Case P67

Judges:
KP Brady Ch
LC Voumard M
JE Stewart M

Court:
No. 2 Board of Review

Judgment date: 23 July 1982.

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

In his returns of income covering the years ended 30th June 1978, 1979 and 1980, the taxpayer included, in addition to income and related expenses referable to his employment and practice as a medical practitioner, receipts and related expenses arising out of his activities as a photographer. Broadly, these references raise questions of the deductibility of the latter expenses and losses, including depreciation.

2. The relevant schedules in the returns of income showed:

YEAR ENDED 30th JUNE 1978

``Statement of Income and Expenditure as Photographer

                                                                      $
      Income                                                         425
      Expenses                                      $
            Film                                    400
            Depreciation                          1,236
            Insurance                               227
            Travel expenses (being 75% of total
            Motor Vehicle Expenses)               3,898            5,761
                                                  -----            -----
                                      Net Loss                    $5,336
                                                                  ------
      

The taxpayer is involved in photographing spiders and snakes in their native environment, for which he receives an income from publishing houses and the like. In addition he is on-call medical officer for spider and snake bites.''

YEAR ENDED 30TH JUNE 1979

``Statement of Income and Expenditure as Photographer

                                                                     $
     Income                                                         100
     Expenses                                        $
        Film                                        577
        Insurance                                   237
        Subscriptions ... Conference                 30
        Motor Vehicle Expenses, excluding repairs
              (again, 75% of total)               2,639
        Repairs (75% of $802)                       600
        Depreciation                              1,094           5,177
                                                  -----          ------
                                   Net Loss                      $5,077
                                                                 ------''
      

• Note: This schedule has been adjusted to show repairs to the taxpayer's motor vehicle separately from other motor vehicle expenses.

At the foot of this schedule it was noted that ``in addition to the above'' the taxpayer was ``expecting to receive income from'' the Education Department of his State for slides and for slide sets on insects, and from a named magazine for wildlife articles and photographs.

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ATC 319

YEAR ENDED 30TH JUNE 1980

``Statement of Income and Expenditure as Photographer

                                                            $
   Income                                                   731

   Less Expenses                                 $

        Film                                    535
        Insurance                               239
        Repairs                                  65
        Motor Vehicle Expenses (57% of total)             1,331
        Sundry equipment                         91
        Depreciation                            964
        Travel expenses - air fares             208
        Typing                                   30       3,463
                                              -----      ------
                                   Net Loss              $2,732
                                                         ------''
      

3. The Commissioner disallowed the claims in each year. In the case of the 1978 year the adjustment sheet stated: ``Claim for loss on photography activities disallowed. +$5,336''. This figure was the net amount after setting off against the total deductions claimed the amount of $425 returned as income. In the 1979 adjustment sheet the ``Loss $5,077'' was said, by reference to an explanation code, to be ``not allowable''. Again, $5,077 was the net figure. For the 1980 year the adjustment sheet read: ``Amount claimed as net loss incurred as a photographer disallowed - Add $2,732.''

4. In respect of the year ended 30th June 1980, the Commissioner also disallowed a claim for the deduction of a premium of $122 paid in respect of a loss of income insurance policy. This claim was, however, subsequently allowed by the issue of an amended assessment on 20th May 1981. Consequently, the only matters outstanding at the time of the hearing of these references were those relating to the taxpayer's photography activities. These covered a number of items which, if deductible at all, would be deductible under sec. 51(1) of the Income Tax Assessment Act 1936, as being losses or outgoings incurred in gaining the assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing such income. There were also claims to deduct depreciation on a substantial quantity of photographic equipment which was deductible, if at all, under sec. 54, and to deduct expenditure on repairs (in the last two of the three years before us) which in turn was deductible, if at all, under sec. 53. The taxpayer's claims, therefore, raised questions affecting sec. 51(1); 54 and 53. A question arose whether, in view of the narrowness of the notices of objection and the terms of sec. 185 and 190, it was open to the taxpayer to argue his sec. 54 claims (all years) and his sec. 53 claims (1979 and 1980 years). There was no doubt that the objections were sufficiently wide to permit him to press the sec. 51(1) claims.

5. Section 185 provides:

``A taxpayer dissatisfied with any assessment under this Act may, within 60 days after service of the notice of assessment, post to or lodge with the Commissioner an objection in writing against the assessment stating fully and in detail the grounds on which he relies''

(emphasis added),

while sec. 190(a) enacts that:

``Upon every such reference or appeal -

• (a) the taxpayer shall be limited to the grounds stated in his objection;.''

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ATC 320

The operative part of the notice of objection against the assessment for the year ended 30th June 1978, simply read: ``In summary, we (the taxpayer's agents) believe the taxpayer is entitled to a deduction under the provisions of sec. 51(1) for the $5,336 expenses which were not allowed in the assessment''. The notice of objection in respect of the year ended 30th June 1979, having stated that ``the loss incurred in respect of photography should not have been disallowed'', went on: ``As the taxpayer is in the business of photography we believe the expenses incurred in excess of the income received is [sic] an allowable deduction under the provision of sec. 51(1) of the Act''. The 1980 objection did not in terms go any further.

6. Putting to one side the question whether objections expressed as these were can be said to state ``fully and in detail'' the grounds relied upon, the taxpayer's representative sought to support the view that the notices of objection were sufficiently wide to enable him to argue the claims for depreciation and repairs in two ways. One involved the proposition that ``depreciation for a motor vehicle'' (and presumably cameras and camera equipment) ``is allowed under the provisions of sec. 51(1) of the Act''. The decision in
F.C. of T. v. Vogt 75 ATC 4073 (Waddell J.) was cited as authority for this novel proposition, but a reading of his Honour's judgment shows that the question of depreciation was dealt with under sec. 54 - see at p. 4079. It is just not correct to say that depreciation is allowable under sec. 51(1). The representative was on somewhat safer ground when he sought to overcome the shortcomings of the notices of objection by reliance upon some passages from the reasons of the then Chairman of the No. 3 Board of Review, Mr. Dubout, in Case F67,
74 ATC 397 at p. 401. Mr. Dubout quoted the well known remarks of Williams J. in
H.R. Lancey Shipping Co. Pty. Ltd. v. F.C. of T. (1951) 9 A.T.D. 267 at p. 273, where his Honour said:

``The grounds of objection need not be stated in legal form, they can be expressed in ordinary language, but they should be sufficiently explicit to direct the attention of the respondent to the particular respects in which the taxpayer contends that the assessment is erroneous and his reasons for this contention,''

then he went on:

``In a notice of objection, a taxpayer is dealing with the Commissioner, not with some uninformed third party who knows nothing of what items of claim have been allowed or disallowed. The taxpayer has only to direct the attention of the Commissioner to what he considers to be erroneous, and the Commissioner, in interpreting and understanding the document of objection has the immense advantage of having made the assessment and of having already explained the adjustments to the taxpayer. Conceding that the present taxpayer does not specifically mention depreciation, and that it would be a misuse of language to describe depreciation as an `expense', I still find myself compelled to ask, rhetorically, `How could the Commissioner conceivably be heard to say in these circumstances that his attention was not directed to the fact that the taxpayer was objecting to the disallowance of depreciation and for the reason that the asset was used in the production of assessable income?.''

In the result, Mr. Dubout, with whom Mr. G. Thompson agreed, held in Case F67 that it was open to the taxpayer to press his claim for depreciation. But in the case before us the taxpayer's notices of objection, embracing between them three separate years of income, all explicitly rely on sec. 51(1), and sec. 51(1) alone. (This section, the taxpayer's representative also added, authorised a deduction in respect of depreciation - see supra - so it could perhaps be inferred that reliance on sec. 54 was thought unnecessary.). There is no reference, save so far as it can be spelled out from the total amounts of ``net loss'' stated as representing the claims disallowed, to depreciation or repairs, or to the sections authorising deductions therefor. Moreover, like Mr. Dubout in the passage quoted, we think that the word ``expenses'' as used in the notices of objection, is not apt to describe ``depreciation''. On the whole, therefore, we are of the opinion that none of the three notices of objection raises the matter of deductions under sec. 53 or 54.

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ATC 321

(And cf. the decision of the majority of this Board as then constituted in Case B68 70 ATC 326.) Hence the taxpayer is not at liberty to press claims based on sec. 53 or 54. This may be partly the fault of what have been described as the ``unduly restrictive'' provisions of sec. 185 and 190 of the Act, and partly the result of a certain lack of care in drawing the notices of objection, but whatever the cause neither the Commissioner nor a Board of Review has any power to waive compliance with the two last-mentioned sections. See, on this point, what was said in
Molloy v. Federal Commissioner of Land Tax (1938) 59 C.L.R. 608 at p. 610. Speaking of sec. 44M(3) of the Land Tax Assessment Act 1910-1934, which provided that ``a taxpayer shall be limited, on the hearing of the appeal, to the grounds stated in his objection'', the High Court (Latham C.J., Rich and Starke JJ.) observed:

``Section 44M(3) is a positive statutory provision that upon appeal the taxpayer is limited to the grounds set out in the notice of objection. This we regard as an imperative direction to the Court, not a provision merely for the benefit of the Commissioner which he is in a position to waive. The provision is made for the purpose of protecting public revenue, and the Court is bound to give effect to it.''

This is equally applicable to sec. 190(a) of the Income Tax Assessment Act.

7. The consequence is that, of the items under the headings of ``Expenses'' that are set out in para. 1 of these reasons, we must disallow the claims for depreciation and repairs for the reasons given above. Henceforth, therefore, we are concerned only with sec. 51(1).

8. The Commissioner's argument was put in two ways. His representative first submitted that the taxpayer was not carrying on a business of photography, so that the second limb of the section could not authorise any of the deductions sought. Then, to meet a possible claim that the outgoings had been incurred in gaining or producing the assessable income (as that expression has been judicially interpreted in relation to the first limb), it was submitted that the amounts returned as income from photography in each of the three years before us did not represent ``income''. And he added that if the Board should find them to be ``income'', then the outgoings in any event lacked the necessary connection with those receipts. (We might interpolate here that the Commissioner's representative explained the disallowance of the ``net loss'' in each year by describing the receipts as contributions towards expenses, although that seems scarcely to fit sums received from the taxpayer's sales of goods and services. In Case M96
80 ATC 683, this Board described certain non-business receipts as ``a partial recoupment of private expenditures'', but the vastly different circumstances now before us make a repetition of that description inappropriate. Moreover, against what items and in what proportions are the receipts to be offset?)

9. It is necessary now to describe the taxpayer's activities, other than his employment as a medical officer at the A hospital and later at the B hospital. From about 1967, when he was aged 15 years, he had shown a keen interest in reptiles and, indeed, in flora and fauna generally. This was accompanied by an equally strong interests in photographing wildlife, concentrating initially upon specimens in captivity. These interests had been inherited from his parents. For some years he used his father's photographic equipment, but by 1977 he had concluded that his interests in wildlife had passed the hobby stage, and he began to buy his own photographic equipment, which appears to have been extensive, costly and sophisticated. At the time of his initial purchases of equipment he believed there was a demand for detailed photographs of native wildlife in general, and reptiles in particular. He felt that with the substantial knowledge of them that he had amassed over the years, and the photographic skills that he had developed, he was better placed than most to enter what he saw as the market for good photographs of Australian fauna.

10. During the years with which we are concerned, the taxpayer made many trips to outback areas of both his home State and other States to find, photograph and document unusual species or unusual colour forms of reptiles, and other fauna as they became available. On these trips he was

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ATC 322

accompanied by student volunteers who helped him to collect the animals he was subsequently to photograph. The mode of transport was a four wheel drive vehicle, which the taxpayer leased.

11. In 1971, the taxpayer had played a large part in forming a group interested in the zoology of reptiles and he had maintained his interest in it ever since. Membership, he said, had enabled him to meet other people sharing his interest in reptiles, and had assisted him in obtaining permits which were necessary before he could catch animals for photographic purposes. As far as possible, the taxpayer prefers to photograph his subjects in their natural habitat.

12. We were given details of the taxpayer's slide catalogue. We do not need to reproduce that here; it is enough to say that it covers a vast range of reptiles of different species, and spider species, insect species and small mammals. He also has some 10,000 feet of movie film.

13. Although the taxpayer had no recollection of the precise time he spent in the field, he thought that in the year ended 30th June 1979, the time so spent was about 12 per cent of available time, with a similar percentage in the previous year and only slightly less in the following year.

14. The taxpayer seeks to market his photographs in a variety of ways. He has made contact with publishers who, knowing of his interest and ability, have asked him to provide photographs for publication. Articles on wildlife written by him, and illustrated by photographs taken by him, have been accepted for publication. He has accepted a commission to provide slides plus limited information for a series of educational sets on insects, to be sold to schools. Without overloading this narrative with detail, we are satisfied that the taxpayer has earned money from the use of his slides and from articles he has written, and that he expects to continue to earn money from these sources. But this is not all. In addition, as part of a wider environmental impact study, the taxpayer, because of his knowledge of reptiles and his skills as a photographer, was commissioned to make a report on the likely effect of a proposed mining development upon the fauna in that area; for this he received a fee of over $1,500 in the year ended 30th June 1982, with a further sum to be paid upon the completion of his report. And at the request of a surgeon at the hospital employing the taxpayer, he undertook the production of a training film (a movie) on cardio-thoracic surgery. This is now the standard training film in his home State. He received payment for the film during the year ended 30th June 1978. Finally, his knowledge of reptiles and the like has led to him becoming recognised in the medical field as an expert on envenomation and its treatment, on which he delivers lectures to other hospital staff, while his photographic skills have earned him appointment at the hospital as co-ordinator for the cranio-facial unit, in which capacity he supervises the photographing of patients, as well as the production of training films.

15. In the light of the above summary of the facts, was the taxpayer carrying on a business at the time of incurring the outgoings concerned in these references? The definition of ``business'' in sec. 6(1) does not provide much assistance in the present case, but the summary of relevant criteria contained in the joint judgment of Bowen C.J. and Franki J. in
Ferguson v. F.C. of T. 79 ATC 4261 at pp. 4264-4265 does. There, their Honours said:

``There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another

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ATC 323

business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial.''

And see the cases there cited.

16. Quite apart from the benefit that the taxpayer gained from his photographic and allied activities in relation to his profession as a medical practitioner, we regard those activities as having sufficient elements of continuity, organisation and repetition to warrant the description of ``a business''. the taxpayer's evidence indicated an object of profit making, even though the returns in the years under review were small, due no doubt in part to the apparently limited market for the particular products and the seeming difficulty of breaking into it. It may be said that the taxpayer's activities, at least initially, were not organised in a business-efficient manner, but this can be attributed to the fact that he was trying to enter what to him was a new and untested market. All in all, the evidence satisfies us that the taxpayer's activities in the photographic and related fields went further than the vigorous pursuit of a hobby. On this ground alone, therefore, his claim to deduct the sec. 51(1) outgoings - that is, all those claimed apart from depreciation and repairs - should be allowed in full under the second limb of that section. And as an alternative, we think they are deductible under the first limb. We do not accept the submission on behalf of the Commissioner that the sums returned as income were not income, or perhaps not assessable income, but were merely contributions towards expenses. On the contrary, we regard them as assessable income, and the relevant outgoings were, in our view, incurred in or in the course of gaining that income. If it be said that the two amounts, income and outgoings, are altogether disproportionate one to the other, reference should be made to what was said in the joint judgment of the members of the High Court in
Ronpibon Tin N.L. v. F.C. of T. (1948-49) 78 C.L.R. 47 at p. 60:

``It is not for the Court or the Commissioner (or, one might add, a Board of Review) to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent: see per Ferguson J. in
Tooheys Ltd. v. F.C. of T. (1922) 22 S.R. (N.S.W.) 432 at p. 440; per Williams J. in
Tweddle v. F.C. of T. (1942) 7 A.T.D. 186 at p. 190.''

The disproportion may be grounds for questioning the soundness of the taxpayer's business judgment, but it is not by itself a ground for saying that the outgoings are therefore non-deductible.

17. It follows that, except as regards depreciation and repairs, the outgoings are deductible in full under sec. 51(1). The amounts returned as income from photography in the three years before us should be brought to assessment as assessable income, and the gross amounts of the sec. 51(1) allowable deductions should be allowed in full. The Commissioner's decisions on the objections should be confirmed as far as they relate to deductions for depreciation and, with respect to the last two years before us, for repairs. We should add that if the notices of objection had been less restrictively drawn, and had permitted the claims to deduct depreciation and claims for repairs to be pressed, we would have allowed those claims under sec. 54 and 53 respectively. But the shortcomings of the notices of objection prevent us from doing so.

Claims allowed in part