Case S23

Judges:
KP Brady Ch
JE Stewart M
DJ Trowse M

Court:
No. 2 Board of Review

Judgment date: 29 March 1985.

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K.P. Brady (Chairman), J.E. Stewart and D.J. Trowse (Members)

In this reference the taxpayer, a Member of Parliament in the State of X during the 1980 year, i.e. the year under review, contended that various amounts expended on clothing, hair care and dry-cleaning were deductible in terms of sec. 74 of the Income Tax Assessment Act 1936. That section provides that expenditure incurred by a taxpayer in contesting an election for membership of, or in being elected as a member of, the Federal or a State Parliament is deductible irrespective of the candidate's success or failure. It is also appropriate to observe that sec. 74, unlike sec. 51, does not deny deductibility on the basis that the outgoings are of a capital, private or domestic nature.

2. At the hearing, the taxpayer appeared in person and gave evidence under oath. The Commissioner was represented by one of his officers.

3. It appears that the taxpayer had been a member of the Y political party for some years and that, in December 1978, she gained party preselection for the country electorate of T which, according to the statistics quoted, represented a marginal seat in the State of X. Following the State election held in May 1979, the taxpayer, having won a majority of votes in the resultant poll, albeit by a slender margin, was elected a member of the Parliament, a position she occupied until her ultimate defeat in the next election which was held in April 1982. It will therefore be observed that the expenses subject to this review were incurred at a time when the taxpayer was, in fact, already a member of a State Parliament.

4. It appears that the taxpayer, in cognisance of the swinging nature of the seat of T, resolved to commence her campaign for the 1982 election the day after her appointment in May 1979, and that the object of the expenditure now under consideration was directed towards the maintaining of a high profile in the community of T in the expectation that such an image would secure both party endorsement and voters' continuing support in the latter election. The evidence adduced indicates that the area of T was serviced by a local television station as well as a regional newspaper, and that during the 1980 year the taxpayer was the focus of media attention. She submitted that the amounts expended on clothing, hair care and dry-cleaning enabled the achievement of the desired profile, and that as a consequence that expenditure enhanced the likelihood of her subsequent re-election and accordingly those outgoings should be viewed as expenditure incurred in contesting an election.

5. The following items of expenditure were claimed by the taxpayer in the preparation of her 1980 return -

                                       $
      Clothing                       1,864
      Hair care                        603
      Dry-cleaning                      39
      Suits for husband worn on
        official occasions             360
                                    ------
        Total:                      $2,866
                                    ------
      

It is notable that the taxpayer, in an explanatory letter written to the Commissioner soon after the lodgment of the return, contended that the above amounts were deductible in terms of sec. 51, i.e. that they were incurred in the production of her assessable income and that such outgoings were not of a private or domestic nature. However, upon the total disallowance of the claim, the taxpayer in her objection altered her stance with the statement that she relied upon the provisions contained sec. 74. The question of quantum was not in dispute as between the parties.

6. The provisions of sec. 74 are as follows:

``(1) Expenditure incurred in the year of income by the taxpayer in being elected as a member, or in contesting an election for membership, of the Parliament, of the Parliament of a State or of the Legislative Assembly of the Northern Territory of Australia shall be an allowable deduction.

(2) When a deduction has been allowed or is allowable under sub-section (1) in respect of any expenditure and that expenditure or any part of it is reimbursed to the taxpayer or paid for him by any other person or by any organization the assessable income of the taxpayer of the year in which the amount is so reimbursed or paid shall include that amount.''

Having regard to the taxpayer's assertion that the purpose of the outgoings related to the subsequent election held in April 1982, it is incumbent on her to establish the claim under

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ATC 255

the second limb of that section, i.e. that the expenditure totalling $2,866 was incurred in contesting an election for membership of the Parliament of X. In our view, this raises for consideration two separate and distinct questions: first, could it be said that during the 1980 financial year the taxpayer was engaged in contesting an election ultimately held some 22 months after the end of that year, and, secondly, if such a contest was on foot at that time, does there exist a sufficient nexus between the outgoings incurred and the contesting of that election?

7. On the first of those propositions, we refer to the decision of the Federal Court in
F.C. of T. v. Wilcox 82 ATC 4411. The facts of that case, which have been taken from the headnote, are:

``On 28 September 1978, the taxpayer gained preselection as his party's candidate for a seat in State Parliament. He unsuccessfully contested the seat in an election held in November 1980.

In his 1979 return, the taxpayer claimed that expenses of $1,185 which he had incurred between November 1978 (i.e. after preselection) and 30 June 1979 were deductible under sec. 74 as expenses in contesting an election. At the time the expenses were incurred, no date had been fixed for the holding of an election. The Commissioner disallowed the claim on the basis that there cannot be a contest for an election until there is an election on foot and an election begins only on the issue of the writ for the election. In the present case the writ issued on 27 October 1980 and therefore, on the Commissioner's view, the expenses claimed were incurred at a point in time too early to qualify for deduction under sec. 74.''

In that case it was held that the expenses were deductible under sec. 74 even though they had been incurred prior to the issue of the writs for the election. In the course of their joint judgment, Toohey and Fitzgerald JJ. made the following comments (see p. 4413) which are pertinent to the determination of the initial question posed in the preceding paragraph:

``The central feature of an election viewed as a contest is the voting at the poll which takes place during the electoral process initiated by the issue of the writ and terminated by its return. We see no reason either in logic or in the language of subsec. 74(1) of the Act for denying that a contest in respect of an election, at least an election which must occur, may begin notwithstanding that the formal election process has not commenced.''

8. Whilst the decision in Wilcox provides authority for the view that campaign expenses incurred prior to the official commencement of the election may, in certain circumstances, qualify for deduction in terms of sec. 74, the precise parameters of time are not clearly defined. However, the reasoning applied by Toohey and Fitzgerald JJ. in arriving at their decision is of assistance in determining the issue before us, and accordingly we consider it appropriate to recite the following extract (see p. 4414) from their judgment:

``Marshalled against the taxpayer are a formidable array of relevant considerations. For example, the expenditures occurred up to two years and not less than about one and a half years before the election in fact occurred. When the expenditures were incurred, no more was known than that an election must take place at some time in the future, certainly no later than when it did. There was no opposing candidate. The electoral rolls had not closed, and there would be some changes to the eligible voters in the electorate. The taxpayer might die, have his endorsement withdrawn by his party, or become ineligible to stand in the electorate. He might simply change his mind and decide not to nominate. On the other hand, the facts that the taxpayer had been chosen as his party's candidate and his candidacy announced are entitled to considerable weight.''

(emphasis added)

In our opinion, the pre-existence of party endorsement and the public announcement of such candidacy were the basic reasons for the above two judges' decision. (The decision of the other judge who sat on the case, Fox J., was also in favour of the taxpayer, but for reasons which differed from those of Toohey and Fitzgerald JJ.)

9. In the present reference, the taxpayer not only faces the same array of difficulties encountered by Mr Wilcox, but also suffers the disadvantage of not being the endorsed party candidate for the 1982 election at the time

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ATC 256

when the claimed outgoings were incurred. Whilst acknowledging that the phrase ``in contesting'' is suggestive of a longer or more protracted period of time than the formal duration of the election process (see Wilcox at p. 4412), we take the view, having due regard to all of the circumstances, particularly those relating to the absence of party endorsement, that the taxpayer was not at that stage engaged in contesting an election, and for that reason her claim in terms of sec. 74(1) fails.

10. For the sake of completeness and to cover the possibility that we have erred in the interpretation of the phrase ``in contesting an election'', we express the further opinion that there is insufficient connection between the outgoings of $2,866 and the contesting of the election. It will be recalled that at the time when the expenditure was incurred on clothing, hair care and dry-cleaning, the taxpayer was the sitting Member of Parliament for the electorate of T, and it occurs to us that those same outgoings would, as a consequence of her public station in life, have eventuated irrespective of her future political aspirations. As those outgoings relate to a duality of activity and purpose, we are unable to conclude that the totality of the sum claimed represents expenditure incurred in the course of contesting an election for membership of the Parliament of X and, on that basis, deductibility under sec. 74(1) is denied.

11. For the reasons stated above, we uphold the Commissioner's decision on the objection and confirm the assessment before us.

Claim disallowed