Between: Lunney
And: Commissioner of Taxation

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

MELBOURNE

Judgment by:
Williams J
Kitto J
Taylor J

The questions posed by these two cases stated raise for our consideration a matter of general interest in relation to s. 51 of the Income Tax and Social Services Contribution Assessment Act 1936-1956. What we are called upon to decide is whether the expenditure incurred by each of two taxpayers in travelling to and fro between their respective residences and places of work are "losses or outgoings" of the description specified in the section and, therefore, allowable deductions for the purpose of the Act. The first of the appellants, it may be assumed, was an employee in receipt of wages payable for services rendered at his place of employment, or elsewhere as directed by his employer, whilst the other carried on in Sydney the professional practice of a dentist, and each has claimed in his return of income to deduct fares paid during the relevant period for conveyance by public transport from his residence to his place of work and from his place of work to his residence.

The fact that s. 51 was intended to deal with a great variety of items of expenditure made it inevitable that it should be couched in general terms and both that section and its immediate predecessor have been the subject of judicial consideration on a number of occasions. In terms, the section provides that all losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private, or domestic nature. The language is simple enough and, in the main, little difficulty is encountered in recognizing those items of business expenditure which qualify as deductions. But in the nature of things it has been impossible to devise, as a substitute for the words of the section, a simple formula which will readily and precisely mark the limits of the operation of the section. Yet, in the course of dealing with individual cases, it has been necessary to devote particular attention to the words "in gaining or producing the assessable income" and "incurred in carrying on a business for the purpose of gaining or producing such income" and to attempt to express precisely what those words mean.

For the purpose of advancing the appellants' cases counsel, naturally enough, seized upon observations which have been used from time to time in attempts to elucidate the meaning of these expressions. In particular, it was said, expenditure is invested with the requisite character if it may properly be regarded as "incidental or relevant" to the derivation of assessable income. This expression has been used in a variety of cases where it has been necessary to deal with problems arising under the section. For instance in dealing with the immediate predecessor of s. 51 in Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation, ^[F56] it was said: "The expression `in gaining or producing' has the force of `in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself". ^[F57] In dealing with the same section in W. Nevill & Co  Ltd v Federal Commissioner of Taxation ^[F58] it was said that "it is necessary that the expenditure should have been incurred in gaining or producing the assessable income, that is the assessable income of the given financial year or accounting period. This means that it must have been incurred in the course of gaining or producing the assessable income. It does not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income". ^[F59] The same expression was again used in Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation ^[F60] when it became necessary to solve a problem arising under s. 51. In that case it was said that "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". ^[F61] This passage was repeated in Charles Moore and Co (W.A.) Pty Ltd v Federal Commissioner of Taxation. ^[F62] Examination of these cases, however, readily shows that the expression "incidental and relevant" was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section. That this is so appears from some of the brief passages already quoted and is made quite clear by consideration of the reasons in the cases referred to. In Ronpibon Tin N.L. and Tongkah Compound N.L. v Federal Commissioner of Taxation ^[F63] the passage quoted above (3) was immediately followed by the observation "The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income". ^[F64] Thereafter, it was said: "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". ^[F65] In the context in which they have been used the expressions relied upon by the appellants have been intended as a reference, not necessarily to the purpose for which an item of expenditure has been incurred, but, rather, to the essential character of the expenditure itself. In each of the cases except the last the expenditure in question was essentially expenditure of a business character but the question was whether it was expenditure "incurred in gaining or producing the assessable income" or necessarily "incurred in carrying on a business for the purpose of gaining or producing such income" whilst in the last-mentioned case the occasion of the loss in question was properly regarded as an "incident" of the carrying on of the business which produced the taxpayer's assessable income.  

The sense in which the appellants suggest that the expenditure in question in this case was incidental and relevant to the derivation of assessable income is well illustrated by the observations of Holroyd J. in In re The Income Tax Acts. ^[F66] In that case the learned judge was concerned, inter alia, with the question whether a taxpayer was entitled to claim as a deduction expenditure incurred in travelling to and fro between his private residence and the city of Melbourne where he performed duties which enabled him to earn fees as a director of a company. His Honour said: "These fees, like the profits of his business, are part of his income, and the money which he employs in travelling up to Melbourne in order to earn them is expended for the purpose of enabling him to earn his income and without paying those expenses, apparently, he could not earn it. I may say I do not understand the difference between the going and 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". ^[F67] The question in that case was whether expenditure so incurred by the taxpayer was "wholly and exclusively expended for the purposes of his trade" and may, perhaps, be said to differ substantially from that which arises in the present case. Possibly, if the learned judge had been required to apply the provisions of a section similar in terms to s. 51 he would have found great difficulty in saying that the expenditure had been "incurred in gaining or producing" the taxpayer's assessable income. The grounds for his Honour's decision on the point did not, however, commend themselves entirely to the other two members of the court in that case and do not appear to have found acceptance on any other occasion on which not dissimilar problems have arisen for consideration.

The question whether the fares which were paid by the appellants are deductible under s. 51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer's residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as "incidental and relevant" to the derivation of such income. No doubt both of the propositions involved in this contention may, in a limited sense, be conceded but it by no means follows that, in the words of the section, such expenditure is "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business for the purpose of gaining or producing such income". It is, of course,beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived.

The problem now before us was to some extent the subject of consideration in the recent case of Newsom v Robertson ^[F68] where, pursuant to the Income Tax Assessment Act 1918 (Imp.), the question was whether railway fares which had been paid by a professional man in respect of journeys between his home and his professional chambers constituted "money wholly and exclusively laid out or expended for the purposes of his profession". It should be mentioned that in this case the additional fact appeared that the taxpayer consistently performed some of his professional duties at his home and the case was put as one in which the facts disclosed that the expenditure was incurred, not merely in travelling between his home and place of business, but, rather, in travelling between one place of business and another. Yet the taxpayer's claim to a deduction was rejected both in the first instance and in the Court of Appeal. None of the members of the latter court were prepared to assent to the proposition that the taxpayer's journeys were for the "purpose" of his profession; in the language of Romer L.J. "The object of the journeys, both morning and evening, is not to enable a man to do his work but to live away from it". ^[F69] The fact that few taxpayers are free to choose whether they will live at their place of work or away from it may appear to invest this statement with a degree of artificiality. But, even in these modern times, they still have, within limits, the right to choose where their homes shall be so that a taxpayer's daily journeys between his home and place of work are rendered necessary as much by his choice of a locality for his residence as by his choice of employment or occupation. And indeed the purpose of such journeys is, at least, as much to enable him to reside at his home as to attend his place of work or business. In the course of seeking to ascertain the "purpose" of such daily journeys, Denning L.J. in Newsom's Case ^[F70] made some obvious,but nevertheless interesting, observations on this point. He said: "In the days when income tax was introduced, nearly 150 years ago, most people lived and worked in the same place. The tradesman lived over the shop, the doctor over the surgery, and the barrister over his chambers, or, at any rate, close enough to walk to them or ride on his horse to them. There were no travelling expenses of getting to the place of work. Later, as means of transport quickened, those who could afford it began to live at a distance from their work and to travel each day by railway into and out of London. So long as people had a choice in the matter- whether to live over their work or not-those who chose to live out of London did so for the purposes of their home life, because they preferred living in the country to living in London. The cost of travelling to and fro was then obviously not incurred for the purpose of their trade or profession. Nowadays many people have only a very limited choice as to where they shall live. Business men and professional men cannot live over their work, even if they would like to do so. A few may do so, but once those few have occupied the limited accommodation available in Central London, there is no room for the thousands that are left. They must live outside, at distances varying from three miles to 50 miles from London. They have to live where they can find a house. Once they have found it, they must stay there and go to and from it, to their work. They simply cannot go and live over their work. What is the position of people so placed? Are their travelling expenses incurred wholly and exclusively for the purposes of the trade, profession or occupation? I think not. A distinction must be drawn between living expenses and business expenses. In order to decide into which category to put the cost of travelling, you must look to see what is the base from which the trade, profession, or occupation is carried on. In the case of a tradesman, the base of his trading operation is his shop. In the case of a barrister, it is his chambers. Once he gets to his chambers the cost of travelling to the various courts is incurred wholly and exclusively for the purposes of his profession. But it is different with the cost of travelling from his home to his chambers and back. That is incurred because he lives at a distance from his base. It is incurred for the purposes of his living there and not for the purposes of his profession, or at any rate not wholly or exclusively; and this is so, whether he has a choice in the matter or not. It is a living expense as distinct from a business expense". ^[F71]  

In the course of the argument we were referred to a number of cases in which, from time to time, much the same problem has been discussed. It is unnecessary to review these cases but of them we mention Cook v Knott; ^[F72] Friedson v Glyn-Thomas; ^[F73] Ricketts v Colquhoun; ^[F74] Nolder v Walters; ^[F75] Blackwell v Mills, ^[F76] and Durbidge v Sanderson. ^[F77] No doubt the legislative provisions which required consideration in these cases were not identical with s. 51, but the process of reasoning by which they were decided consistently rejects the notion that expenditure incurred by a taxpayer in order to travel from his home to his place of business is, in any sense, a business expenditure or an expenditure incurred in, or, in the course of, earning assessable income. Indeed they go further and refuse assent to the proposition that such expenditure is, in any relevant sense, incurred for the purpose of earning assessable income and unanimously accept the view that it is properly characterised as a personal or living expense. This view agrees with that which we, ourselves, entertain. Expenditure of this character is not by any process of reasoning a business expense; indeed, it possesses no attribute whatever capable of giving it the colour of a business expense. Nor can it be said to be incurred in gaining or producing a taxpayer's assessable income or incurred in carrying on a business for the purpose of gaining or producing his income; at the most, it may be said to be a necessary consequence of living in one place and working in another. And even if it were possible-and we think it is not-to say that its essential purpose is to enable a taxpayer to derive his assessable income there would still be no warrant for saying, in the language of s. 51, that it was "incurred in gaining or producing the assessable income" or "necessarily incurred in carrying on a business for the purpose of gaining or producing such income". The questions in the cases stated should be answered in the negative.