Lunney v Commissioner of Taxation

100 CLR 478
1958 HCA 5
32 ALJR 139
11 ATD 404
[1958] ALR 225

(Judgment by: McTiernan J)

Between: Lunney
And: Commissioner of Taxation

Court:
High Court of Australia

Judges: Dixon CJ
McTiernan J
Williams J
Kitto J
Taylor J

Subject References:
Taxation and revenue
Income Tax
Allowable deductions
Fares paid travelling between home and work

Legislative References:
Income Tax and Social Services Contribution Assessment Act 1936 (No 27) - s 51

Hearing date: SYDNEY 26 November 1957; 27 November 1957; 28 November 1957
Judgment date: 11 March 1958

MELBOURNE


Judgment by:
McTiernan J

The question which is stated for the Court's opinion concerns fares incurred by the taxpayer for transport by bus from Narraweena, a suburb of Sydney, at which he resided, to the waterfront at which his employment as a ship's joiner was carried on. The distance from Narraweena to the city is fourteen miles. It is a residential suburb. The fares were paid to enable him to go from his home to the city to report for work in accordance with a duty appertaining to his employment, and include the expense of coming back to his home after leaving off work for the day. The total amount of fares which he paid on all those occasions in the financial year was PD62. The question for the Court is whether this sum is an allowable deduction under the Income Tax and Social Services Contribution Assessment Act 1936-1956. If it is, s. 48 requires that a deduction of PD62 should be made from the taxpayer's assessable income in calculating his taxable income.

The taxpayer's employers made him no allowance to cover fares and he was not paid for time occupied by travelling from his home to the employment. It does not appear that the rate of wages paid to workmen in his trade is influenced by the consideration that they may incur the expense of travelling to their work. The taxpayer did not carry on at home or in its vicinity any pursuit for gaining or producing assessable income. The income he earned by his employment was assessed to tax.

His employment was not a business for the purposes of s. 51 (1). This is shown by the definition enacted in s. 6 (1). Section 51 (1) is not, however, limited to deductions from income derived from carrying on a "business": Federal Commissioner of Taxation v Green. [F5] The question for decision depends on the words of s. 51 (1) pointing to "all losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income" as being allowable deductions. The only exception which has become material for present purposes is that applying to outgoings "of a ... private or domestic nature".

In the case of Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation [F6] the Court said in reference to s. 51 (1):"For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income- ... In brief substance, to come within the initial part of the sub-section 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 or, if none be produced, would be expected to produce assessable income .... [F7] These tests were cited in the judgment in Federal Commissioner of Taxation v Green [F8] and governed the decision of that case.

In that case the Court decided that the words, "incurred in gaining or producing the assessable income" applied to an amount paid by the taxpayer for train fares. The payment of this amount was occasioned by travelling done before and after the time in which the assessable income was actually earned. The decision is important because in the present case the taxpayer has to meet an argument that all his assessable income was derived from the employment in question and the fares which he claims as a deduction were paid going to that employment and returning home from it. This argument proceeds upon the view that the word "in" in s. 51 (1) requires to be narrowed by construction to mean only a relation of time or place and that it cannot be extended to aim, object or purpose. To read the word as signifying such a relation as aim, object or purpose would not be contrary to usage (see Shorter Oxford English Dictionary, vol. 1, p. 573). In Ward & Co Ltd v Commissioner of Taxes [F9] the word "in" was read as meaning "for" in a context similar to that which is now being considered. For my part, I cannot explain the construction of the words "incurred in gaining or producing the assessable income" which is set out in Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation [F10] on the basis that the Court wholly dissociated the relation signified by "in" from any element of purpose. Indeed the Court spoke of the words "in gaining or producing the assessable income" as expressive of an "end". The Court said the operation of those words is "very wide" [F11] and approximates to the meaning of "incurred in carrying on a business for the purpose of gaining or producing such income". [F12]

Returning to the case of Federal Commissioner of Taxation v Green. [F13] The taxpayer claimed as a deduction, among other expenses, a proportion of the train fares which he paid on an occasion he went from his home in Brisbane to North Queensland to inspect and supervise his shop properties in that part of the State. He had also income-producing interests in Brisbane, and managed all his own affairs, maintaining for that purpose "a properly equipped office at his residence". The Court decided that the proportion of the train fares which he claimed as a deduction "was incurred in relation to the management of the income-producing enterprises of the taxpayer". [F14] The management of the properties in North Queensland involved inspecting and supervising them. These were the purposes of the journey northward. It is obvious that the taxpayer was not managing, inspecting or supervising the properties while travelling on the train. The Court took the view that a part of the train fares was "incurred in gaining or producing" the assessable income of the taxpayer. He claimed only a part because, as he conceded, the journey was made also for purposes outside the gaining of assessable income. The Court said: "... it is immaterial that there might be a difficulty in holding that the taxpayer was carrying on in a continuous manner an identifiable business". [F15] Hence that case is one in which expenses of travelling from the taxpayer's residence to a place where he had other income-producing activities were held to have been incurred "in gaining or producing the assessable income". Case No. 59 [F16] is analogous.

Case No. B107 [F17] is one where the taxpayer travelled between two places of employment. These were an accountant's office and the University. The board of review decided that the expenses of travelling from one place of employment to the other were "incurred in gaining or producing the assessable income" and that they formed an allowable deduction under s. 51 (1). The taxpayer was not performing a duty of either employment while he was travelling. He had in that period ceased performing any duties of his employment as an accountant and had not entered upon the performance of any of his duties as a lecturer.

The decision of the Supreme Court of Victoria in the case In re Income Tax Acts [F18] was given on different wording but, in my view, it assists the taxpayer to maintain that the cost of travelling to his employment was "incurred in gaining" the assessable income thereof. The Court said in Federal Commissioner of Taxation v Green [F19] as to private or domestic outgoings that "such expenditure is expressly excluded from deductibility by the final words of the first sub-section of s. 51". [F20] This express exception would seem to imply that the words "all losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income" were contemplated as having a wide operation and capable of including certain expenditure of a private or domestic nature, if there were no express exception of such expenditure.

The provisions of "Schedule E r. 9" (8 & 9 Geo. 5 c. 40) are very different from s. 51 (1). The decisions on the former do not assist in deciding the present problem. The Court did not have recourse to those decisions when explaining the operation of s. 51 (1) in the case of Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation. [F21] With the comment made by the Court that the distinctive words of s. 51 (1) "have a very wide operation" [F22] there ought to be noticed the observation made by Lord Blanesburgh in Ricketts v Colquhoun [F23] on r. 9: "Undoubtedly its most striking characteristic is its jealously restricted phraseology, some of it repeated to heighten the effect". [F24] Vaisey J. spoke to the same effect in Lomax v Newton. [F25] I think that the view which Warrington L.J. took of the scheme of r. 9 in his dissenting judgment in Ricketts v Colquhoun [F26] approximates to the meaning of the provisions of s. 51 (1), whereas the same thing could not possibly be true of the explanation made by Lord Blanesburgh. Warrington L.J. said in reference to r. 9: "Now I think, and I understand on this the Attorney-General agrees, that the words `necessarily' and `necessary' in the rule do not mean necessary and necessarily in the abstract, but that they mean necessary in regard to the circumstances of the individual concerned, the holder of the office, and in regard to the ordinary usages of mankind at this time in the history of the world. If that is so, and if he is unable to enter upon the performance of his duties without incurring, under the circumstances in which he is properly situated, the expense of travelling from his home to the borough, and if in the same way there is cast upon him, in order efficiently to perform his duties, extra expense by going to a hotel in Portsmouth, it seems to me that those are expenses incurred in the performance of his duties. He cannot perform his duty without incurring them, and in principle I cannot see the difference between an expense incurred while he is actually performing his duties, and one incurred for the purpose of enabling him to perform his duties". [F27]  

In my opinion it is an unduly narrow construction of the initial part of s. 51 (1), in the case of an employment, to confine its operation to expenditure made by the taxpayer within the bare physical or temporal limits within which he performs his work or labour and to disregard any expenditure made outside those limits even though it has a necessary relation to the purpose of earning income for which the taxpayer carries on the employment. It is shown by the stated case that the taxpayer could not in the circumstances under which he was situated earn any assessable income by his employment without incurring the cost of travelling which he claims to be an allowable deduction. I cannot see the difference in principle between an expense incurred in gaining income and one incurred necessarily for the purpose of gaining it.

If the facts found in the stated case prove that the expenses of travelling from the taxpayer's home to his employment were incurred in gaining the income of such employment, it would follow that the expenses of travelling back to his home were similarly related to the earning of that income. Somervell L.J., as he then was, in Newsom v Robertson [F28] said: "I doubt if it is helpful to consider the journeys separately. It is the expenses of going to and fro which have to be considered. It would be an impossible result to hold that one journey was `wholly and exclusively' and the other not". [F29] The principle underlying that statement is the right one to apply here.

Holroyd J. said in the case In re The Income Tax Acts: [F30]

"I may say I do not understand the difference between the going and the returning in such cases. If he goes to Melbourne, he comes back to where he lives; and in my opinion the expenses of going and returning are both necessary for the purpose of earning the money. I do not suppose that it is expected that, when a man goes up to Melbourne to earn money, he should remain there; that he is never to go back to his residence; that he is to be permanently there because he earns a few pounds as a director there". [F31]

In that case, as in Federal Commissioner of Taxation v Green [F32] the taxpayer carried on business at his residence. In the present case the taxpayer did not. That is the fine distinction on which the present case turns. Conceding even that the travelling expenses in question were incurred by the taxpayer in gaining or producing the income from his employment, it is said against him that they are not allowable deductions because they are expenses "of a private or domestic nature." This argument is founded entirely upon the circumstances that the expenses were the cost of travelling from the taxpayer's home and returning to it. It disregards the importance of the purpose of the travelling. The point which is in dispute is similar to that which a'Beckett J. reserved in the above-mentioned Victorian case. He said: "I am not saying what the difference would be if he were a mere suburban resident coming and going from the place where he resided, and which he occupied without any reference to his carrying on business there". [F33] Why should expenses of travelling between home and a place where assessable income is earned be "private" or "domestic", if no business is carried on at home, but allowable as a deduction if some business is carried on at the place which is the taxpayer's home and it does not cease to be his home? a'Beckett J. took as a point of distinction that in the latter case the taxpayer's "presence is requisite for the purpose of his carrying on of the businesses from which his taxable income is produced". [F34] In regard to the same point Mr. R. R. Gibson said in case No. 27: [F35]

"Where the assessable income is produced or earned by activities carried on by the taxpayer in several places the taxpayer's expenses of travelling from any one to any other of those places for the purpose of engaging in those activities are surely just as much incurred in gaining the assessable income as, and no more of a private nature than, are the expenses directly arising out of those activities. And, in my opinion, it does not matter whether the activities in any of those places do or do not amount to the carrying on of a business: if the taxpayer were a director of two companies carrying on business in different States, or if he were an employee in one place and the proprietor of a business in another, it would still be prima facie necessary for him to go from one State or place to the other for the purpose of gaining or producing his assessable income. Nor, in my opinion, would it be a material circumstance that the taxpayer was living at one of several places in which he was carrying on income-producing activities. In normal circumstances it would be advantageous to the gaining or producing of his assessable income for such a taxpayer to live at one of those places, one obvious advantage being that he would save the expenses, which he would have otherwise incurred, of travelling between his home and that place. This leads me to the view that if a taxpayer lives at a place where his presence is required from time to time for the purpose of engaging in income-producing activities, his expenses of travelling between that and any other place where his presence is required for similar purposes not only are incurred in gaining or producing his income but also should not be held to be of a private nature merely because it suits his private convenience to live where he does or even because the selected place of residence is, for private purposes, the most suitable of the several places at which he carries on income-producing activities". [F36]

However, in that case, Mr. Gibson dissented. It appears that he relied on the Victorian case cited above. But the majority of the board, Mr. J.P. Hannan and Mr. E.F. Hamilton, thought that having regard to the decision of the majority in Ricketts v Colquhoun [F37] the right view to take of the expenses allowed as deductions in the Victorian case was that they were "private" or "personal" outgoings.  

In case No. 59, [F38] a board of review said that the decision in the case of Federal Commissioner of Taxation v Green [F39] shows that the dissenting view of Mr. Gibson was right and they approved of what he said in the passage cited above. It would seem that if a case with facts similar to Cook v Knott [F40] or Ricketts v Colquhoun [F41] arose for decision under s. 51 (1), the taxpayer would find the decision in Federal Commissioner of Taxation v Green [F42] regarding the train fares of much assistance to him.

The view that the expenses of travelling from home to employment are "of a private or domestic nature" goes back to Cook v Knott [F43] which was decided in 1887. Hawkins J. said in that case: "I cannot see any difference in this case and the case of a man having an office in London, who chooses for his own convenience or pleasure or domestic necessity, as the case may be, to live and occupy a house at Brighton, and pay his ticket up to town every day. It was never contemplated that they should be called expenses necessarily incurred in the transaction of his business. I do not see if he is staying 300 miles off, and comes up specially to attend to his duties once a week, why he should not charge that, if his contention be correct" [F44] These remarks have no relevance to the modern usage of residing in a suburb and working in the city or in another suburb. In Ricketts v Colquhoun [F45] all that was said in reference to Cook v Knott [F46] was an observation by the Lord Chancellor that it had stood for thirty-eight years and the rule on which it was decided had been re-enacted. Lord Blanesburgh said regarding the expenses in question in Ricketts v Colquhoun: [F47]

"Rather are they expenses incurred by him" (the taxpayer) "because, for his own purposes, he chose to live in London; in other words they are purely personal to himself". [F48]

It is a mistake to regard this as a reaffirmation of what Hawkins J. said in Cook v Knott. [F49] I think that the explanation which Mr. R. R. Gibson gave in case No. 27 [F50] of Lord Blanesburgh's observation is correct. It is important to quote what Mr. Gibson said. "In that case (Ricketts v Colquhoun [F51] ) it was held that the appellant's expenses of travelling from London, where he was practising as a barrister and residing, to Portsmouth in order to attend to his duties as Recorder of Portsmouth, and of afterwards travelling back to London, were not incurred in the performance of his duties as Recorder and were therefore not deductible. The opinion was not expressed that the travelling expenses were of a private nature. I think it would be wrong to read that opinion into Lord Blanesburgh's remark [F52] ... that `the expenses were incurred by him' (the appellant) `because for his own purposes, he chose to live in London: in other words they are purely personal to himself'. If this remark is read with its context (I refer to the reasoning which ends with the statement that the appellant `was ... under no obligation ... to continue so to practise while holding his office') it will be seen that what his Lordship meant was that the expenses were purely personal to the appellant because, for his own purposes, he chose to practise in London where he lived: they were personal in the sense that his practice was personal". [F53]  

Another judicial pronouncement relied upon to support the view that expenses of travelling from home to work are "private or domestic" is that of Murray D.C.J. in Re Adair. [F54] His Honour's pronouncement was obviously based upon what Hawkins J. said in Cook v Knott. [F55] It might have been a fair presumption for Hawkins J. to make in 1887 about the London business man that he lived at Brighton for his own convenience or pleasure or domestic necessity; perhaps, a fair presumption for Murray D.C.J. to make in 1898 that an accountant practising in Sydney had decided to live at the suburb of Burwood for similar private of domestic reasons. But there is no ground for any such presumption in the facts set out in this stated case. If modern housing conditions and the ordinary usages of the working population are taken into account, it would be wrong to presume or infer without evidence that an employee who lives at a distance from his employment has simply chosen to do so in preference to living in the vicinity of his employment.

Narraweena is according to the facts a residential suburb with a working population most of whom are employed in the city. When, as under modern conditions, homes are not generally available to employees near their employment it is, in my opinion, wrong to presume that an employee who resides in an ordinary residential suburb is actuated by some reason such as Hawkins J. mentioned. The truth is rather that the employee is concerned with having a place of abode, which necessarily becomes the base from which he goes and to which he returns in the course of earning his livelihood. It is not a correct construction of the situation in which he is placed to say that he lives there to get far away from his employment, because, if he is unable to reside near it, he needs to reside somewhere from which it is possible to get to his employment. The less time he spends travelling to and from his employment the more he is pleased. I do not take the view that the expense of such travelling belongs necessarily to the sphere of private or domestic expenditure. It is rather business expenditure chargeable to the earnings of the employment-his earnings-to and from which the taxpayer goes and comes. The expenditure does not provide for any private or domestic need. The expenditure is not in the category of ordinary living expenses. Its purpose is rather to earn income to meet such expenses. I do not take the view that the result of s. 51 (1) is that the expenses of travelling between a home and employment may not be private or domestic expenditure because a feature of the home is a room where the taxpayer earns other assessable income, whereas similar travelling expenses of a taxpayer who derives all his assessable income from the employment to and from which he travels are of an essentially different nature and cannot be regarded as incurred in gaining or producing the assessable income, but as expenses of a private or domestic nature, even though the latter taxpayer resides within a reasonable distance of his employment, or not so far away that it could not be expected that normally a person in his circumstances would live where he resides.  The fact that the expenses in the case of either taxpayer are incurred solely and necessarily for the purpose of travelling to the taxpayer's employment may in all the circumstances of the case be sufficient to justify the conclusion that such expenses are incurred in gaining the taxpayer's income and are not "of a private or domestic nature". In this case that conclusion is in my opinion amply justified by the facts which are set out in the stated case.

I am of the opinion that the sum in question, PD62, was wholly incurred in gaining the taxpayer's assessable income and was not to any extent of a private or domestic nature. It was, therefore, an allowable deduction under s. 51 (1) of the Act. I would answer the question by saying that the sum of PD62 is wholly deductible.

Hayley v Commissioner of Taxation of the Commonwealth of Australia.

The dental practice which this taxpayer carried on was a business within the meaning of s. 51 (1). He was therefore entitled to rely upon the alternative words of the sub-section as well as upon those in its initial part. The reasons which I have given in the former case apply here. I would, therefore, answer the question stated for the Court's opinion in the same way.