counselling by her Church, and also because of her association with her husband in his practice, she was able in the years in issue to actively participate in the treatment of patients in addition to performing her normal duties of a secretarial kind. It appears that over the years the taxpayer also grew to appreciate the benefits to be gained in his practice by using meditation and control techniques. He used those in conjunction with acupuncture rather than tranquillisers and anti-depressants as an adjunct to that treatment. By experience and training and by disposition his wife was able therefore to assist him more and more in his treatment of patients to the point where she fulfilled the several roles mentioned.

5. However, it should be observed that in fulfilling those roles his wife did not undertake activities which would normally be performed by a qualified medical practitioner, nor did she render treatment in the acupuncture field other than on occasions withdrawing needles from patients which had been inserted by the taxpayer. Normal medical activities, including acupuncture, were undertaken by the taxpayer who did, however, refer patients to his wife, where appropriate, for comfort and for elucidation, of his requirements for diet control and advice concerning meditation techniques, etc.

6. In relation to the years in issue, there was no evidence that the wife's salary was determined with reference to those specialised duties nor was there specific evidence that the taxpayer's income in those

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years had been increased because of them. However, the taxpayer gave us to understand that his wife's specialised services enabled him to treat patients quicker than he could otherwise have done, with the consequence that the number of patients treated by him was greater than it would otherwise have been, with the further consequence that (at least potentially) his income would also have been greater than what it would have been without those services. In the years in issue his wife did not have patients of her own nor were separate charges made by her or by the taxpayer for her specialised services. However, it appears that in a later year charges were made for them ($2 per patient per session) which, it is understood, were treated as being part of the taxpayer's gross fees.

7. It would seem that the taxpayer's wife spent some 30-35 hours per week in both years in the performance of her duties (mostly of the normal receptionist type), but they did include short periods that were spent in comforting patients and in giving advice re diet, etc. From the evidence it appears that, additionally, she spent approximately 1½ hours on Wednesday evenings (outside normal surgery hours) and 1½ hours on Thursday mornings (inside normal surgery hours) in specific counselling sessions that were concerned with imparting to the taxpayer's patients her specialised knowledge in matters pertaining to meditation and relaxation techniques. Similar sessions were conducted by her at weekends; however, those sessions were undertaken by her in her capacity as a trained counsellor of her Church and did not, as a general rule, involve her with her husband's patients.

8. The 1979 trip which gave rise to the amount of $2,140 in issue for that year was commenced on 7th January, 1979, and ended on 23rd January, 1979. As indicated above, the taxpayer was accompanied by his wife on the trip and the travelling expenses for both of them were paid by him. The evidence of the taxpayer, which was supported by his wife's evidence, indicated that the principal purpose of the trip was to study acupuncture establishments in America, to discuss diet and natural therapy with practitioners there and generally to gain some experience in diet and vitamins and mineral therapy. The trip entailed flying to San Francisco, then travelling overland by bus to Los Angeles and Las Vegas, followed by a return flight home via Hawaii where they rested for two days. It appears that during that trip the taxpayer's wife (in company with her husband) visited two acupuncture clinics, basically as an observer. Each visit lasted approximately half a day. Those visits enabled her to observe the techniques employed when extracting acupuncture needles (which she was required to do at the surgery on occasions) and to discuss with a nurse at one of them general problems associated with clinic administration and floor planning which could be adopted in her husband's practice then being conducted in a new building owned by the family company. On one occasion in Las Vegas she spoke for a short period with an Australian who shared her interest in health foods. On other occasions, including short visits to several particular establishments, she made general enquiries concerning herbs and vitamins and was an observer generally of natural food outlets from the viewpoint of her husband combining one with his practice. She did not keep a diary or other written record of the trip.

9. The 1980 trip which gave rise to the amount of $2,101 in issue for that year was commenced on 27th March, 1980, and ended on 13th April, 1980. It would appear that the purpose of that trip was twofold; first, it was to attend a conference, or seminar, in America and to receive instruction there on meditation and stress control techniques; secondly, it was to provide an opportunity for the taxpayer and his wife on the journey home to spend a week or so on holidays in Tahiti. As already indicated, the taxpayer was accompanied by his wife on the trip and her travelling expenses were paid by him. The taxpayer also paid his wife's fees for the seminar which was attended by both of them. His expenses on that occasion, including seminar fees, were paid by company Y abovementioned. On that occasion also air travel was resorted to with stops outside Australia being made at San Francisco for approximately seven days where the seminar was held, and then at Los Angeles (one day), at Tahiti where the taxpayer and his wife holidayed for approximately seven days, and at Auckland with a stopover there for one day. With the exception of two lectures

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concerned with ``Direct Mailing Advertising'', the taxpayer attended all other seminar sessions which included lectures on ``Management and Change'', ``Attitudes and Stress Management'', ``Practice Promotion'', ``Human Relations'', ``Motivation and Marketing'', ``The Essentials of Modern Management'' and ``Management of Time''. It would appear that the taxpayer was occupied with those sessions for some 3½ days during the week's seminar. While his wife did attend some lectures with him, that was not always so as she apparently attended some lectures in the same subjects but at different times. However, it appears that, overall, she attended lectures for a period approximating 2½ days in subjects above-mentioned concerned with change, attitude and stress in relation to management and with practice promotion and human relations. As was the case in 1979, she did not keep a diary or other record of the trip.

10. In his evidence the taxpayer intimated that the advantages obtained by him as a consequence of his wife's overseas trips were the broadening of her knowledge and confidence in the management of the meditation and stress programmes which were, it was said, improved to such an extent that ``it saves me considerable time in that if she did not do it (i.e. the management) I would have to do it all, I would have to employ somebody else to do it''.

11. We have no hesitation in accepting the proposition put to us by taxpayer's counsel that the taxpayer's wife is a unique person who has for some time participated in, albeit at a subordinate level, the proper functioning of the taxpayer's practice. The evidence supports that conclusion. However, it also supports the further conclusion that her participating role was not a new one and that in its scope and content it had remained substantially at the same level throughout the two years in issue. The evidence does not therefore support the taxpayer's conclusions as to the advantages obtained by him by virtue of the trips. Those advantages were available to him and were utilised by him in his practice in much the same way before the trips were undertaken as they were after the trips were completed. The evidence does not support a conclusion that her participation in his practice activities was extended as a consequence of the trips or, if it was, it does not indicate the manner in which or the extent to which it was extended. It is conceivable, though not directly relevant for present purposes, that his wife may have benefited in a limited way from the trips. That conclusion appears to be borne out by the facts referred to above concerning her various discussions and observations when overseas and by the taxpayer's own words, where he stated that:

``... what I have done for my wife probably is a very small amount, and I think mainly her education, in the field of meditation, she has brought about by herself. Me taking her to a couple of seminars has been but a small part of her education.''

The taxpayer's conclusions in that matter appear to be an honest indication of his perceptions of his wife's considerable abilities and of the benefits that she obtained. However, they also appear to be at variance with his conclusions as to the advantages accruing to him because of her trips.

12. On the evidence therefore we are not able to identify any close or direct nexus between the taxpayer's expenditure in relation to his wife's overseas trips and the derivation of his assessable income in the years in issue or in any later year. While it is apparent that her counselling and other activities were largely responsible for his receipt of the abovementioned $2 fee per client per session in a later income year, it could not be said, in our view of the evidence, that those activities had their origin in the overseas trips or that they were otherwise connected in some meaningful way with them. The case for the taxpayer in that respect is not assisted on the evidence by any knowledge that may have been acquired by his wife in her attendance at seminar lectures during the second trip.

13. Another area that was relied upon by taxpayer's counsel as supporting the proposition that the travelling expenses were productive of assessable income in the taxpayer's hands concerned the wife's personal goodwill and following in the field of counselling. In that matter the submission appeared to be based upon the premise that the overseas experiences of the taxpayer's wife had created the goodwill and personal following or, at least, had created them as a

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source of income or as a source of greater income for the taxpayer in that people who attended his wife for counselling were referred oftentimes by her to him for medical attention. While we have no reason to doubt that a number of the taxpayer's income producing patients were referred to him in the manner suggested both before and after the trips, there is no evidence before us that would support a finding that the above premise was soundly based or that the wife's trips had attracted people to her in the first instance. In our view the evidence strongly suggests that any goodwill and personal following enjoyed by the taxpayer's wife were acquired by her over a period of time commencing long before the trips were undertaken and were not in any tangible way affected by them.

14. A further area relied upon by counsel as supportive of the taxpayer's claims concerned the acknowledged experience and expertise of his wife as his assistant, which, it was said, enabled him to spend less time with each patient and therefore to see more patients and to earn more fees. We do not doubt that the taxpayer's income may well have been increased for the reasons mentioned. However, we cannot identify any evidence that would justify a finding that additional fees, if derived in the circumstances described, were related to or were affected in any way by his wife's trips.

15. Having regard to the definition of ``business'' in sec. 6 of the Act, which includes a profession, both of the positive limbs of sec. 51(1) are pertinent to the question of whether the expenses in issue are an allowable deduction. However, as observed by Wilson J at p. 4161 in the case of
F.C. of T. v. Forsyth 81 ATC 4157, which concerned the deductibility of ``home office'' expenses:

``The second alternative probably prescribes a test which is different, if not wider, than the first, but I do not think that in the circumstances of this case any distinction is material. This Court in
Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at pp. 56 and 57 observed that the words `incurred in gaining or producing the assessable income' mean `in the course of gaining or producing such income', and that they have a very wide operation and will cover almost all the ground occupied by the alternative phrase.''

And, as observed by Brennan J. at p. 4545 in the Federal Court case of
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 (which concerned the deductibility of legal expenses incurred by a company in defending criminal charges against its directors and agents):

``The requirement in the second limb that expenditure be incurred in carrying on a business parallels the requirement in the first limb that the expenditure be incurred in gaining or producing the assessable income. In
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057; (1975) 132 C.L.R. 175 Mason J. said (at ATC 4072; C.L.R. p. 198):

• Thus in the Ronpibon case ((1949) 78 C.L.R., at p. 57) the Court stated that `to come within the initial part of the subsection 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'. So also it may be said that it is enough to satisfy the second part of the subsection that the occasion of the loss or outgoing is to be found in the carrying on of a business for the production of assessable income.''

16. Clearly, on the evidence, the expenses in issue relative to the first limb of the subsection were not ``incurred in gaining or producing the assessable income'' in the sense that they were incurred ``in the course of gaining or producing such income'' (Ronpibon Tin N.L. case (supra)), nor were they ``incidental and relevant'' to the derivation of that income. (See
Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295;
Lunney & Hayley v. F.C. of T. (1958) 100 C.L.R. 478, and
Charles Moore & Co. (W.A.) Pty. Ltd. v. F.C. of T. (1956) 95 C.L.R. 344.) As we have already explained, there was no identifiable nexus between the overseas trips by the taxpayer's wife and his assessable income, with the consequence that the expenses incurred in connection with them could not be incidental and relevant and could not

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therefore fall for deduction under the first limb of the subsection.

17. In considering the application of the second limb of the subsection, it only appears to be necessary for present purposes, in the light of the above comments and authorities referred to, to consider briefly the word ``necessarily'' which appears at the commencement of that limb. In the Ronpibon Tin N.L. case (supra), the High Court indicated that the word ``necessarily'' limits the operation of the limb to expenditure which is ``clearly appropriate or adapted for'' the needs of the business. The use of the word places a qualification upon the degree of connection required between the expenditure as an outgoing or loss and the carrying on of the business for as Dixon C.J. observed at pp. 436-437 in
F.C. of T. v. Snowden & Willson Pty. Ltd. (1958) 99 C.L.R. 431:

``Clearly its operation (i.e. of the word `necessarily') is to place a qualification upon the degree of connexion between the expenditure and the carrying on of the business which might suffice in the absence of such a qualification... What is meant by the qualification is that the expenditure must be dictated by the business ends to which it is directed, those ends forming part of or being truly incidental to the business.''

See also the observations made by Gibbs C.J. at p. 4263 concerning the meaning of the word ``necessarily'' in
F.C. of T. v. Foxwood (Tolga) Pty. Ltd. 81 ATC 4261.

18. From our earlier comments relative to the evidence before us it will be apparent that we cannot perceive any relevant connection between the expenditure in issue and the income producing activities of the taxpayer in the sense that it was ``clearly appropriate or adapted for'' his business needs. We cannot see either how the expenditure in issue could have been dictated by the business ends of the taxpayer or how the ends to which it was in fact directed, being substantially of a private nature, could be said to have formed part of, or was truly incidental to, the taxpayer's business or income producing activities. In the circumstances, the expenditure in issue must fail in our view to qualify as a deduction under the second of the two criteria of deductibility which are described in positive terms in sec. 51(1).

19. However, in deference to submissions made to us by counsel for the taxpayer, we would add that, in our opinion, the taxpayer's claims are not assisted by the reasons of the majority of the Board of Review No. 3 (as then constituted) for its decision in Case A44,
69 ATC 251. The facts in that case differ materially from those found on the evidence to exist in the instant case. It would appear that, in Case A44 (supra), the taxpayer was required, inter alia, to select and purchase new materials and designs and the expenditure there in issue (which concerned expenditure on an overseas trip by his wife) was seen by the majority of the Board to have been incurred by him (voluntarily in his capacity as an employee) in the course of gaining or producing his assessable income because it secured assistance during the trip that enabled him to carry out those tasks more efficiently (emphasis added). With respect, we consider that the differing reasons of the majority of the Board of Review No. 1 (as then constituted) for its decision in Case Q16,
(1964) 15 T.B.R.D. 85, concerning facts ``in all material respects indistinguishable from'' those in Case A44 (supra), are to be preferred. In any event, we consider that, in the light of the more recent Court decisions in such cases as
F.C. of T. v. White 75 ATC 4018 and
Burton v. F.C. of T. 79 ATC 4318 the majority conclusion reached in Case A44 would not now be tenable.

20. In the conclusions which we have reached, that the expenditure fails to qualify as a deduction under either of the two criteria abovementioned, it is not necessary for us to consider whether it would be precluded as a deduction by virtue of its being a loss or outgoing ``of capital, or of a capital (or)... private... nature''. However, in the interests of completeness we would mention that in our view the essential character of the expenditure was private in nature (and therefore not deductible) in that the ends to which it was directed (despite the alleged purposes of the trips insofar as they may be said to have affected the wife's position) were substantially concerned with providing the taxpayer with the companionship of his wife during the trips and with providing him with the opportunity of sharing with her their

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common interests during those times. In the alternative, we consider that, to the extent that his wife was concerned on tour with clinic administration and floor planning of the new premises owned by the family company and with the setting up of natural food outlets as part of the practice activities to be conducted from those premises, the expenditure takes on the character of an outgoing of a capital nature and therefore not deductible for that reason. Finally, we would observe that our conclusions have been reached without the need, as we see it, of analysing in any depth the effects on the character of the expenditure and on its connection with the taxpayer's assessable income arising out of the fact that in a strict technical sense the taxpayer's wife was not his employee. We would simply say in respect of that matter that the nexus between the outgoings and incomings in those circumstances appears to us to be even more remote and unfavourable to the taxpayer's claims than that which has been considered by us in some depth.

21. For the above reasons, we would uphold the Commissioner's decisions on the objections and confirm the assessments in issue before us.

Claims disallowed