CASE 6/2001

Judges:
KL Beddoe SM

Court:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2001] AATA 965

Judgment date: 28 November 2001

KL Beddoe (Senior Member): The applicant seeks review of objection decisions for the years of income ended 30 June 1991, 30 June 1992 and 30 June 1993.

2. The essential question at issue in each year of income is whether a proportion of costs incurred by the applicant in relation to a sailing catamaran are deductible, the catamaran being an excepted facility as defined in section 51AB of the Income Tax Assessment Act 1936 (``the Act'').

3. Section 51AB(4) of the Act has the effect of not allowing as a deduction losses and outgoings to the extent incurred by the taxpayer for or in connection with the use of a leisure facility.

4. A ``leisure facility'' is relevantly defined by section 51AB(1) to mean, in relation to a


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year of income, a boat that is not an excepted facility.

5. An ``excepted facility'' is also defined by section 51AB(1). In so far as is relevant the definition defines excepted facility to mean in relation to a year of income:

  • ``(a)...
  • (b) a boat that, at all times during the year of income, is used, or held for use, by the taxpayer principally for any one or more of the following purposes:
    • (i) for the purpose of being let on hire in the ordinary course of a business of letting boats on hire carried on by the taxpayer;
    • (ii) for the purpose of transporting for reward members of the public, goods (including live stock) or substances in the ordinary course of a business carried on by the taxpayer;
    • (iii) for any other purpose in the ordinary course of a business carried on by the taxpayer if the taxpayer satisfies the Commissioner that the use of such a boat for that purpose is essential to the efficient conduct of that business;
  • (c)-(e)...''

6. Section 51(1) of the Act relevantly provides that 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 such a purpose shall be allowable deductions except to the extent those losses and outgoings are of a private or domestic nature.

7. Sub-section 54(3) of the Act provides that depreciation of any property that is a leisure facility for the purposes of section 51AB is not an allowable deduction.

8. At the hearing Mr Robertson appeared for the applicant and Mr Porter appeared for the respondent. The documents lodged in the Tribunal pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were before the Tribunal as the T documents and further documents were tendered and marked as exhibits. Oral evidence was given by the applicant.

9. I make the following findings of fact in relation to the years of income ended 30 June 1991, 30 June 1992 and 30 June 1993.

10. On 9 May 1995 the applicant lodged income tax returns apparently following a requirement to lodge by the respondent. Those returns described the applicant as an ``administrator'' and disclosed the main business activity as ``Secretarial and Rental Services and Promotional Sales'' except that ``and Promotional Sales'' was not included in the 1991 return description of the main business activity.

11. The business address of the main business was set out in each return as follows:

Year ended 30 June 1991    Waterfront Place
                           Brisbane

Year ended 30 June 1992    28 Leura Terrace
                           Hawthorne

Year ended 30 June 1993    Mt Nebo Road
                           Mt Nebo
          

12. Non-Primary Production Income was disclosed as follows (cents rounded):

Year ended 30 June 1991    $26,906

Year ended 30 June 1992    $34,174

Year ended 30 June 1993    $32,635
          

13. Expenditure was shown as follows for the three years of income (cents ignored)

            


                                    1991      1992     1993
Bank charges                         $49       -        -
Computer expenses                    125       838    1,335
Depreciation - office equipment    3,660     3,890    3,890
Newspapers & magazines/
 Subscriptions                        26       160      230
Office rental - Motor Vessel
 Depreciation                   (59,250)  (59,250)  (34,562)
 Fuel                               -         -         420
 Insurance                       (3,077)   (2,848)   (1,905)
 Interest                       (12,135)   (8,856)   (6,433)
 Loan expenses                   (3,833)
 Mooring fees                    (2,339)
 Repairs and maintenance           (366)     (140)   (1,250)
 Sundries                           -         -      (1,415)
 Registration                       -        (183)      -
Less 75% private
Amount claimed                   20,250    17,819    11,496
Purchases                           -         552     3,745
Petty Cash                          101       -         -
Photocopying                        112       -         -
Printing and stationery             130       -         -
Rent                                122       -         -
Repairs and maintenance             -          75       413
Sales aids                          -         126       139
Reference books and materials       -         -          55
Seminars and training               -         -         958

Net Profit                        2,327    10,711    10,371
                                -------   -------   -------
          

The 1991 return also disclosed social security benefits received of $7,334. These benefits were described as unemployment benefits but there is no explanation of the apparent contradiction with carrying on a business.

14. At all material times the applicant was the sole owner of a catamaran. The vessel was registered in the applicant's name. The boat was constructed by the applicant's spouse with a construction cost of approximately $395,000 although there must be some doubt about that figure in the light of the applicant's oral evidence. She said it was based on the cost of material. Construction was undertaken by her husband. The insured value is $300,000 but the market value is $500,000.

15. From 1 July 1990 to 3 January 1991 the catamaran was permanently moored at Waterfront Place. It was then moved to a permanent mooring said to be ``at 28 Leura St, Hawthorne''. I have inferred that the mooring was the jetty contiguous to 28 Leura Street (Exhibit 1, T55). The catamaran remained permanently moored except when it needed to enter dry dock for repairs and two occasions when it was taken to Moreton Island for a week at each time.

16. Document TS18 in Exhibit A is an extract from the Queensland Business Names Register relating to the business carried on by the applicant's husband. That shows the business being carried on at various locations as follows:

To 18 November 1991:                     1 Eagle Street
                                         Brisbane

18 November 1991 to 30 September 1994:   28 Leura Avenue
                                         Balmoral
          

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17. As to why 28 Leura Avenue was described as being in Balmoral was not explained to the Tribunal. Reference to a contemporaneous street directory confirms Hawthorne as the correct suburb of Brisbane.

18. The boat was the applicant's home at all relevant times (Exhibit C para 6). Part of the boat was given over to the husband's business and a different part for the secretarial services provided by the applicant. The balance constituted the applicant's home. I infer that more than 50% of the useable floor area was used for private and domestic purposes. For this inference I rely on the apportionment claimed by the applicant to be applicable to business purposes.

19. The applicant did not keep a separate bank account in respect to the secretarial service and there is no basis for finding that her husband actually paid her for the accommodation and secretarial service. In her oral evidence the applicant said that she paid the outgoings out of her husband's bank account or by using a credit card, which I infer was settled from her husband's bank account. There was a melding of financial affairs so that the husband's bank account was used to meet the expenses of the boat and other expenses incurred by his business and the applicant's secretarial service. I am not satisfied that the applicant actually received income as distinct from allocating an arbitrary amount based on $20 per hour as assessable income derived by the applicant. There seems to have been no clear demarcation between the applicant's secretarial service and her husband's business activities.

20. The catamaran has four staterooms, a large cockpit/lounge and I infer other facilities. Part of the boat was set up as an office used by the applicant's husband as his office to do accounting work and see clients. The applicant's husband paid her $400 per month as rent for use of the office area. The rent was calculated on the basis of floor space used by her husband to conduct his business. The returned assessable income includes the following amounts for rent so derived:

Year ended 30 June 1991    $4,800
Year ended 30 June 1992    $4,800
Year ended 30 June 1993    $2,800
          

21. Besides renting space on the boat to her husband, the applicant also provided him with secretarial services. Those services were provided from the boat until January 1993. An undefined part of the boat was used by the applicant to provide these services but was an area apart from the area used by the applicant's husband for his business. The amounts derived by the applicant from the provision of secretarial services has been quantified as follows:

Year ended 30 June 1991    $22,106
Year ended 30 June 1992    $28,925
Year ended 30 June 1993    $25,498
          

22. There does not appear to have been a separate accounting for secretarial services provided because the applicant merely withdrew moneys from a joint bank account to meet business and other expenses of the applicant.

23. In her statement (Exhibit C) the applicant has quantified and explained the basis of her claims for losses and outgoings. Those claims are partly substantiated by documents included in Exhibit A. Nothing turns on those expenses which have not been properly substantiated.

24. The applicant did not lodge the relevant income tax returns in accordance with the respective Gazette notices. She lodged the returns after being required to do so by the respondent's notice dated 15 March 1995 - the returns being lodged on 9 May 1995. In doing so she complied with the respondent's time limit as set out in the requirement to lodge returns.

The applicant's submissions

25. The applicant's returns as lodged were correct and fairly raised the issue as to whether section 51AB applied in the circumstances of the case. This is made apparent by the Australian Taxation Office letter of 9 January 1998. Full disclosure of the factual circumstances was given in the return.

26. This is not a boat that was used for leisure purposes. The use was as business premises and as a home for the applicant and her husband. It was not a leisure facility.

27. Alternatively the leisure facility was that part of the boat related to the conduct of business and that was an excepted facility. The business use was the principal use of the boat and any other use was subsidiary to that use. There was a two part use for business purposes; the licensing of use of part of the boat to the


ATC 146

applicant's husband and the use by her of another part of the boat for the applicant's secretarial service.

28. In the alternative if the boat itself, as a whole, is to be treated as a leisure facility then it is conceded that it was not at all times, during the whole of each of the years of income, used or held ready for use principally for a purpose in the ordinary course of the applicant's business for which the use of the boat was essential.

29. The circumstances of this case justify exercise of the discretion in accordance with sub-section 51AB(5) of the Act so as to apportion the losses and outgoings attributable to the boat as it is used for business purposes.

30. This is not a tax avoidance scheme and has not been particularised as such by the respondent.

31. As to penalties imposed by the Act the applicant says that in relation to the 1991 year the applicant made a full and true disclosure of all material facts so that the respondent was left in no doubt, it is submitted as to the deductions claimed for the use of the boat. Nor was the respondent left in any doubt as to the facts. It was the legal issue that was doubtful.

32. Here everything was disclosed, there was no omission of income and the use of the boat was made clear in the returns. All reasonable care was taken in preparation of the returns which were lodged with expert assistance.

33. As to late lodgment penalties, the applicant's case is that she did not refuse to lodge the returns neither did she fail to lodge the returns in the sense explained in
Ganke v DFC of T 75 ATC 4097. The applicant believed that she was not required to lodge returns of income in those years where no tax was payable.

34. While the applicant made submissions about section 170AA of the Act there is nothing to show that the section applied or was thought to be applicable by the Commissioner in the 1991 and 1992 years. In any event the operation of section 170AA of the Act is beyond the jurisdiction of this Tribunal.

The respondent's submissions

35. The Tribunal must be satisfied that the claimed outgoings were incurred by the applicant.

36. The boat is a leisure facility by its nature and not because of its use. Only boats which are not excepted facilities will be covered, in effect, by the definition of leisure facility. In any event the boat is correctly characterised as a leisure boat.

37. There is no basis for apportionment of the boat so that it is broken into ``parts'' for the purpose of identifying what is a leisure facility. The boat is not to be characterised as if it was a structure. The decision in
Elwes v Briggs Gas Company (1886) 33 Ch D562 is distinguishable on the facts and does not support a proposition to the effect that the boat was a fixture.

38. Even if some method of apportionment could be shown to be correct, the areas of the boat used for business purposes are not self contained but are merely part of the common areas of the boat and used generally including private and domestic use.

39. The applicant fails the principal use test. Whether a quantitative or qualitative assessment of use is adopted the applicant cannot show that business use was the principal use of the boat.

40. The mere leasing of a property does not constitute carrying on a business whether the secretarial service provided to the applicant's husband is a matter of degree depending on the facts of the case (
Blockey v FC of T (1923) 31 CLR 503 at 511).

41. The secretarial service is not organised as a business, it is a private business not open or offered to the public. While the secretarial activities derived assessable income the activities did not constitute a business (
Lapin v Abigail (1930) 44 CLR 166 at 198-199
Ferguson v FC of T 79 ATC 4261).

42. Whether a leisure facility is an excluded facility depends in part on the intention of the legislation to only consider a business activity as relevant. Further a leisure facility boat will only be an excepted facility if the use of the boat is essential to the efficient conduct of that business.

43. The particular situation of the applicant's husband carrying on his business on the boat is not determinative of whether it was essential for the applicant's secretarial service to be located on the boat.

44. Because, it is submitted the applicant was not carrying on a business, the discretion in sub-section 51AB(5) does not have application.


ATC 147

Even on ``business'' days the business use, on the applicant's case, was 25%. It remained principally domestic premises at all times.

45. The tax shortfall penalty has been remitted to reflect this matter as not of the most serious kind. The policy of section 222 is to ensure that returns are lodged on a timely basis. In relation to 1992 and 1993 whatever view is taken in relation to the boat there was a requirement to lodged those returns.

Consideration

46. While the respondent put substantiation of losses and outgoings in issue little was made of that in the hearing. That does not absolve the Tribunal from its responsibility to be satisfied on the balance of probabilities, that the losses and outgoings were incurred.

47. In Exhibit C the applicant says ``I included the following amounts in my assessable income as income from secretarial services at the rate of $20 per hour:

1991    $22,106
1992    $28,925
1993    $25,498''
          

48. On my calculations the weekly hours of secretarial service based on those figures would be (assuming a 48 weeks working year):

1991    23 hours
1992    30 hours
1993    27 hours
          

49. On that basis the activity can be said to have been substantial and suggesting a level of activity consistent with carrying on a business.

50. A contrary indication is the limited scope of that business. The secretarial service was limited to secretarial services provided to the husband's business. It seems he was a sole trader so that, in effect, the applicant was his secretary. On the material before me I cannot see anything to suggest that the activities (described as a secretarial service) were anything beyond what might be provided by an employed secretary.

51. In particular the melding of the applicant's supposed income with domestic expenses and the lack of any separate bank account points, in my view, to a single business carried on by the applicant's husband and the applicant with secretarial services being provided to that business by the applicant. As to her relationship to that business is something I need not decide but I am satisfied that the applicant's secretarial services did not constitute a separate business. Those services are more correctly characterised as activities of the business. The fact of leasing portion of her boat to her husband does not alter that situation.

52. The mere leasing of portion of the applicant's boat does not itself constitute the carrying on of a business. In this case it has more the attribute of an offset against quite substantial outgoings incurred in relation to the applicant's boat. Given her reported income it must be assumed that her husband accepted responsibility for the outgoings incurred in respect of the boat so that the amount paid for the husband's business to occupy the boat is an allocation of that portion of the losses and outgoings attributable to the husband's business. A comparison of actual outgoings with the applicant's net income makes this clear.

53. Ignoring non-cash items the applicant's personal account as set out in her income tax return would be as follows:

Year ended 30 June 1991
  Income                   $26,906
  Expenditure              $22,421
                           -------
  Cash surplus              $4,485
                           -------

Year ended 30 June 1992
  Income                   $34,174
  Expenditure               13,780
                           -------
  Cash surplus             $20,394
                           -------

Year ended 30 June 1993
  Income                   $32,635
  Expenditure               18,302
                           -------
  Cash surplus             $14,333
                           -------
          

54. It is reasonable to conclude, in my view, that the secretarial service was reasonably profitable if the non-cash items for depreciation are ignored. The figures set out above as cash surplus represent the return to the applicant for her time.

55. Adopting the figures in paragraph 53 above the cash return to the applicant per hour is:

Year ended 30 June 1991    $4.06
Year ended 30 June 1992   $14.16
Year ended 30 June 1993   $11.05
          

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56. While the year ended 30 June 1991 return of $4.06 would be regarded as inadequate the subsequent years show a reasonable return based on the estimated hours worked.

57. Taking all the material into account I am satisfied that this is not an alienation of income case and it should be accepted that the applicant was providing secretarial services to her husband as an independent contractor carrying on a business albeit that the business activity was part of the husband's business.

58. I am satisfied that the applicant's use of the boat and its use by her husband in his business can be construed as use as part of and in the course of the secretarial service business. As I have illustrated above the business bore the operating expenses of the boat and still provided a reasonable return to the applicant in two of the three years.

59. I am satisfied that the secretarial service was conducted on the boat because, on the material, that was the applicant's principal place of residence. She conducted the business from her residence. The essential character of the boat remained that and did not change because it was a place of business. It was a place of business but it was also the applicant's residence and not held for use in the ordinary course of the secretarial service business. The secretarial service business was conducted at the place that the applicant's husband conducted business which was the applicant's principal place of residence.

60. There is no relevant connection which would allow the Tribunal to find that the boat was used by the applicant principally for any of the purposes (i), (ii) and (iii) in paragraph (b) of the definition of ``excepted facility''.

61. Clearly the boat was used in the ordinary course of the secretarial service which I am satisfied was a business carried on by the applicant. However that was not the principal use - that was use as domestic premises. Further I cannot be satisfied that the use of the boat was essential to the efficient conduct of the secretarial service. I have accepted that the licence to use granted to the applicant's husband was part of the overall secretarial service. There is nothing before me that satisfies me that the use of the boat was for a purpose essential to the efficient conduct of the business. So far as I can see the boat was used to conduct business because that was the applicant's principal place of residence.

62. There is nothing before me to show that it was in any way essential to either the husband's business or the applicant's business be conducted on the boat. It was no doubt convenient for the applicant and her husband and may have been more economical than other suitable places of business given that the applicant resided on the boat. Convenience and economy may suggest efficiency but they do not suggest essentiality.

63. I am satisfied that the deductions claimed have been incurred. I am not satisfied that the boat was an excepted facility for the purposes of section 51AB of the Act.

64. In so far as it may be said that the boat was relevantly used for part only of the respective years of income - there was evidence of some recreational use - the operation of sub-section 51AB(5) needs to be considered. Having concluded that the boat was not an excepted facility because paragraph (b)(iii) of the definition was not satisfied both as to principal use and essentiality there is no basis for a favourable exercise of discretion under sub-section (5). That subsection is only concerned with use as to time ie use during part only of the relevant year of income.

65. I turn now to the imposition of additional tax. Mr Robertson submitted that all relevant information had been provided in the returns and that was sufficient to put the Australian Taxation Office on notice as to the facts albeit that the returns were lodged late.

66. If, as seems to be the case, additional tax was remitted (1991 and 1992) or assessed (1993) on the basis that the applicant was reckless in the preparation of the returns then I am satisfied there is no basis for such a finding.

67. Sub-section 223(1) of the Act applied to the 1991 and 1992 years of income. The essence of the sub-section is that it applied to false or misleading statements or omissions from a statement so as to make that statement misleading in a material particular. Additional tax was imposed at double the amount of the tax properly payable that exceeded the amount that would have been payable if the assessment was based on the false or misleading statement. By virtue of the operation of sub-section 34(7) of the Taxation Laws Amendment (Self Assessment) Act 1992 (No 101/1992) section 223 continues to apply to years of income ended 30 June 1992 and prior years of income.


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68. Given that I am satisfied that the applicant was carrying on a business for the years of income ended 30 June 1991 and 1992 I can see nothing in the relevant returns of income that would cause section 223 to operate so as to impose additional tax. In case I be wrong in relation to the operation of section 223, I would be of the view that the additional tax should be remitted in full pursuant to sub- section 227(3) of the Act. My reason for this is that I am satisfied that the applicant sought to make a full and true disclosure there being no intention to make a false or misleading statement.

69. In relation to the year ended 30 June 1993 in Case 74/96, 96 ATC 662 I considered the additional tax provisions in some detail and need not repeat all that I said there. I there referred to the respondent's concept of the meaning of reckless as ``gross carelessness'' but expressed the opinion that recklessness meant something beyond carelessness. At page 676 I said:

``... I think the meaning [of recklessness] goes beyond gross carelessness... there must be some disregard for the consequences before it can be said that an action is, in fact, reckless.''

I adopt my reasons in Case 74/96,
96 ATC 662 for the purposes of this case. That leads me to the conclusion that section 226H does not apply here.

70. In relation to section 226G which applies where there is a tax shortfall caused by a lack of reasonable care, I am satisfied that the 1993 income tax was, self-evidently, prepared with reasonable care by the tax agent. I am satisfied that section 226G does not apply. In my view the claims in relation to the boat were reasonably arguable and section 226G does not operate in this case on those grounds and quantum grounds.

71. One result of these proceedings is that the applicant was required by the Gazette notices, to lodge income tax returns for each of the years of income ended 30 June 1991, 1992 and 1993. That the applicant did not lodge in accordance with those Gazette notices is not in issue but the applicant does put in issue that there was a failure to furnish as required by section 222 of the Act.

72. While I can accept that the issue as to the application of section 51AB was reasonably arguable, Mr Gelski's opinion suggests this is the case, I do not accept that a taxpayer who has a reasonably arguable case is thereby permitted to avoid the argument by not lodging returns. The matter will only be reasonably arguable after the respondent has been made aware of the taxpayer's position. The thresholds set out in the Gazette notice are the actual taxable income amounts - not the best case scenario claimed by the taxpayer. In this case the applicant's case depends on being able to claim for expenses in relation to the boat. At its highest it is an arguable claim. It cannot however, be an answer to the general requirement to lodge income tax returns where the claims have not previously been considered by the respondent. The late lodgement penalty should apply in each year of income in accordance with the normal policy of the respondent (Taxation Ruling IT 2475).

73. The decisions under review will be set aside and the matters remitted to the respondent to amend the assessments in accordance with the following directions:

  • (a) the applicant was carrying on business as a secretarial service and incurred outgoings claimed in relation to that business (subject to (b) below);
  • (b) the boat, nor any portion of it, was not an excepted facility so that section 51AB operates to deny a deduction for outgoings relating to the boat;
  • (c) sections 223, 226G and 226H of the Act do not apply to impose additional tax in the relevant years of income;
  • (d) late lodgment penalty should be recalculated in accordance with Taxation Ruling IT 2475; and
  • (e) these proceedings have been terminated in a manner favourable to the applicant.


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