Moller, J

1,2 July, 4 September 1970 - Auckland

Moller, J    This appeal by way of case stated calls for an examination of s 111 of the Land and Income Tax Act 1954 (NZ) as it now reads following the passing of the Land and Income Tax Amendment Act 1968. It also calls for consideration of subparagraph (i) of s 112 of the 1954 Act as inserted by s 20 of the Land and Income Tax Amendment Act (No 2) 1968. And, moreover, counsel told me that, in respect of the new s 111, there has been no previous decision of this Court.

   Section 111 now reads as follows: "In calculating the assessable income of any taxpayer, any expenditure or loss to the extent to which it-

   (a) Is incurred in gaining or producing the assessable income for any income year; or

   (b) Is necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income for any income year-

   may, except as otherwise provided in this Act, be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss is incurred"; and it is common ground that in this case I have to deal with subparagraph (a) only.

   Section 112, as far as it applies here, provides that: "Notwithstanding anything to the contrary in section 111 of this Act, in calculating the assessable income derived by any person from any source, no deduction shall, except as expressly provided in this Act, be made in respect of any of the following sums or matters:-

   (i) Any expenditure or loss to the extent to which it is of a private or domestic nature ...."

   The basic facts appearing from the case stated are these:-

   (1) The appellant, Mr Tout, is himself an Inspector employed by the Inland Revenue Department;

   (2) In his return of income for the year ended 31 March 1969 he declared his salary but, to reach what he claimed to be his assessable income, he made certain deductions, one of these being $86.77 described as "Other expenses";

   (3) These "Other expenses" were made up in this way:-


"Mileage as calculated $19.67
Proportion of clothing costs 20.00
Education-Psychology, Sociology 30.00
Driver's Licence .75
Books and replacement 16.35

   (4) The Commissioner decided that this sum of $86.77 was not deductible and issued an assessment accordingly;

   (5) The appellant objected to the assessment and, when the Commissioner disallowed the objection, he was required to state a case.

   In the present appeal the taxpayer claims that the "Other expenses" are deductible by virtue of s 111; but the Commissioner asserts that they are items of a private or domestic nature and therefore are not deductible because of the provisions of s 112.

   In the course of the hearing the appellant abandoned his claim for a deduction of the sum of $20 being a "Proportion of clothing costs", and there remain for my consideration only two matters: (a) certain travelling expenses amounting to $19.67; and (b) expenses amounting to $46.35 incurred by the appellant in connexion with a series of lectures attended by him at a University Extension course. I also record at this stage that it was conceded by Mr Bridger, on behalf of the Commissioner, that, if either item of expenditure was ultimately found to be deductible, there would be no dispute over the amount claimed in respect of it, except, perhaps, to the extent that some part of it could be considered expenditure of a private or domestic nature.

   Before I deal further with the facts I intend examining s 111. It certainly seems that there has been no relevant reported decision of this Court since the amendment came into force, but there are a very great number of authorities available from Australia, most of them being decisions of Commonwealth Taxation Boards of Review but some being decisions of the High Court. These are all helpful because the Australian section has for many years read as follows:-


"51. Losses and outgoings.-(1) 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, or are incurred in relation to the gaining or production of exempt income."

   Throughout these judgments one finds constant reminders that each case of this sort must depend on its own facts. This was emphasized by Windeyer, J, in Federal Commissioner of Taxation v Finn (1961), 8 AITR 406; 106 CLR 60, where Dixon, CJ, on the same point, said: "... as the legislation stands such cases cannot, unfortunately, be determined by any very broad proposition of law. For the issue must be whether the expenditure was incurred in gaining or producing the assessable income and, although the meaning and application of this phrase have been elucidated judicially, and perhaps may be further so elucidated, in the end the decision often will depend on the facts of the given case". And in the joint judgment of Williams, J, Kitto, J, and Taylor, J, in Lunney v Federal Commissioner of Taxation; Hayley v Federal Commissioner of Taxation (1958), 7 AITR 166; 100 CLR 478 the following passage appears: "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."

   Most of the judicial "elucidations" referred to by Dixon, CJ, are to be found in a paragraph in the judgment of that learned judge in Finn's Case, supra. It reads: "The words of s 51 which are most material to the primary question on which the taxpayer's claim to a deduction depends are 'incurred in gaining or producing the assessable income'. With respect to this phrase, before the consolidation of 1936 was made it was remarked that 'the expression "in gaining or producing" has the force of "in the course of gaining" and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to the purpose itself'; Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935), 54 CLR 295, at p 309. In Ronpibon Tin (NL) and Tongkah Compound (NL) v Federal Commissioner of Taxation (1949), 78 CLR 47, at p 56; 4 AITR 236, at pp 244-5, the judgment of the Court contained two or three comments that may be relevant. It was said, 'No doubt the expression "in carrying on a business for the purpose of gaining or producing" lays down a test that is different from that implied by the words "in gaining or producing". But these latter words have a very wide operation and will cover almost all the ground occupied by the alternative' ... Again, 'For expenditure to form an allowable deduction as an out-going incurred in gaining or producing the assessable income it must be incidental and relevant to that end.' ... There is a third comment which may be added though perhaps it does not go so far, 'In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or out-going should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.' "

   Most of these expressions of opinion were also referred to in Lunney's Case, supra, in the judgment of the three learned judges to which I have already referred, their comment upon them being: "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." This extract was, in turn, further elucidated in 11 CTBR (NS) Case 40, where one member of the Board is reported as saying: "The ratio in Lunney's Case was, I think, that in order to be deductible in terms of s 51, it is not sufficient that the purpose of the expenditure is incidental and relevant to the derivation of assessable income, but it must also be of a character incidental and relevant to such derivation, ie, in the present case, it must have the character of an expenditure truly incident to the proper execution of the functions of taxpayer's office or employment. In Lunney's Case, the routine daily journey to and from work did not have such a character. In light of the terms of reg 381 which prescribes the touchstone whereby a teacher's efficiency in the execution of his office shall be judged, it seems to me that the taxpayer's attendance at the school outside official hours of duty for the various purposes shown in the detailed listing above, was not only for purposes incidental and relevant to the proper execution of his functions, but his attendance was also of a character incidental and relevant to the performance of those functions."

   Finally, I mention the short judgment of Windeyer, J, in Finn's Case, supra, which contains this passage: "Generally speaking, it seems to me, a taxpayer who gains income by the exercise of his skill in some profession or calling and who incurs expenses in maintaining or increasing his learning, knowledge, experience and ability in that profession or calling necessarily incurs those expenses in carrying on his profession or calling. Whether he be paid fees by different persons seeking his skilled services from time to time, or be paid a regular salary by one person employing him to exercise his skill, matters not in my opinion."

   In his argument before me Mr Renneberg appeared to me to adopt, primarily, the "elucidation" that spoke of the expenditure's having to be incidental and relevant to the gaining or producing of the assessable income. Mr Bridger for his part, on much the same authorities, submitted that in every case two tests must be satisfied. He adopted, as one of these, that which I have just mentioned in connexion with Renneberg's contentions, but he added another based upon what he called "the vital words" of s 111(a), namely, "incurred in gaining or producing the assessable income"; and he put marked emphasis upon the word "in", because, according to him, that word bore an important connotation of time in the sense that the expenditure, if it is to be deductible, must be incurred "while" the taxpayer is actually doing the work by which the income is gained or produced. His authority for this was that part of the judgment in the Ronpibon Tin Case, supra, (which is reported in 78 CLR, at p 47) which reads as follows: "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". As I understood him Mr Bridger argued that, in this passage, the Court set up two separate tests. I cannot agree with him. In my view, there are other passages in the same judgment which show that the Court was not doing what Mr Bridger alleged, and I refer in particular to this sentence which appears later: "The question is how far was it incurred in the course of, how far was it incidental and relevant to, gaining or producing the assessable income." Moreover, if Mr Bridger is correct in his submission as to the importance of the time factor, a number of cases in Australia have been wrongly decided including the leading one in the High Court, Finn's Case, supra. This would be difficult to accept in any circumstances, but it is much more so when one realizes that Dixon, C.J, who delivered the leading judgment in Finn's Case was also, as Dixon, J, a member of the Court which decided the Ronpibon Tin Case.

   I now pass to consider in detail the facts in connexion with the taxpayer's claim to have deducted the expenses involved in his attending the course of lectures under the control of the University Extension.

   Mr Renneberg produced as an exhibit, without objection from Mr Bridger, a copy of an address to the School of Taxation delivered by the late Mr L J Rathgen when he was Commissioner of Inland Revenue. The address was entitled "Some Thoughts on the Philosophy of Public Relations". And it was at least implicit in Renneberg's argument that the taxpayer's claim under this head should be considered against the background of what Mr Rathgen then said. It is, I think, necessary for me to quote at some length from this document. The important passages are the following:-

   (1) "The old concept of tax administration as it has been for centuries and indeed as it still exists in differing degrees and in many countries even today, is that the taxing authorities should police the tax paying public with the first and indeed only motive of enforcing the taxing laws.

   The objective has been maximum immediate government revenue with little assumption in favour of the taxpayer.

   The new concept as we are developing it is that a tax department like any others exists to give service to the people and that the specific function with which it is charged, in this case the collection of taxes, follows naturally.

   To this end we introduce the objective of thoughtfulness for the feelings of people and consideration for the convenience of the public;

   (2) "The thought that taxpayers have rights as well as obligations is a natural corollary which develops from this desire to give service based on thoughtfulness understanding and tolerance.

   Indeed the concept that taxpayers are people is one which strikes with ever increasing forcefulness;

   (3) "But there will be a small investigating group still to deal with these few who, because of congenital criminal tendencies or because of pressures they have been unable to withstand are wilful tax evaders, and who in the public interest must be acted against.

   In the actions to be taken against these people principles of justice, tempered with understanding, are needed;

   (4) "How indeed can these new ideas be instilled in minds where jargon, gobbledygook and officialese have for so long been the means of an obscure or evasive official answer;

   (5) "My experience is that public relations is not a function to be left entirely to a specially designated officer.

   It is in fact a philosophy of management which in itself becomes a function of management projected into the thinking and thus inherent in the day to day acts of administration of every member of an organization.

   Public relations is the built in concern of all. You must give a better service. Not just arrange publicity. You must rethink your attitudes;

   (6) "Please do not forget though, that some of these things are common to all institutions. Service, understanding, tolerance, putting oneself in the other man's position, seeing that you and your staff have the right attitudes and that these seep right through the organization."

   I pass now to consider the evidence given by the appellant himself.

   When describing his work he said that the first "physical contact" that he would have with a taxpayer whose affairs he was investigating would be when he arrived at the taxpayer's office; that they would then discuss, in general terms, the procedures that he, the appellant, would follow, and the information that he sought. He went on to say that, with larger companies, his discussions would be with many different people-the secretary of the company, its general manager, its solicitor, its accountant, or its tax consultant. Having reached his own findings, the appellant would then make a final report to the District Commissioner covering "all the matters unsettled in the investigation" and commenting upon "matters of personal judgment relating to co-operation" of the taxpayer. The appellant also told the Court that he had to do his share of staff training, both by lecturing to groups and by assisting individuals. He gave evidence that, against this background, he decided to take the University Extension course in psychology and sociology; and he said further that, as a result of the course, he was better able to understand himself, his own attitudes, and the attitudes of taxpayers and others with whom he came into contact. He also considered that the course gave him additional knowledge "relating to procedures at interview". Then in his evidence came this passage: "It was because of my course in psychology and sociology and my understanding of many of the psychological factors involved in an interview situation that I was asked by our Senior Inspector, following some information he had received from the Chief Inspector in Wellington, to take a lecture group and to talk to the more experienced inspectors in Auckland on this very question of the psychological factors involved in our work in interviewing taxpayers and others."

   He was asked to give his reasons for taking the course. This was his answer: "In my personal report for 1968, I think it was, there is some mention ... of a need to improve my technique. Knowing the content of this course, the textbooks, from the ones they were using, knowing the attitude of the department to public relations, to festering an ability to understand the taxpayers, I felt that this course would assist me in the duties I was to perform in the department."

   The appellant's "personal report" for the years ended 31 March 1968, 31 March 1969, and 31 March 1970 became exhibits. It appears in such reports every officer in the department has to be graded by his Controlling Officer from "Excellent" through other standards to "poor" in connexion with a number of specified aspects of the work being done. The appellant considered that the course undertaken by him in the academic year 1969 would help him in such listed matters as "initiative", "versatility", "judgment", "staff relations", and "public relations". In the end his report for the year ended 31 March 1970(that is to say, the report covering the year in which he undertook the studies concerned) resulted in his obtaining, from the same Controlling Officer, the same gradings in all these matters as he got in March 1969, except in respect of "versatility", under which heading he dropped from "exceptional" to "adaptable". The appellant, in a statement attached to the report, complained about this reduction in grading, saying that, during the year, he had "received no indication ... that [his] versatility was slipping", and that the report set out no specific reason for this alleged deterioration. There is no further evidence available to assist me on this point, and I must confess that I do not look upon it, a result in one category of performance amongst so many others, as of any great importance. At the same time there is no improvement indicated in the report for the year ending 31 March 1970 over his performance in the year ending 31 March 1969, in respect of the categories in which he considered his studies would most assist him. Again, however, I do not treat this as being of any great significance, because, for instance, it could well be that the full benefits that the appellant may have obtained from his further studies during 1969 may not become apparent until his work for the current year is assessed.

   The appellant was cross-examined by Mr Bridger at some length in connexion with this whole matter, and, when asked to tell the Court what was taught in those courses, said: "The course is a very interesting course involving the study of the behaviour of people both as individuals, and their behaviour in groups. This course involved an understanding of ones' own attitude to others, an understanding of the various factors which affect perception both of oneself and of others, an understanding of how people are affected by the situations they find themselves in, an understanding of how they try and cope in these situations, and an understanding of how much of the real person we see during an interview .... Yes, we had lectures on interviewing. Much of the lecture material in both subjects ... relates to the behaviour of people and including myself in an interview situation"; and he went on to say that the course had assisted him greatly in "modern developments in Taxation work" because, referring to the views of the late Mr Rathgen as set out earlier in this judgment, he considered that the Inland Revenue Department had, for some years, been concerned with "improving its public image" and that it was along these lines that the course was "of assistance in keeping trend with modern developments".

   It was suggested to him that, before the course, he must have treated taxpayers more as "victims" than as "people", but he answered that the course had "crystallized many things" that he had already practiced and had given him more confidence in his ability to face taxpayers in the various situations in which he encountered them.

   I now refer to two other matters of fact appearing from the evidence.

   The first is this: It appears that there was some competition for places in connexion with this particular University Extension course. Because of this the appellant approached the Senior Inspector, Mr Cournane, with the result that Cournane wrote to the Director of University Extension a latter dated 20 February 1969 which read as follows:-"Mr R P Tout, an Inspector of the Department, has intimated that he intends to apply for a place in the course on Social Studies to be held this year. Mr Tout's duties involve him in interviews and discussions with persons in all walks of life and it is considered that the proposed course will be of benefit to him in his work."

   The second is this: Mr Cournane gave evidence on behalf of the Commissioner and, when asked if it was essential for an inspector to have the benefit of the subjects studied by the appellant, he answered: "I wouldn't use the word essential, very desirable."

   I should, before I leave the evidence on this part of the appeal, record that the appellant is a person interested in good works of a community nature. In this connexion he has church interests, and, in addition, became, in 1968, the honorary secretary of a branch of the Good Samaritan Society. He had indeed been interested in this Society for some considerable time before 1968, and he admitted that these interests played some part in his decision to take the particular course that he chose; but he also said, in answer to a question from me, that, if he had been called upon to consider only his church work and his work with the Good Samaritan Society, he would not have embarked upon this further study. He said that what really motivated him was the knowledge that, in the modern approach to the collection of taxes, public relations were important to his job. This I accept.

   Two other witnesses were called to support the appellant's case. One was a Senior Clinical Psychologist employed at Kingseat Hospital. He was apparently a lecturer in University Extension classes and knew the appellant. As far as I was able to appreciate his evidence, it appeared to me to add little to what I had already heard. The other was Professor Timms, Professor of Sociology at Auckland University. He was a good deal more impressive. He taught the appellant in the sociology lectures and considered that the course would have general relevance to staff relations, judgment, and public relations. He also expressed the opinion that the course would assist the appellant in his interviewing technique, and would be "desirable, but not essential" in helping him to assess trustworthiness and creditworthiness. Professor Timms was able to say that, from his knowledge of the results of the appellant's examinations, Tout had "effectively worked at the course".

   As I have already said there are numerous authorities in Australia to which one can refer in the hope of getting guidance in matters of this kind. But a perusal of them (and I believe that I have perused them all) serves to emphasize two points: The first is that the decision in each case must eventually depend upon the totality of facts accepted by the tribunal in that particular instance; and the second is that the line dividing the cases in which relief is given to the taxpayer from those in which it is refused is not only thin to the point of its approaching obliteration, but it is also inclined to be so wavy and irregular in its form that it is very difficult indeed to place with certainty one case on one side of it and another case on the other. This is particularly brought home to the reader when he finds dissenting opinions being expressed by experienced members of Boards of Review, or, if not dissenting opinions, agreement with the majority being reached only after considerable hesitation.

   There can be no doubt that the course undertaken by the appellant was basically one which was in the nature of advanced educational training for people in all walks of life (see 10 CTBR(NS) Case 23). There can be no doubt that in undertaking the course the appellant to some extent had his sights fixed upon the possibilities of promotion. (See 13 CTBR (NS) Case 29). But, because each case must be decided upon its own facts, matters such as these must be placed in their proper perspective. I take the view that the appellant in this case is entitled to have his actions in connexion with this course of study considered against the background of the new philosophy in taxation work as outlined by the late Mr Rathgen; and, in that context, I find that the course of study undertaken by the appellant was of a character which was relevant and incidental to the gaining of his assessable income, and that it was incurred wholly in achieving that end. This means that I do not have to make any apportionment to meet the requirements of s 112(i).

   I pass now to consider the item of travelling expenses. As I understand the evidence on this matter an inspector in the position of the appellant is, each year, allotted a certain number of miles in respect of which he can use his own car in connexion with his work and have paid to him a mileage allowance by the department; and I find that the appellant had such an allowance available to him at the time of certain investigations which began in September 1968 and in respect of which he used his own car on 14 different occasions to transport him to Mt Wellington, Penrose, and other districts in and around Auckland. On those occasions he first travelled from his home to the offices of the department, and then from these offices to the point where his investigation required him to be; and, when his work for each day was completed, he drove again to these offices for the purpose of, for instance, depositing records there, and, after that, drove to his home. For the use of his car from the office in the morning to the place of his investigation each day, and in the afternoon from the place of the investigation back to the office, he was paid his mileage allowance in the ordinary way. His claim for a deductible expense is, however, in respect of the mileage on each of these 14 occasions between his home and the office in the morning, and the office and his home in the evening. The deduction that he claims has been calculated in such a way as to give credit for what would have been the cost of travel by public transport. The appellant also gave evidence (and I accept it) that on none of the 14 occasions under consideration did private interest play any special part in the use by him of his own car in travelling between his home and the office.

   There was a suggestion raised by Renneberg that, in some way, arising out of an interview that the appellant had with one or more senior officers of the department in February 1968, he was under some compulsion-indirect though it may have been-to use his own car in preference to other means of transport on this particular job. I am going into no further detail in respect of this and merely record that I reject the contention. However, in spite of the evidence of Cournane and the strenuous arguments based upon it by Mr Bridger, I am satisfied, not only on the balance of probabilities, but beyond any reasonable doubt, that the use by the appellant of his own car as the most suitable method of transport on each of those 14 occasions between the office and the place of investigation was amply justified. That in itself, however, might not be enough to entitle me to say that he should be allowed, as an expenditure deductible for income tax purposes, the cost to him of bringing his car from his home to the office before leaving for that place of investigation, and the cost of taking his car home from the office after the day's work of investigation had been completed.

   However, in the course of the evidence another matter of interest and importance came to light. It was this: (a) If the appellant had, for instance, gone directly from his home to the place of investigation without calling at the office, and, if he had (after completing his work) gone from that place directly to his home without calling at the office, he would have been entitled to a mileage allowance in respect of the whole trip both outward and return; but (b) if he had, after leaving home in the morning in his own car, to call at the office to collect records before going to the place of investigation, and, after finishing work at that place, had to call at the office to deposit those records then again, he would have been entitled to a mileage allowance only from the office to the place of an investigation and return, and would have had to pay out of his own pocket the cost of bringing his car from his home to the office and later returning it from the office to his home. I am satisfied that in this investigation the appellant had, at least at times, copious records to transport in connexion with what was a major examination, and that he would have been open to serious criticism if he had risked taking those records to his home each evening instead of returning them to the office. It was suggested that he could have used public transport, but he demonstrated with ease that this would, in the circumstances, have been impracticable to the point of being highly unreasonable. It was suggested that he could have used a taxi, but I am satisfied that economically, this would have been unnecessarily extravagant. It was apparently even suggested that the taxpayer under investigation, "the victim", should send a car to pick him up at the bus stop and return him there in the afternoon. The appellant was asked if he implemented this idea, and I was certainly not surprised when he answered: "I realized the implications. No. I did not." It seems that, even in 1968, Tout's appreciation of the value of public relations was of a standard somewhat superior to that of some officers in the department senior to him.

   The cases are of course embarrassingly numerous in which it has been held that the cost incurred by a taxpayer in using his own car merely to bring him into work in the morning and take him home again at the end of the day cannot be treated as deductible expenditure under statutory provisions such as s 111. This did not, however, deter Renneberg from submitting that I should disregard all such authority, and, without further ado, find in favour of his client. This I certainly refuse to do. In Newson v Robertson (Inspector of Taxes), [1953] 1 Ch 7, Romer, LJ, put it in this way: "In other words, 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". In the present case I think that I am faced with something quite different, and I hold that the use of the appellant's car on the 14 occasions with which I am concerned was not of a kind to enable the appellant to live away from his work, but was of a character which enabled him, in a reasonable and proper manner, to do the work upon which he was then engaged, and so was of a character relevant to and incidental to the gaining of his assessable income, and was, moreover, wholly incurred in gaining it. Once more this finding makes it unnecessary for me to give detailed consideration to s 112(i).

   In respect therefore of the travelling expenses and of the expenses incurred in connexion with the course of studies the appeal is allowed. I leave it to counsel to submit to me for consideration a form of order that will cover the situation. The appellant is entitled to costs against the Commissioner, and these I fix at $85.00 together with any proper disbursements to be fixed by the Registrar.

   I make only this final comment: This must be understood to be a decision on what I consider to be the somewhat special and unusual facts of this particular case, and not one of general application.

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