Case U65
Members:P Gerber SM
KL Beddoe SM
Tribunal:
Administrative Appeals Tribunal
Dr P. Gerber and K.L. Beddoe (Senior Members)
The question at issue is whether the applicant is entitled to the following deductions claimed in respect of a "home office":
Year ended Year ended Year ended Year ended
30 June 1979 30 June 1980 30 June 1981 30 June 1982
$ $ $ $
Insurance 19 81 93 92
Interest - 231 1206 756
Rent 360 555 - -
Rates - 65 - -
--- --- ---- ---
TOTAL 379 932 1299 848
--- --- ---- ---
2. Section 51 of the Income Tax Assessment Act is the only statutory provision which can be fairly said to have been raised by each notice of objection. In fact the notices of objection do not rely on or mention any statutory provision. The question is therefore whether the various amounts in dispute were incurred -
- (a) in gaining or producing the applicant's assessable income;
- (b) in carrying on a business for the purpose of gaining or producing the applicant's assessable income; or
- (c) as outgoings of a private or domestic nature.
3. During the year ended 30 June 1979 the applicant was employed by the Education Department until January 1979. She then became employed by a publisher well known as a publisher of legal texts and loose-leaf services for the professions. A feature of the services is that they require the insertion of updating material at regular intervals so as to maintain an updated text in the areas of law covered by the various services.
4. The nature of the applicant's employment with the publisher may be gleaned from two letters dated 30 June 1979 (Document T27) and 29 June 1981 (Document T43). The letters,
ATC 417
which were addressed to a deputy commissioner of taxation, are in similar terms and it will suffice to set out T27 in full (modified to maintain confidentiality):"This will confirm that (applicant) is a saleswoman employed by this company and that her earnings, as shown on her Group Certificate, are made up of a basic retainer plus a bonus or commission, depending on results achieved.
She is allocated a sales territory and is required to administer that territory from an office in her own home.
She is required to call on existing subscribers and on prospects each day direct from her home.
In managing her territory she incurs the expenses associated with paperwork and record keeping, telephone and mailing.
She is not provided with a company car but is required to finance her own vehicle which must be of a good standard and to pay all the expenses associated with it including parking expenses, tolls, etc.
To compensate in some degree for the expenses of running her own vehicle and her home office, we have allocated her, for the income year 1978/1979, the sum shown on the Group Certificate as `Travelling Expenses'. Such an allocation is made in accordance with the Commercial Travellers' Award and on the basis of our experience of what is a reasonable amount that will be incurred by our sales team. In practice, however, many incur, and can justify, expenses greater than that reasonable amount. Those earning a higher commission or bonus income have often done so by making more telephone calls, by calling more frequently on customers or by doing more mailings to prospects and customers and so can usually justify a higher level of expenses.
We ask that in considering her claim for deductions for expenses incurred, you take account of the manner in which she is required to conduct her business as set out in this letter."
5. The admissibility of T27 and T43 was contested by the respondent in so far as those documents contain assertions of fact. However, as the applicant's evidence is consistent with those documents and as the existence and bona fides of the documents is not disputed they should be in evidence.
6. Relevant details of income derived and deductions claimed by the applicant during each of the years in dispute may be set out as follows:
Year ended 30 June 1979
$
Income Education Department - salary 6,301
Present employer - salary 5,108
- travel allowance 2,130
------
13,539
------
Deductions $
Motor vehicle expenses 2,141
Bank charges 26
Depreciation of office furniture
and typewriter 41
Electricity 20
Entertainment 289
* Insurance 19
* Rent 360
Stationery etc. 46
Telephone 205
-----
3,147
-----
(*Claims in dispute)
ATC 418
Year ended 30 June 1980
$
Income Present employer - salary 13,773
- travel allowance 4,322
- expense allowance 941
------
19,036
------
Deductions $
Motor vehicles expenses 4,353
Bank charges 39
Depreciation of office furniture and typewriter 86
Electricity 47
Entertainment 488
* Insurance 81
* Rent (part year to 14.3.80) 555
* Rates 65
* House Mortgage Interest 231
Telephone 286
Stationery etc. 133
-----
6,364
-----
(*Claims in dispute)
Year ended 30 June 1981
$
Income Present employer - salary 21,460
- travelling and
expenses allowance 5,643
------
27,103
------
Deductions $
Motor vehicle expenses 3,535
Bank charges 44
Depreciation office furniture and typewriter 79
Electricity 96
Entertainment 567
* Insurance 93
* House Mortgage Interest 1,206
Telephone 458
Stationery etc. 166
-----
6,244
-----
(*Claims in dispute)
($75 disallowed in respect of telephone rental but not in dispute)
Year ended 30 June 1982
$
Income Present employer - salary 23,608
- travelling and
expenses allowance 6,433
- payment in respect of
unused leave 643
------
30,684
------
ATC 419
Deductions $
Motor vehicle expenses 4,637
Bank charges 48
Depreciation office furniture, typewriter
and "phone" answering machine 103
Electricity 83
Entertainment 598
* Insurance 92
* House mortgage interest 756
Telephone 621
Stationery etc. 188
-----
7,126
-----
(*Claims in dispute)
7. It appears that salary was based on a retainer plus commissions earned by the taxpayer on sales made by her.
8. In each year the insurance and rent/house mortgage interest have been claimed on the basis that 25% of the amount incurred by the applicant is attributable to the "home office".
9. The above details have been set out because the claims for deductions provide a factual indication of the level of activity required to be undertaken by the applicant in managing her territory.
10. The evidence given by the applicant established the following:
- (a) The applicant maintained a full range of her employer's publications at her home so that she could provide a quick and efficient service to her customers.
- (b) Those publications remained the property of her employer.
- (c) The looseleaf services held by the applicant at her private residence were updated by her.
- (d) The publications were held at her private property so that she could fill urgent orders without the customer having to wait the normal two weeks supply period.
- (e) The applicant spent two days per week at home phoning potential customers for the publications and would spend the remaining three days on the road visiting customers and potential customers.
- (f) The applicant had a defined area of responsibility which embraces about 600 clients as well as others obtained by "cold canvassing".
- (g) Facilities provided by the employer at its premises consisted of a number of trays and bins from which representatives collected messages and pamphlets dealing with new publications, a couple of chairs in the sales manager's office and a red phone which required 20 cents to be inserted with each use by a representative.
- (h) The applicant's home in a Sydney suburb was originally leased by the applicant but subsequently purchased by her; the purchase being financed by a deposit and a loan of $36,000.
- (i) The home is a Victorian house of barely seven squares consisting of one bedroom, a relatively large living room (the room used as the home office), a kitchen, bathroom and laundry (the kitchen included a dining area).
- (j) The living room was reserved for storage of her employer's publications and her work in connection with the sale of those publications.
- (k) The living room was lined with shelving to accommodate the stocks of publications and also contained a desk, chairs, filing cabinets and the telephone.
- (l) Her home served as her base of operations in her employment and was acknowledged by her employer to be such.
- (m) The applicant conducted direct mailing campaigns from her home office.
- (n) The home office was not used for normal social intercourse, any entertainment being undertaken in the kitchen.
ATC 420
- (o) The applicant's business cards showed her home phone number as her contact point but did not show any address.
- (p) In addition to the facts set out in para. (e), when the applicant was "cold canvassing" for clients it was not unusual for her to make 200 phone calls on her home phone a day.
- (q) Her employer had made availability of a telephone and a good car requisites of the employment.
- (r) At the time the taxpayer took up residence in what became her home she was aware of the requirements of her employer as to the use of her home or other premises in connection with her employment.
11. Turning now to the questions of law which arise this seems to us to be a case of an office in the home rather than a home office.
12. The law, as it applies to home office expenses, has been considered on innumerable occasions by the Taxation Boards of Review and by the courts. The definitive statements of the law in relation to home office expenses are to be found in the decisions of the High Court in
F.C. of T. v. Forsyth 81 ATC 4157; (1980-1981) 148 C.L.R. 203 and
Handley v. F.C. of T. 81 ATC 4165; (1980-1981) 148 C.L.R. 182. Both cases involved barristers who occupied city chambers but also performed necessary work in their home offices.
13. In Forsyth's case the principal judgment was given by Wilson J. (with whom Mason J. was in general agreement) who after stating the facts and reviewing the authorities, stated at 81 ATC p. 4163 and 148 C.L.R. p.215:
"In my opinion, an important question is the relationship of the study and ancillary space to the house as a whole. There would appear to be complete integration, with no suggestion of any physical exclusivity. The study is indistinguishable from other rooms in the private living area of the house, and is so placed to the taxpayer's bedroom that he finds it convenient to keep his clothes in the study and use it as a dressing room. The ancillary space for a desk, where the taxpayer often works, is downstairs at the side of the living room. It would seem to be intimately related, in a physical sense, to the life of the family. These matters are not decisive in themselves. Other features of the arrangement are relevant though, again, not decisive. The taxpayer maintains chambers in the city. There is no compulsion for him to work at home, as was the case with the part-time lecturer in Banks (1978) 2 N.Z.L.R. 472. Like many professional people, he finds it convenient to do so. The professional activity he engages in at home is mostly research and reading, presumably not requiring the services of a secretary. Resort to the house by clients and/or solicitors for the purpose of professional conferences is apparently so infrequent as to be immaterial.
As I have said, in the last resort the question is one of fact and degree. Having regard to all the circumstances, I conclude that it is not open on the facts of this case to find that the outgoings in question were incurred in gaining or producing the assessable income, or were necessarily incurred in carrying on the taxpayer's professional business. The home was not his business premises. It was not open to be described, with any show of reality, as his base, or one of his bases, of operations, to use the term adopted by the Court of Appeal in
Newsom v. Robertson (1953) 1 Ch. 7; cf.
Lunney (1958) 100 C.L.R., at p. 500;
Horton v. Young (1972) 1 Ch. 157. The outgoings were therefore neither incidental nor relevant to the gaining of assessable income."
See also Mason J. in Handley's case at 81 ATC p. 4,171 and 148 C.L.R. pp. 193-194 where his Honour stated:
"It is because the study in these cases and the case now under consideration, despite its predominant use for the purposes of the taxpayer's profession or employment, remains an integral part of the home that expenditure referable to it is an outgoing having the character described. Here the study is a room in the taxpayer's home, not separate from it in any way, having no distinctive physical characteristics, readily capable of other use for family purposes, and in fact used for non-professional purposes from time to time. Moreover when used for professional work it is ordinarily used only for professional work that can be done at home, in the evenings and at weekends, e.g. working on briefs and preparing opinions. Expenditure related to the study is therefore referable to the home.
ATC 421
The `essential character of the expenditure', to take up the expression used in Lunney v. F.C. of T. (1958) 100 C.L.R. 478 at p. 497 is therefore that of a `capital, private or domestic nature'."
14. Those statements of the law should be contrasted with the dissenting judgment of Stephen J. in Handley's case at 81 ATC p. 4,167 and 148 C.L.R. pp. 187-189:
"It is principally with the decisions in
Thomas (1972) 46 A.L.J.R. 397; 3 A.T.R. 165; 72 ATC at p. 4094 and in
Faichney (1972) 129 C.L.R. at p. 38 that this appeal must be concerned. In Thomas a barrister had borrowed money to meet the cost of adding rooms to his house, one of which he used as a study. In denying him a deduction for any part of the interest on the borrowed money Walsh J. said ((1972) 46 A.L.J.R. at p. 399; 3 A.T.R. at p. 168; 72 ATC at p. 4097) that the house `should not be regarded in the circumstances of this case as being or as including part of the business premises of the appellant'. Accordingly the interest incurred was of a capital, private or domestic nature and hence excluded from deductibility. It did not lose that character because the appellant `like most professional men, did some of his work at home, or because he used one of the added rooms for that purpose'. The appellant had not spent money `in erecting premises suitable only for use as business premises. He added rooms to his house.'In Faichney (1972) 129 C.L.R. at p. 43 Mason J. said that a study in a home was as part of the home `no matter how great the extent of its dedication in point of use to the pursuit of those activities from which the taxpayer earns his income'. His Honour ((1972) 129 C.L.R. at p. 44) distinguished the case of a doctor's surgery integral with his home. He observed that `a study does not cease to be part of a taxpayer's home because it is used by the taxpayer for the pursuit of activities from which he earns his income. However, the doctor's surgery is not in a relevant sense part of his home; it is his place of business...'.
As I read those judgments the above represents the substance of the reasoning which led in each case to disallowance of the claim to deduct interest. In Thomas the decision was squarely based upon the expenditure being of a capital, private or domestic nature; likewise in Faichney, save that Mason J. was at pains to point out that he was not thereby to be taken as assuming that the outgoing would in any event have fallen within the general class of business expenses.
In each of these cases the use made by the taxpayer of the room in question was not regarded as the critical feature. Rather it seems to have been the physical character of that room, forming as it did an integral part of the taxpayer's home, which was regarded as decisive. However Mason J. would not regard mere physical unity as necessarily disqualifying, as was shown by his remarks concerning a doctor's surgery. With respect, this must clearly be correct; it cannot matter that the proprietor of a small suburban shop lives behind that shop in premises integral with it; the rent attributable to the shop will none the less surely be deductible. Nor can it matter to what degree the two parts intercommunicate; sec. 51(1) cannot be effected by vagaries of architecture or design.
Wherein then lies the distinction between shop or surgery on the one hand and so-called home office on the other? It can scarcely reside in the fact that in addition to the home office the taxpayer maintains elsewhere another and principal place of business. A surgery will be none the less a surgery, properly regarded as a place of business, although the doctor conducts most of his practice at some central clinic or larger surgery distant from his home. A fruiterer is not to be denied deductions in respect of the suburban fruit shop behind which he lives because he also conducts a more substantial business at a lock-up fruit shop in some nearby shopping centre.
Again, while it is true that to sell fruit or to attend to patients involves direct contact with the public, whereas a study may seldom if ever be entered by customers or clients, this distinction is surely irrelevant in the application of sec. 51(1). It only reflects the different character of work involved in different income-earning pursuits. Thus a caterer may prepare in the kitchen of his own home all the food which he supplies to meet orders and may derive a substantial
ATC 422
income from his business but he will not be denied deductions because no customers visit his kitchen.Moreover, to take the same example, the fact that such a caterer uses one and the same kitchen both to prepare the food which he delivers to customers in the course of his business and to cook his own meals, while it may call for apportionment of outgoings, will not disqualify him from entitlement to a due proportion of those outgoings. Likewise with many small businesses (and local chiropodists, physiotherapists and the like come to mind) which, perhaps only after-hours or on week-ends, involve attending to customers in a room in the house which at other times may be used as an ordinary living room. These are occasions for apportionment, not for exclusion from deductibility. Incidentally, the foregoing examples suggest that the term `home office' may be a misnomer if thought of as describing some unique situation; there seems in fact little to differentiate a so-called home office from any other business use of a home, whether it be used conjointly with a principal place of business located elsewhere or as the sole place of business."
15. It was a common feature of Thomas, Faichney, Forsyth and Handley that they involved a home office with the essential characteristic of being nothing more than a part of the home.
16. The practical distinctions drawn by Stephen J. found judicial support from Hunt J. in
Swinford v. F.C of T., 84 ATC 4803 where his Honour had to consider whether a proportion of rent paid by a scriptwriter who rented a flat with an extra room used for writing (she had no other place of business) was an allowable deduction. His Honour held that the rent, in so far as it applied to the room set aside for writing, was a allowable deduction.
17. In the present application the applicant was not supplied with premises by her employer. She is required to work from her own premises and to maintain stocks of her employer's product in those premises so that she could effectively perform her duties as a sales person. If she had rented separate premises for this purpose there is no doubt that the rent would be allowable as a deduction.
18. We therefore take the view that this application falls within the category of the doctor's home surgery as discussed by Mason J. in Faichney's case, the examples given by Stephen J. in Handley's case and is thus governed by the decision of the Supreme Court of New South Wales in Swinford's case. The only judicial pronouncement which has caused us some concern is the observation of Wilson J. in Handley, where his Honour noted that "[The] payments for mortgage interests, rates and insurance premiums were of a kind which in the circumstances of this case (our italics) cannot be apportioned between home and office expenses. They relate to the building and/or land as a whole, and are not affected in any way at all by reason of the fact that the taxpayer performs professional work on the premises. They would remain the same whether or not he worked at home" (148 C.L.R. at pp. 201-202; 81 ATC at p. 4176). The same judge came to a similar conclusion in Forsyth (81 ATC 4165; 148 C.L.R. at p. 217). However, it seems to us that his statement of the law must be read in the context of the facts as he found them - that is, in each of the two cases, the home office was used predominantly for the purpose of deriving income. In the instant application, the evidence established an exclusive user, thus providing that element of discreteness which removes from the apportioned outgoing its presumptively private or domestic character.
19. That leaves the issue of insurance premiums. To the extent that office equipment such as desks, chairs and library were the subject of insurance, it is clear that the premium with respect to these items would constitute an allowable deduction. However, the applicant failed to establish with sufficient specificity how the amounts claimed were arrived at, as the following dialogue between the applicant and members of the Tribunal will indicate:
"Are you able to tell us the contents in respect of which the $19 is claimed in 1979, for example? - Well, 1979 was when I was renting, and, at that stage, I did not have very much furniture in the place, it was unfurnished. I think during `79 I would have had - I certainly had my big oak desk, but then I realised that I did not value that too much. When I found out the price of them in the shops - when I went around and looked in antique shops as I was - because
ATC 423
I had picked it up at a second-hand place, I realised it was worth a lot more so I upped my insurance on contents. So I had an oak desk, and I also had planks - like, they were just boards that I got from the timber mill around the corner. And while I was renting I just bought besser blocks because I could not drill holes in the walls because the place was not mine, and I just put besser blocks and then laid planks to put - to make a bookcase out of to house these - and that was on two walls, all these besser block shelving units. The shelving later became fixed to the wall which made it easy to clean the front room. What else was in there was customer files - a couple of filing cabinets to keep all the extra leaflets.
But really, what you were asked was how did you arrive at these amounts? You presumably have got a lump-sum premium? - Yes.
And how did you apportion that premium in terms of contents of office and rest of house? - Well, there was really very little that I was going to lose. It was a very - actually a very small amount because there was not really that much of my personal things in the front room. The only things that were personal, that I had any attachment to, were a couple of chairs that were a part of my furniture and also an oak desk. So it was a very small proportion of the total assessment. When I talked it over with my tax agent he suggested a figure which sounded fine to me at the time, because I would just go and discuss my tax with my tax agent when I did it. There was - I had very little when I moved in, and, because I had to budget, I certainly did not go out acquiring things for the sake of it. I really had quite a lot of debts to pay. So it was a very small proportion. Later on, as it became more evenly balanced, it still remained at, I would say, just off the top of my head, it would be less than one-fifth of the - probably even less than that - of the overall insurance bill per annum."
20. We turn now to consider the quantum of the remaining claims for rent, rates and interest.
21. Considerable time was taken at the hearing in trying to elicit the basis upon which the various deductions in dispute had been quantified. It quickly became apparent that the applicant did not know the basis upon which the claims were made and had relied upon her accountant's apportionment. The accountant did not give evidence.
22. The house in question is barely seven squares (imperial measure) in area and the room used by the applicant in her employment was stated to measure 12 feet by 12 feet. There was no evidence as to the size of the curtilage but we presume that the surrounds would be minimal, given the applicant's description of the house. The front door of the house opened into the subject room, so that all ingress and egress of the house by the front door necessarily involved use of portion of the subject room for the general purposes of the house.
23. Doing the best we can we have decided that 1/7 of the expenditure (other than insurance premiums) incurred in relation to the property is attributable to the use of the room in the course of the applicant's employment.
24. In determining that the appropriate basis is 1/7 of the expenditure we have taken into account the fact that the room in question also functions as the entry to the rest of the house, that the house has verandahs and curtilage, that the house is used for private and domestic purposes and that the room was established as an office in such a way as to make it almost entirely unsuitable for any private or domestic purposes. It should be noted that the respondent has allowed claims for depreciation in respect of the furniture in the room without deduction for private use.
25. The objection decisions will be set aside and the objections will be allowed in part as follows:
Year ended 30 June 1979
In Dispute Allowed
Rent 360 206
Insurance 19 nil
--- ---
379 206
--- ---
ATC 424
Year ended 30 June 1980
Rent 555 317
Rates 65 37
Interest 231 132
Insurance 81 nil
--- ---
932 486
--- ---
Year ended 30 June 1981
Interest 1206 689
Insurance 93 nil
---- ---
1299 689
Year ended 30 June 1982
Interest 756 432
Insurance 92 nil
--- ---
848 432
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