Handley v. Federal Commissioner of Taxation
(1981) 148 CLR 18255 ALJR 345
(Judgment by: Aickin)
HANDLEY v. FEDERAL COMMISSIONER OF TAXATION
Court:
Judges:
Stephen
Mason
Murphy
AickinWilson JJ.
Other References:
Income Tax (Cth)
Judgment date: 1 APRIL 1981
Judgment by:
Aickin
In this matter I have had the advantage of reading the reasons for judgment of my brother Stephen. I agree with his reasons and his conclusion. There are however three aspects on which I wish to add a comment. (at p198)
The taxpayer claimed and the Commissioner allowed a deduction of an apportioned part of the taxpayer's expenditure for electricity and house cleaning costs for the house as a whole. I find the allowance of such amounts difficult to reconcile with the disallowance of an apportioned part of interest, rates and insurance payable by the taxpayer. (at p198)
The second matter arises from the fact that some reliance was placed in argument by Counsel for the Commissioner on the distinction between the purpose for which an item of expenditure has been made and the essential character of the expenditure. It was submitted that the latter was the relevant test. This distinction was drawn in Lunney v. Federal Commissioner of Taxation (1958) 100 CLR 478 , at p 497 in the judgment of Williams, Kitto and Taylor JJ. With due respect I am unable to regard their Honours as having excluded as irrelevant the purpose of the expenditure. Moreover I find it difficult to see how the essential character of an item of expenditure can be ascertained except by reference to the character of the item upon which it was incurred, and in one sense at least that must involve an examination of the purpose of the expenditure, both immediate and remote. That will involve an examination of the nature of the consideration received for the expenditure, its relationship to the income-earning activity and the purpose which it serves in that activity. It is clear from the joint reasons in Lunney's Case that the nature of the expenditure is not to be taken as the only test or for that matter to exclude recourse, where it is useful, to the purpose for which the expenditure has been incurred. The same would doubtless be true of other so-called 'tests' of deductibility such as the use to which the study is put in order to produce income. It is clear that their Honours were not laying down any simple formula which would delimit with precision the scope of s. 51 (1). As my brother Stephen has rightly observed the only criterion of deductibility is the wording of the section itself. He has also made it clear that in this context there is no necessary conflict between the factors such as use and the determination of the essential character of the payment. (at p199)
Leaving to one side for the moment Thomas v. Federal Commissioner of Taxation (1972) 46 ALJR 397 ; 3 ATR 165 ; 72 ATC, at p 4094 and Federal Commissioner of Taxation v. Faichney (1972) 129 CLR 38 , which decisions have been called into question in these proceedings, where decisions of this Court have denied deductibility in the case of outgoings of a private or domestic nature it has been on the basis that they were not incurred in gaining or producing assessable income or in carrying on a business for the purpose of gaining or producing assessable income, rather than that they were to be excluded as deductions because, although of that character, they were also of a private or domestic nature. In Thomas and Faichney and also Lodge v. Federal Commissioner of Taxation (1972) 128 CLR 171 no concluded view was expressed by the trial judge on the question whether the expenditure was incurred in gaining or producing assessable income or necessarily incurred in carrying on a business; the decisions were based on the expenditure being of a private or domestic nature. In Ronpibon Tin N.L. v. Federal Commissioner of Taxation (1949) 78 CLR 47 , at p 56 it was pointed out that the express exclusion of expenditure incurred in gaining exempt income operated to exclude something which could not fall within the opening words of s. 51 (1), but that expressly to exclude losses and outgoings of capital was both logical and necessary because such losses and outgoings could none the less be incurred in the course of carrying on a business or gaining or producing income. (at p200)
There has been no decision of this Court which characterizes expenditure of a private or domestic nature in that way. Logic would seem to suggest that expenditure incurred on private or domestic matters could not be incurred in gaining or producing assessable income but, as appears from the observations in Ronpibon, and in John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation (1959) 101 CLR 30 , strict logic has not been the sole guide of the draftsman. The fact that s. 51 (1) both permits and requires dissection and apportionment of expenditure by the use in the opening words of the expression "to the extent to which they (i.e. 'all losses and outgoings') are incurred in gaining or producing the assessable income" suggests that some expenditure may be of a mixed character such that it must be apportioned so as to ascertain that amount which can be regarded as expended in gaining or producing assessable income or carrying on a business. Thus the exclusion of expenditure made on, or in so far as it is on, private or domestic matters comes from the requirement of the opening words of s. 51 (1) which limit deductions to expenditure incurred in gaining assessable income. The express exclusion in the closing words of the sub-section of expenditure of a private or domestic nature has the same character as the exclusion of expenditure in gaining exempt income; it must be regarded as having been inserted by way of precaution or emphasis - cp. the discussion by Menzies J. in Federal Commissioner of Taxation v. Hatchett (1971) 125 CLR 494 , at p 498 . The fact that the opening words impliedly exclude that which is not incurred in gaining or producing assessable income may make the final express excluding words no more than partly explanatory and partly definitive of what is excluded. In my opinion the section does not require a two-stage apportionment. (at p200)
The third point concerns the mode of apportionment of the expenditure on mortgage interest. This is a matter which is primarily one of fact and is not one in which questions of principle can arise. However since it was raised by counsel for the Commissioner I think I should say that I agree with the views expressed by Yeldham J. that in a case like the present, if any adjustment must be made to the apportionment on the basis of floor area, then the proper measure is a comparison between the time during which the room was used for professional work and the time during which it was used for other purposes, and not between the time for which it was used for professional work on each day and twenty-four hours. There is nothing in the material before us to indicate the mode of calculation of the amounts allowed as deductions for electricity and house cleaning costs, but no complaint is made about those items by either party. (at p201)
In my opinion the taxpayer's appeal should be allowed. (at p201)