• The impact of this case on ATO policy is discussed in Decision Impact Statement: Willersdorf-Greene v Commissioner of Taxation (Published 4 December 2009).

WILLERSDORF-GREENE v FC of T

Members:
SA Forgie DP

Tribunal:
Administrative Appeals Tribunal, Melbourne

MEDIA NEUTRAL CITATION: [2009] AATA 649

Decision date: 28 August 2009

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SA Forgie (Deputy President)

1. Mr Douglas Neil Willersdorf-Greene believed that he could gain or produce assessable income for the purposes of the Income Tax Assessment Act 1997 (ITAA97) by encouraging an investor to invest in a scheme to import fuel into Australia and to distribute it. It was a scheme developed and promoted by his friends. Mr Willersdorf-Greene found the investor and gave him a guarantee and a mortgage over his house to secure the investment. His friends took the investor's money. Only then did Mr Willersdorf-Greene discover that those he regarded as his friends were not in truth his friends for there was no fuel scheme. The investor claimed under the guarantee and settled for half the amount of his investment.

2. The Commissioner of Taxation (Commissioner) did not allow Mr Willersdorf-Greene's claim for interest and bank expenses associated with the loan that he had to obtain to pay the investor under the guarantee. He did not regard them as being incurred in gaining or producing Mr Willersdorf-Greene's assessable income. I have decided that they did have the necessary nexus and are deductible.

3. The Commissioner also disallowed other claims for deduction made by Mr Willersdorf-Greene. In relation to a Kawasaki motor cycle, he disallowed the full amount claimed as he considered that an error had been made in calculating the depreciation claimed. The Commissioner also disallowed other deductions on the basis that they have not been substantiated. I agree with the Commissioner on these matters and have decided that he has

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correctly assessed the penalties in relation to them.

Background

Overview of sequence of assessment of taxable income and imposition of penalties

4. Mr Willersdorf-Greene's accountants lodged income tax returns on his behalf for the years ending 30 June 2005, 2006 and 2007. They did so on 8 November 2007 and estimated that he would be entitled to a refund of taxation already paid in the amount of $48,189.20.

5. On 5 December 2007, an officer of the Australian Taxation Office (ATO) asked Mr Willersdorf-Greene to itemise and substantiate the deductions he had claimed.^[1] Documents lodged under s 37, Administrative Appeals Tribunal Act 1975 (T documents), T6 at 59-60 She asked for further information in January 2008 and, later in the month, Mr Willersdorf-Greene was sent a Notice of Income Tax Audit.^[2] T documents, T9 at 104-108 His accountants replied to that Notice on 21 February 2008.

6. On 8 April 2008, the Commissioner made a decision on the Income Tax Audit^[3] T documents, T11 at 352-378 and later issued Notices of Assessment in relation to the imposition of penalties. He issued those Notices of Assessment on 21 April 2008 in respect of the years ending 30 June 2005 and 2006^[4] T documents, T13 and T14 at 382-385 and on 28 April 2008 in respect of that ending on 30 June 2007.^[5] T documents, T16 at 389-390 Mr Willersdorf-Greene objected to the assessments in letters dated 22 April 2008^[6] T documents, T15 at 386-388 and 22 May 2008 respectively.^[7] Supplementary documents lodged under s 37, AAT Act; (TS documents) TS18 at 405

7. In the meantime, the Commissioner had, on 15 April 2008, issued notices of assessment in relation to the three years imposing penalties amounting to $7,116.70 on Mr Willersdorf-Greene.^[8] T documents, T12 at 380-381 Mr Willersdorf-Green objected to those assessments in his letter of 22 April 2008.

Claimed deductions, assessments of tax payable and objections

8. Each objection raised three issues relating to claims for deduction. They were whether Mr Willersdorf-Greene was entitled to claim certain amounts as travel expenses, other amounts as work related expenses and yet other amounts as interest and dividend expenses. The Commissioner allowed some of the travel expenses he had claimed but none of the other claims. Therefore, on 10 July 2008, the Commissioner allowed Mr Willersdorf-Greene's objection in part.^[9] Supplementary documents lodged under s 37, AAT Act; (TS documents) TS21 at 431-454

9. The following table sets out Mr Willersdorf-Greene's original claims for deductions and variations he made to his claims during the objection stage, the amounts the Commissioner allowed and disallowed on those claims at both the assessment stage and after considering the objections:

Year	Amounts claimed, allowed/disallowed	Work Related Travel Expenses	Other Work Related Expenses	Interest and Dividend Deductions	Total Disallowed
2005	Original claim	$3,055.00[10] Mr Willersdorf-Greene increased his claim to $3,720.00 on lodging his objection.	$5,757.00[11] Mr Willersdorf-Greene increased his claim to $6,270.00 on lodging his objection.	$25,478.00
	Allowed	$1,802.00	$5,399.00	$0.00
	Disallowed	$1,918.00	$871.00	$25,478.00	$28,267.00
2006	Original claim	$5,350.00[12] Mr Willersdorf-Greene increased his claim to $5,996.00 on lodging his objection.	$8,190.00[13] Mr Willersdorf-Greene increased his claim to $8,882.00 on lodging his objection.	$20,539.00
	Allowed	$4,804.00	$7,942.00	$0.00
	Disallowed	$1,192.00	$940.00	$20,539.00	$22,671.00
2007	Original claim	$6,392.00[14] Mr Willersdorf-Greene increased his claim to $7,033.00 on lodging his objection.	$8,771.00[15] Mr Willersdorf-Greene increased his claim to $11,750.00 on lodging his objection.	$19.916.00
	Allowed	$5,862.00	$5,450.00	$0.00
	Disallowed	$1,171.00	$6,300.00	$19,916.00	$27,387.00

Assessment of penalties and objection

10. In objecting to the Commissioner's imposition of penalties totalling $7,116.70,^[16] 2005: $3418.40; 2006: $1,726.75; and 2007: $1,971.55: T documents, T12 at 380 Mr Willersdorf-Greene raised three issues in respect of each year: had he made false or misleading statements when claiming deductions to which he was not entitled; had he taken reasonable care in the preparation of the income tax returns; and, if reasonable care had been taken, should the penalties be remitted in full or in part. The Commissioner disallowed his objection on 8 May 2008.^[17] T documents, T17 at 391-401

11.

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The Commissioner decided that, in each of the three years, Mr Willersdorf-Greene had claimed deductions to which he was not entitled or which he could not substantiate. In either case, Mr Willersdorf-Greene's claims, had they been allowed, would have produced a greater deduction than that which would have been produced had he claimed only those to which he was entitled or could substantiate. In this case, the greater deduction would have led to Mr Willersdorf-Greene's receiving a subsequent taxation refund. This meant that there was a shortfall amount as there was an "… amount by which the relevant liability, or the payment or credit, is less than or more than it would otherwise have been."^[18] ITAA97, s 995-1(1) and TAA, s 284-80

12. The Commissioner went on to conclude that Mr Willersdorf-Greene had made a false and misleading statement within the meaning of s 284-75(1) of Division 284 of Schedule 1 to the Taxation Administration Act 1953 (the TAA). This meant that there was a tax shortfall on the basis that:

"An amount that the Commissioner must pay or credit to you under a taxation law^[19] A “ taxation law ” is “(a) an Act of which the Commissioner has the general administration (including a part of an Act to the extent to which the Commissioner has the general administration of the Act); or (b) regulations under such an Act (including such a part of an Act)”, ITAA97, s 995-1 for an accounting period … worked out on the basis of the statement is more than it would be if the statement were not false or misleading."^[20] TAA, Schedule 1, s 284-80(1), item 2

13. The tax shortfall amounts were found to be:

Year	Income Tax	Original Shortfall
2005	$67,766.95	$13,673.00
2006	$13,724.70	$6,907.00
2007	$21,970.80	$7,886.20

14. Section 284-75(1) of the TAA provides:

"You are liable to an administrative penalty if:

• (a) you or your agent makes a statement to the Commissioner or to an entity that is exercising powers or performing functions under a taxation law; and
• (b) the statement is false or misleading in a material particular, whether because of things in it or omitted from it; and
• (c) you have a shortfall amount as a result of the statement."

15. The amount of the administrative penalty is first calculated by reference to the base penalty amount. If that amount is not increased under s 284-220 or decreased under s 284-225 of Schedule 1 of the TAA, that is the amount of the penalty.^[21] TAA, Schedule 1, s 284-85(1) Neither of those sections is relevant in this case. The base penalty amount is determined by reference to s 284-90(1). That section contains six situations and determines the base penalty amount for each. Only the first four are relevant in this case:

" Item	In this situation:	The base penalty amount is:
1	Your shortfall amount or part of it resulted from intentional disregard of a taxation law by you or your agent	75% of your shortfall amount or part
2	Your shortfall amount or part of it resulted from recklessness by you or your agent as to the operation of a taxation law	50% of your shortfall amount or part
3	Your shortfall amount or part of it resulted from a failure by you or your agent to take reasonable care to comply with a taxation law	25% of your shortfall amount or part
ATC 3023 4	Your shortfall amount or part of it resulted from you or your agent treating an income tax law as applying to a matter or identical matters in a particular way that was not reasonably arguable, and that amount is more than the greater of $10,000 or 1% of the income tax payable by you for the income year, worked out on the basis of your income tax return.	25% of your shortfall amount or part"

16. The Commissioner imposed a base penalty, and so an administrative penalty, of 25% of the shortfall amount. He did so on the basis that the shortfall amount had resulted from the failure of either Mr Willersdorf-Greene or his agent to take reasonable care to comply with a taxation law.

Adjustment of penalties after application for review of assessment decision

17. Later, and after Mr Willersdorf-Greene had applied to the Tribunal for review of the objection decision, the Commissioner reduced the penalty amounts. He did so in order to take account of the reductions in assessable income following his allowing, in part, Mr Willersdorf-Greene's objection to the Amended Assessments. In view of Mr Willersdorf-Greene's application to the Tribunal, the Commissioner did not issue amended penalty notices but he did give him notice of the reduced penalties.^[22] T documents, ST28 at 527 The penalties originally imposed and subsequently reduced are:

Income year	Amount of penalty originally imposed	Amount of reduced penalty
2004-2005	$3,418.40	$3,317.25
2005-2006	$1,726.75	$1,665.80
2006-2007	$1,971.55	$1,909.35

Subsequent negotiations between the parties

18. Following Mr Willersdorf-Greene's lodging a Statement of Facts and Contentions, a conciliation conference conducted by the Tribunal and further discussions between them, the parties had reached the following positions regarding the deductions originally claimed:

•	Work related expenses	No agreement
•	Home office expenses	Allowed
•	Kawasaki motor cycle expenses	Agreed but no agreement re calculation of depreciation
•	Internet and mobile and land line telephones	Allowed
•	Computer expenses	Allowed
•	Dividend and interest expenses	No agreement - amount claimed as deduction reduced - see below
•	Bank and credit card expenses	No agreement
•	Flight expenses	No agreement

19. At the hearing, Mr Willersdorf-Greene said that he had mistakenly claimed as a deduction, in each of the years, three loans rather than two. The third loan related to the money he had borrowed to purchase his home. The original amounts he had claimed in relation to the three loans and the adjusted amounts claimed are:

ATC 3024 Year	Interest and borrowing costs originally claimed	Amount relating to home loan	Interest and borrowing costs now claimed
2005	$25,748.00	$10,455.00	$15,292.00
2006	$20,359.00	$10,472.00	$9,886.00
2007	$19,916.00	$10,700.00	$9,216.00

Facts leading to claims for deduction

20. Mr Willersdorf-Greene started work with Shannons Limited (Shannons) in January 1996 where he held the position of National Business Development Manager. Following the collapse of his marriage in 1997, Mr Willersdorf-Greene had become friendly with Toni and Joe Vodopic at a function held at a Ferrari Club. Together with three others, he travelled in Japan with the Vodopics. A few months later in May 1999, Mrs Vodopic told him that she and her husband were proposing to purchase three shiploads of fuel and to supply them to a Queensland company, Fletcher Challenge Fuels Pty Ltd (Fletcher). At all relevant times, Mr and Mrs Vodopic were two of the directors and shareholders of another company, Joton Australia Pty Ltd (Joton).^[23] T documents, ST30 at 561-564 It carried on business arranging the supply of fuel as an agent. Mr Willersdorf-Greene understood that Joton was to act as Fletcher's agent in the arrangements. Initially, three shipments would be purchased over a three month trial period. If all went well, further shipments would follow. Mrs Vodopic asked Mr Willersdorf-Greene for help in preparing a presentation for Fletcher's consideration.

21. Mr Willersdorf-Greene understood that in approximately October 1999, Mr and Mrs Vodopic travelled to Queensland for the purpose of making the presentation to Fletcher. A couple of weeks later in November 1999, Mrs Vodopic asked him if he knew of anybody who could help her secure a line of credit in relation to the three fuel deliveries. The Vodopics and he agreed that, once he had secured an investor and the first of the three shipments went through, he would become a consultant to Joton. Mr Willersdorf-Greene thought this a very attractive proposition. Given that the potential investor would receive some $150,000 by lending money for a four month period in relation to the first shipment, he saw himself as being in a position to receive a healthy commission. Mrs Vodopic told him that he would be able to purchase a particular Ferrari that he had set his heart on and that he would double his income.

22. On 18 November 1999, Mr Willersdorf-Greene discussed the proposal with Mr Keith Robson about investing in the shipment and supply of fuel. Mr Robson considered investing an amount of $250,000.00 through his company Tangalooma Nominees Pty Ltd (Tangalooma) provided the Vodopics and Mr Willersdorf-Greene secured repayment by means of mortgages over their respective houses. On 19 November 1999, Mr Willersdorf-Greene wrote to Mr Robson setting out the proposed arrangement were he interested in investing in it. He noted that he was prepared to offer his house as security for repayment of any loan made by Mr Robson. He referred to the returns to be had by Mr Robson and himself if Mr Robson were to invest in the arrangement.

23. Mr Willersdorf-Greene did not enter any written agreement with Mr and Mrs Vodopic. They were good friends, who had travelled together, he thought, and he felt that Mrs Vodopic had made a commitment to him. Consequently, on 19 November 1999, Mr Willersdorf-Greene gave Shannons notice that he would cease his employment.

24. A week or so later and at the end of November 1999, Fletcher sent Mr Vodopic a fax confirming that it had made arrangements with Joton in relation to three shipments of fuel. Mr Vodopic told Mr Willersdorf-Greene that the arrangements would take place regardless of whether or not the investor was a person whom he found or another. An investor would be found.

25. On 1 December 2009, Joton, Tangalooma, Mrs Vodopic and Mr Willersdorf-Greene entered an agreement.^[24] T documents, ST29 at 542-552 Tangalooma agreed to lend Joton the sum of $250,000 for the payment of preliminary costs incurred in its agreement with Fletcher. Tangalooma agreed to lend that sum for a period of four months. In consideration of the loan, it would be paid $50,000.00 for each of the three months in which Joton supplied fuel to Fletcher or to one of its related entities. The maximum number of payments was three but there would be fewer if Joton did not successfully negotiate a sale in

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any particular month. If Joton could not negotiate any sales, Joton would pay interest at the rate of 10% per annum. In any event, the loan was repayable to Tangalooma in full four months after 1 December 2009. Tangalooma gave Joton the agreed sum of $250,000.00.^[25] T documents, T7 at 76 and ST29 at 543

26. There were three persons named as guarantors who were obliged to indemnify Tangalooma for the performance and observance of Joton's obligations. Those persons were Mr Willersdorf-Greene and Mr and Mrs Vodopic and an agreement as to that guarantee was made on 1 December 1999. The guarantors charged their respective properties and were obliged to execute mortgages attached to their agreement.^[26] T documents, ST29 at 543-552 Mr Willersdorf-Greene did not execute a mortgage at that time.

27. When Mr Robert Shannon unexpectedly died, Mr Willersdorf-Greene agreed to remain with Shannons. That occurred in March 2000. During April, 2000, Joton became liable to make a payment to Tangalooma. Mr Willersdorf-Greene attempted to contact Mr Vodopic to make the payments of $250,000 and $156,760. His efforts began in approximately mid April 2000 and resulted in Mr Vodopic's giving Tangalooma two cheques for those amounts. Tangalooma paid those cheques into its account on 19 May 2000 but they were dishonoured on 23 May 2000.

28. Mr Willersdorf-Greene arranged to see Mrs Vodopic on 23 May 2000 but she did not keep their appointment. On the following day, he discovered that she had been arrested. Both Mr and Mrs Vodopic were charged with offences related to kidnapping and demanding ransom. Mr Willersdorf-Greene realised that he had been the victim of a scam.

29. Mr Willersdorf-Greene and Mr Robson explored various avenues to recover the monies due to Tangalooma. When they were unsuccessful, Mr Robson advised Mr Willersdorf-Greene that he required him to mortgage his property in accordance with the guarantee agreement. He did in a message sent by facsimile on 26 July 2000.^[27] T documents, ST31 at 573 Mr Robson undertook that he and Tangalooma would diligently exhaust all remedies against the people involved in the matter including Mr and Mrs Vodopic. If Mr Willersdorf-Greene mortgaged his property, Tangalooma would not attempt to take possession of the property before March 2001 and any interest payable on the amount subject to the guarantee would be reduced to 5%. Mr Willersdorf-Greene agreed to mortgage his property, which was already subject to a mortgage registered in Victoria.

30. Mr Willersdorf-Greene also lodged a caveat on the property owned by Mr and Mrs Vodopic. In his mind, his total liability was $50,000.00.

31. Tangalooma foreclosed on the mortgage it held over Mr Willersdorf-Greene's property. At the same time, Mr Robson reassured him that it would continue to seek remedies against Mr and Mrs Vodopic and others engaged in the matter. Should Tangalooma recover monies from those sources, it would reimburse Mr Willersdorf-Greene. In the meantime, it took steps towards enforcing in the Supreme Court the guarantee Mr Willersdorf-Greene had given it and the mortgage over his property.

32. On 19 March 2001, Mr Willersdorf-Greene arranged with the ING Bank (Australia) Limited to borrow an additional $65,000.00. That amount was secured by an existing mortgage held by the bank.^[28] T documents, T7 at 82-91 The bank described the loan as a fixed rate residential investment loan and required it to be paid by monthly repayments of principal and interest over a 30 year period. Interest was fixed for the first three years and thereafter became the ING Bank Standard Variable Rate. Mr Willersdorf-Greene's solicitors arranged to pay the amount of $65,000.00 to Tangalooma.^[29] T documents, T7 at 95

33. On 5 April 2001, Mr Willersdorf-Greene and Tangalooma reached an agreement and executed a Deed of Release.^[30] T documents, T7 at 75-81 In full settlement of its claims, Tangalooma accepted the sum of $125,000.00 payable by Mr Willersdorf-Greene in two instalments. The first instalment of $65,000.00 was payable on or before 9 April 2001 and the second of $60,000.00 on or before 30 June 2003. Mr Willersdorf-Greene granted a mortgage over his property to secure payment of the second instalment.

34. The two mortgagees, ING Mercantile Mutual Bank and Tangalooma, and Mr Willersdorf-Greene executed a Priority Deed. It is undated. The securities held by the first and subsequent mortgagees ranked and operated so that the first mortgagee had priority in relation

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to the sum of $228,000.00 plus interest and costs and the subsequent mortgagee had priority in relation to the sum of $60,000.000 together with interest and costs.^[31] T documents, ST29 at 553-560

35. In the meantime, Mr Willersdorf-Greene continued to work at Shannons. When he was unable to accept an appointment as National Sales Manager with that firm in Sydney, his position was made redundant in April 2004. After working on a private project, he began work with Silverstone Events - Classic Rally Australia in July 2005 as its Business Development Manager. In more recent times, between January and June 2007, Mr Willersdorf-Greene was the Business Development Manager for the Q Media Group. In that position, he administered and managed the BIANTE Touring Car Masters series.

Claims for deduction

36. Mr Willersdorf-Greene claimed the borrowing costs after speaking with his accountant. He understood that his accountant had undertaken considerable research as well as contacting a solicitor. He understood that the solicitor's opinion was that the borrowing costs were deductible as there was a likelihood of an income stream. The solicitor gave no advice regarding the depreciation of the motor bike.

Legislative framework regarding deductions

37. Mr Willersdorf-Greene is an individual who must pay income tax in respect of his taxable income for each financial year ending on 30 June.^[32] ITAA97, s 4-10(1) His income tax is worked out by first working out his taxable income and then multiplying it by the income tax rate that is applicable before deducting any tax offsets.^[33] ITAA97, s 4-10(3)

38. His "taxable income" is his assessable income less any deductions.^[34] ITAA97, s 4-15(1) What is meant by "assessable income" is the subject of Division 6 of Part 1-3 of Chapter 1 of the 1997 ITAA. Although there are some exceptions, assessable income includes ordinary income and statutory income unless it is exempt income.^[35] ITAA97, s 6-1

Deductions

39. Deductions are relevant in this case. The general rules about them are found in Division 8 of Part 1-3 of Chapter 1 of the ITAA97. There are two types of deductions recognised under the ITAA97. The first are general deductions that are the subject of s 8-1:

• "(1) You can deduct from your assessable income any loss or outgoing to the extent that:
  • (a) it is incurred in gaining or producing your assessable income; or
  • (b) it is necessarily incurred in carrying on a business for the purpose of gaining or producing your assessable income.
• (2) However, you cannot deduct a loss or outgoing under this section to the extent that:
  • (a) it is a loss or outgoing of capital, or of a capital nature;
  • (b) it is a loss or outgoing of a private or domestic nature; or
  • (c) it is incurred in relation to gaining or producing your exempt income or your non-assessable non-exempt income; or
  • (d) a provision of this Act prevents you from deducting it."

40. Specific deductions are those that a provision of ITAA97 permits a person to deduct from assessable income.^[36] ITAA97, s 8-5 An amount may only be deducted once even if it can be deducted under more than one provision. It must be deducted under the provision that is most appropriate.^[37] ITAA97, s 8-10

41. Division 25 of Part 2.5 of Chapter 2 of the ITAA sets out some particular amounts that can be deducted. Section 25-25 relates to borrowing expenses and provides in part:

• "(1) You can deduct expenditure you incur for borrowing money, to the extent that you use the money for the purpose of producing assessable income. …"

Supporting a claim for a deduction

42. Until in possession of written evidence of an expense, a taxpayer is not entitled to a deduction for that expense.^[38] ITAA97, s 900-110(1) That is the general proposition in Subdivision 900-E of Division 900 of Part 5-30 of Chapter 5. That Subdivision sets out "… rules for a particular way of getting written evidence to substantiate a deduction. …".^[39] ITAA97, s 900-105 The ITAA97 does not set a time limit for obtaining that evidence but, for all practical purposes, implementation of the general proposition means that obtaining the written evidence and claiming the deduction must go hand in hand. Only if the taxpayer has a good reason to expect to get written evidence

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of the expense within a reasonable time, can the expense can be deducted without actually getting the evidence. That is the effect of s 900-110(2) in Sub-Division 900E but, should the taxpayer fail to obtain the evidence within a reasonable time, the entitlement to claim the deduction ceases. If the deduction has already been made, the taxpayer's assessment may be amended to disallow the deduction.^[40] ITAA97, s 900-110(2)

43. Section 900-115 sets out rules that may be used for any type of expense other than the decline in value of a depreciating asset.^[41] ITAA97, s 900-115(1) Only expenses other than the decline in value of a depreciating asset are in dispute in this case. The relevant provisions in relation to them are found in s 900-115:

• "(1) …
• (2) You must get a document from the supplier of the goods or services the expense is for. The document must set out:
  • (a) the name or business name of the supplier; and
  • (b) the amount of the expense, expressed in the currency in which it was incurred; and
  • (c) the nature of the goods or services; and
  • (d) the day the expense was incurred; and
  • (e) the day it is made out.
• (3) There are 2 exceptions to these requirements:
  • (a) if the document does not show the day the expense was incurred, you may use a bank statement or other reasonable, independent evidence that shows when it was paid;
  • (b) if the document the supplier gave you does not specify the nature of the goods or services, you may write in the missing details yourself before you lodge your income tax return for the income year.
• (4) The document must be in English. However, if the expense was incurred in a country outside Australia, the document can instead be in a language of that country."

44. Section 900-125 is concerned with small expenses. In so far as it provides for expenses other than those that are a decline in value of a depreciating asset, it provides:

• "(1) If your expense is small, and you have a small total of small expenses, you can make a record of the expenses instead of getting a document from the supplier.
• (2) Each expense must be $10 or less, and the total of all your expenses that:
  • (a) are each $10 or less; and
  • (b) you incurred in the income year and wish to deduct; and
  • (c) you must get written evidence for under this Division;

  must be $200 or less. These limits can be increased from time to time by regulations under section 909-1.

• (3) If the expense is not the decline in value of a depreciating asset, you must get a document with the same information as required by section 900-15, except that you may create the document and record all the details yourself. You must do so as soon as possible after incurring the expense.
• (4) …
• (5) A record must be in English."

45. Section 900-130 provides for some amelioration of these requirements:

• "(1) If the Commissioner considers it unreasonable to expect you to have got written evidence of an expense in any other way permitted by this Subdivision, you can use the method in section 900-125 to get written evidence of your claim.
• (2) The expense may be more than $10 and does not count towards the $200 limit in section 900-125."

46. In addition to other matters, Taxation Ruling TR 97/24 explains the operation of Subdivision 900-E of ITAA97 and of s 900-130 in particular. TR 97/24 gave examples of situations in which the Commissioner has exercised the discretion:

• "25. Examples of where the Commissioner exercises this discretion include toll bridge fees, parking meter fees, cash payments made by police officers to informants and entrance fees to shows where the entry tickets must be handed in on entry. An entitlement to claim a deduction must exist under another provision of the Act."

47.

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Subdivision 900-F of Division 900 of Part 5-30 of Chapter 5 tells a taxpayer how to keep travel records and so a record of the activities undertaken on travel. A taxpayer records an activity by specifying in a diary or similar document the nature of the activity, the day and approximate time when it began, how long it lasted and where it was engaged in. That record must be made in English before the activity ends or as soon as possible after it ends.^[42] ITAA97, s 900-150

48. Subdivision 900-G of Division 900 of Part 5-30 of Chapter 5 tells a taxpayer how long records of expenses must be retained and when they have to be produced. When required to retain records of expenses, they must be retained for five years^[43] ITAA97, s 900-165 or, if there should be an objection, a review or appeal arising from an objection or a request for an amendment of an assessment, until those matters are resolved.^[44] ITAA97, s 900-170

49. The Commissioner may require a taxpayer to produce records of expenses provided the taxpayer remains under an obligation to retain them.^[45] ITAA97, s 900-175(1) If the taxpayer does not comply with the notice in respect of any particular expense, that expense cannot be deducted. Should the taxpayer have already deducted it, the Commissioner may amend the assessment to disallow the deduction.^[46] ITAA97, s 900-185(1)

50. Subdivision 900-H of Division 900 of Part 5-30 of Chapter 5 provides for relief from the effects of failing to substantiate a claim for a deduction. Three broad categories of relief are provided for:

• "900-195 Not doing something necessary to follow the rules in this Division does not affect your right to a deduction if the nature and quality of the evidence you have to substantiate your claim satisfies the Commissioner:
  • (a) that you incurred the expense; and
  • (b) that you are entitled to deduct the amount you claim."
• "900-200 Not doing something necessary to follow the rules in this Division does not affect your right to deduct an amount if the only reason was that you had a reasonable expectation that you would not need to do it in order to be able to deduct that amount."
• "900-205
  • (1) If you have a complete copy of a document that is lost or destroyed during the retention period, it is treated as the original from the time of the loss or destruction.
  • (2) If you don't have such a copy, but the Commissioner is satisfied that you took reasonable precautions to prevent the loss or destruction, the rest of this section explains what to do.
  • (3) If the lost or destroyed document was a travel record, log book or other document that is not written evidence of an expense under Subdivision 900-E, you do not need to replace it; your deduction is not affected by your failing to retain or produce the document.
  • (4) If the lost or destroyed document was written evidence, you must try to get a substitute document that meets all the original requirements (except the time limit for getting the original).
  • (5) If you succeed, your deduction is not affected by your failing to retain or produce the original document. The substitute document is treated as the original from the time of the loss or destruction.
  • (6) If it is not reasonably possible to succeed, your deduction is not affected by your failing to retain or produce the original document.
  • (7) If it is reasonably possible for you to get a substitute document, but you don't get one, this section does not protect you from the consequences of failing to retain or produce the original."

51. Taxation Ruling TR 97/24 explains the operation of Subdivision 900-H of ITAA97 as well as other provisions that may grant relief from the effects of a failure to substantiate expenses. With regard to the discretion given to the Commissioner by s 900-195, TR 97/24 states that "It is a question of fact and degree as to whether the evidence available satisfies these criteria"^[47] TR 97/24 at [12] set out in that section. It goes on to say:

• "13. It is the Commissioner's view that relief is not available where there is no supporting documentation or factual material evidencing the expense. It follows that a taxpayer's estimate of an expense supported only by an assertion that the estimate is reasonable does not constitute evidence of a nature and quality to satisfy the Commissioner to exercise the discretion. …"

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  ATC 3029

52. As to the discretion given under s 900-200, TR 97/24 states in part:

• "15.… A taxpayer needs to demonstrate that the only reason for the failure was a genuine belief that those requirements did not need to be met and that this belief was reasonable in all the circumstances. An entitlement to claim a deduction must exist under another provision of the Act.
• 16. This may occur where the taxpayer had a reasonable expectation at the time of incurring the expenses that they would not need to be substantiated because one of the exception categories applied, e.g., work expenses less than $300; reasonable travel allowance expenses; reasonable award overtime meal allowance expenses; laundry expenses of $150 or less. Section 900-200 of the Act provides relief and any right to deduct those expenses is not affected. …
• 17. An expectation that the substantiation requirements would not apply based on a lack of knowledge of the law does not attract the operation of this provision. There is an expectation that taxpayers have a knowledge of the operation of the law. There are a number of generally available sources of information, including TaxPack, to provide assistance to taxpayers. The section may operate if a reasonable expectation that substantiation is not required is created by the advice or conduct of the Australian Taxation Office ('the ATO'). This section does not grant relief where a taxpayer has carelessly or recklessly disregarded whether an exception to the substantiation requirements would apply."

53. In relation to what are "reasonable precautions" and what is "reasonably possible" in s 900-205, TR 97/24 states:

• "22. It is necessary for the taxpayer to show that reasonable precautions were taken to protect documents. What might be 'reasonable precautions' depend upon the facts of each case. However, relief is not granted if the circumstances indicate that the loss or destruction resulted from the taxpayer's carelessness or recklessness.
• 23. What might be 'reasonably possible' in obtaining a substitute document also depends upon the facts of each case. A taxpayer needs to show that a bona fide attempt had been made to obtain a substitute document; or there were reasonable grounds for believing that such efforts would not be successful."

Depreciation: provisions in force between 1 July 1997 and 30 June 2001

54. Part 2-10 of Chapter 2 of ITAA97 is concerned with the rules regarding deductibility of capital expenditure. Division 42 of Part 2-10 was inserted with effect from 1 July 1997^[48] Tax Law Improvement Act 1997 , s 2(2) & s 3, Schedule 1, item 9 and was applicable to assessments for the financial years beginning 1 July 1997. It permitted a taxpayer to deduct an amount for depreciation of a unit of plant for an income year if, in that year, the taxpayer is its owner or quasi-owner and uses it, or has it installed ready for use, for the purpose of producing assessable income.^[49] ITAA97, s 42-15 Plant is defined very broadly and includes motor cycles.^[50] ITAA97, s 42-18 With certain exceptions, the amount deducted is worked out under Subdivision 42-E and the taxpayer cannot deduct more than the undeducted cost of the plant.^[51] ITAA97, s 42-20

55. The first step was to work out the cost under Subdivison 42- D. Generally, the cost is the cost to the taxpayer that may be adjusted by specific items, none of which is relevant in this case.^[52] ITAA97, s 42-65, item 1

56. The second step was to work out the effective life of the plant, in this case a motor cycle, to be depreciated. The taxpayer may either work out the effective life of the plant or adopt the effective life determined by the Commissioner under s 42-110.^[53] ITAA97, s 42-100 That choice is made in the income year in which a depreciation deduction is first allowable for the plant. If the taxpayer chooses to work out the effective life, it is done in this way:

• "(1) You work out the effective life of plant by estimating how long it can be used by any entity for income producing purposes. You do this at the time you first use it, or have it installed ready for use, for the purpose of producing assessable income.

• ---

  ATC 3030

  (2) In making that estimate, you assume the plant:
  • (a) is new; and
  • (b) will be subject to wear and tear at a rate that was reasonable for you to expect when you were working it out having regard to the expected circumstances of your use; and
  • (c) will be maintained in reasonably good order and condition.
• (3) If, at that time, you conclude that you would be likely to scrap the plant, sell it for scrap or abandon it before the end of the period worked out under subsection (1), its effective life ends at the earlier time. This conclusion is also to be made on the assumption that the plant is new."^[54] ITAA97, s 42-105

57. Having worked out the effective life, the taxpayer must then work out the depreciation rate that is applicable to that plant. Section 42-125 provides:

• "(1) The general rates are set out in the following table.
  

  Item	Years in effective life	Diminishing value rate	Prime cost rate
  1	fewer than 3	not applicable	100%
  2	3 to fewer than 5	60%	40%
  3	5 to fewer than 6⅔	40%	27%
  4	6⅔ to fewer than 10	30%	20%
  5	10 to fewer than 13	25%	17%
  6	13 to fewer than 30	20%	13%
  7	30 or more	10%	7%

• (2) These rates do not apply to a car, or a motor cycle or similar vehicle, or an artwork."

58. Section 42-135 set out the rates for motor vehicles such as cars and motor cycles. It did so by reference to the years in the effective life of, in this case, the motor cycle and then set out a diminishing value rate and a prime cost rate:

"Cars and motor cycles rates table

"Cars and motor cycles rates table

Item	Years in effective life	Diminishing value rate	Prime cost rate
1	fewer than 3	not applicable	100%
2	3 to fewer than 5	50%	33%
3	5 to fewer than 6⅔	30%	20%
4	6⅔ to fewer than 10	22.5%	15%
5	10 to fewer than 13	15%	10%
6	13 to fewer than 20	11.25%	8%
7	20 to fewer than 40	7.5%	5%
8	40 or more	3.75%	3%"

59. The taxpayer may choose one of two methods to work out the amount of the deduction; the diminishing value method or the prime cost method. The choice must be made for the income year in which the depreciation deduction is first allowable to that taxpayer for the plant.^[55] ITAA97, s 42-25 Those methods are described in the note to s 42-25:

"The diminishing value method calculates your deduction each year as a percentage of the balance you have left to deduct.

The prime cost method calculates your deduction each year as a percentage of your cost."

60. Balancing adjustment calculations must be made in certain circumstances.^[56] ITAA97, s 42-30 Generally, the taxpayer must make any choice under Division 42 by the day of lodgement of the income tax return for the income year to which the choice relates. Once made, that choice applies to the income year and all later income years.^[57] ITAA97, s 42-40 The taxpayer cannot deduct more than the undeducted cost of the plant.^[58] ITAA97, s 42-20(2) The undeducted cost of plant that is a car is, subject to certain conditions, the amounts that the taxpayer could have deducted under Division 42 for any period during which that taxpayer was its owner and it was used wholly for the purpose of producing assessable income during

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ATC 3031

that period, the taxpayer used the same method and rate as in previous years and certain other provisions did not deny a depreciation deduction.^[59] ITAA97, s 42-175(c)

61. The diminishing value method requires the application of the formula:

"Opening undeducted cost × Days owned 365

×

Diminishing value rate

where:

opening undeducted cost is the undeducted cost of the plant on the first day of the income year on which you were its owner or quasi-owner.

days owned is the number of days in the income year you were the owner or quasi-owner of the plant."^[60] ITAA97, s 42-160

The prime cost method requires the taxpayer to:

• "(1) Calculate your deduction using the formula:
  

  Cost x Days owned 365

  ×

  Prime cost rate

• where:
• days owned is the number of days in the income year you were the owner or quasi-owner of the plant.
• (2) However, if you are using the 100% rate, your deduction is your cost.
• (3) In applying this section, the cost of the plant is reduced by:
  • (a) any amount that you choose under section 42-285 or 42-290 (balancing adjustment relief) to treat as having been deducted for depreciation of the plant; and
  • (b) any amount you are taken to have deducted for depreciation of the plant under subsection 42-48(2) (debt forgiveness)."^[61] ITAA97, s 42-165

The various items in the formulae are subject to further specific provisions but they are not relevant to this case.

Deductions: provisions in force from 30 June 2001

62. The depreciation provisions in the ITAA97 were amended by the New Business Tax System (Capital Allowances) Act 2001 and the New Business Tax System (Capital Allowances - Transitional and Consequential) Act 2001 with effect from 30 June 2001. The new provisions repealed Divisions 40, 41 & 42,^[62] New Business Tax System (Capital Allowances) Act 2001 , s 2(2) & Schedule 1, Item 1; New Business Tax System (Transitional and Consequential Provisions) Act 2001 , s 2(1) & Schedule 1, Item 1 substituted Division 40 and established a new regime regulating claims for deductions for depreciation. Division 40 of Part 2-10 now governs the depreciation provisions and introduces new concepts. At its heart is the proposition that a taxpayer:

"… can deduct an amount equal to the decline in value of a depreciating asset (an asset that has a limited effective life and that is reasonably expected to decline in value over the time it is used) that you hold.

That decline is generally measured by reference to the effective life of the asset.

You can also deduct amounts for certain other capital expenditure."^[63] ITAA97, s 40-1

63. This is not so different from the principles underpinning the original provisions but, in the context of this case, there are significant differences. One is that the depreciation rates set out in ss 42-125 and 42-135 no longer appear. Another is that the formulae for the diminishing value method and the prime cost method have been altered. The diminishing value method is:

"Base value

×

Days held 365

×

150% Asset's effective life

Where:

base value is:

• (a) for the income year in which the asset's start time occurs - its cost; or
• (b) for a later year - the sum of its opening adjustable value for that year and any amount included in the second element of its cost for that year.

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ATC 3032

days held is the number of days you held the asset in the income year from its start time, ignoring any days in that year when you did not use the asset, or have it installed for use, for any purpose."^[64] ITAA97, s 40-70(1)

The prime cost method is:

"Asset's cost

×

Days held 365

×

100% Asset's effective life

Where:

days held has the same meaning as in subsection 40-70(1)."^[65] ITAA97, s 40-75

Sub-section 40-75(7) places a limit on the decline in value calculated according to the prime cost method:

"The decline in value of a depreciating asset under this section for an income year cannot be more than:

• (a) for the income year in which the asset's start time occurs - its cost; or
• (b) for a later year - the sum of its opening adjustable value for that year and any amount included in the second element of its cost for that year."

64. In most instances, the significance of the asset's "start time" is explained in ss 40-60(1) and (2):

• "(1) A depreciating asset you hold starts to decline in value from when its start time occurs.
• (2) The start time of a depreciating asset is when you first use it, or have it installed ready for use, for any purpose.
• (3) …"

Deductions: transitional provisions

65. Section 40-10 of the Income Tax (Transitional Provisions) Act 1997 (Transitional Act) provided for the way in which the depreciation provisions would apply to the taxpayer who has:

• "(a) …deducted or can deduct amounts for plant under Division 42 of the Income Tax Assessment Act 1997 (the former Act ) as in force just before it was amended by the New Business Tax System (Capital Allowances) Act 2001 and the New Business Tax System (Capital Allowances - Transitional and Consequential) Act 2001, or you could have deducted amounts under that Division for the plant if you had used it, or had it installed ready for use, for the purpose of producing assessable income before that day; and
• (b) either:
  • (i) you hold the plant at 1 July 2001; or
  • (ii) subparagraph (i) does not apply and you were the owner or quasi-owner of the plant at the end of 30 June 2001."^[66] Income Tax (Transitional Provisions) Act 1997 , s 40-10(1)

66. Once it is seen that s 40-10 applies to a taxpayer, ss 40-10(2) and (3) set out the manner in which the provisions of Division 40 of the current ITAA97 apply. Of relevance in this case is s 40-10(2)(b) which provides:

"Division 40 of the Income Tax Assessment Act 1997 as amended by the New Business Tax System (Capital Allowances) Act 2001 and the New Business Tax System (Capital Allowances-Transitional and Consequential) Act 2001 (the new Act ) applies to the plant on this basis:

• (a) …
• (b) you use the same cost, effective life and method that you were using under Division 42 of the former Act, or that you would have used if you had used the plant for the purpose of producing assessable income at the end of 30 June 2001; …
• (c) …"

Consideration regarding deductions

Claim for deduction of interest and costs of borrowing: principles

67. As Mr Willersdorf-Greene is an individual who was not carrying on a business, the starting point is s 8-1(1) of ITAA97. Subject to his substantiating his interest and borrowing expenses, he can claim a deduction for them if they were an outgoing "… incurred in gaining or producing … [his] assessable income".^[67] ITAA97, s 8-1(1)(a)

68. I will begin with the recent judgment of the High Court in
Spriggs v Federal Commissioner of Taxation;
Riddell v Federal Commissioner of Taxation (Spriggs).^[68] 2009 ATC ¶20-109 ; [2009] HCA 22 per French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ It was handed down after the hearing of the

---

ATC 3033

application which I must decide but the principles were raised at that hearing. In that case, two footballers from two different codes claimed as deductions management fees they had paid. Their income included amounts paid by their respective clubs for playing their chosen code of football as well as additional amounts paid for their engaging in promotional or marketing activities associated with their sport. There was no question that these amounts were assessable income but the question was whether the management fees had been incurred in gaining or producing that assessable income:

"It is well settled that incurred 'in' gaining or producing means incurred 'in the course of' gaining or producing assessable income^[69] Amalgamated Zinc (De Bavay’s) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295 at 303 per Latham CJ, 309 per Dixon J; [1935] HCA 81 ; Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 56-57 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ; [1949] HCA 15 ; Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344 at 350 per Dixon CJ, Williams, Webb, Fullagar and Kitto JJ; [1956] HCA 77; Federal Commissioner of Taxation v Payne 2001 ATC 4027 ; (2001) 202 CLR 93 at 99 [9] per Gleeson CJ, Kirby and Hayne JJ; [2001] HCA 3 ; Federal Commissioner of Taxation v Day 2008 ATC ¶20-064 ; (2008) 236 CLR 163 at 175 [21] per Gummow, Hayne, Heydon and Kiefel JJ, 192 [69] per Kirby J. .
In Ronpibon Tin NL v Federal Commissioner of Taxation ('Ronpibon Tin') ^[70] (1949) 78 CLR 47 at 57 per Latham CJ, Rich, Dixon, McTiernan and Webb JJ. , this Court explained:

'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.'

The essential question, rephrased in
Federal Commissioner of Taxation v Payne ('Payne")^[71] 2001 ATC 4027 ; (2001) 202 CLR 93 at 100 [11] per Gleeson CJ, Kirby and Hayne JJ, noted in Federal Commissioner of Taxation v Day (2008) 236 CLR 163 at 179 [30] per Gummow, Hayne, Heydon and Kiefel JJ. , is: 'is the occasion of the outgoing found in whatever is productive of actual or expected income?'
In Federal Commissioner of Taxation v Day^[72] 2008 ATC ¶20-064 ; (2008) 236 CLR 163 at 180 [33] per Gummow, Hayne, Heydon and Kiefel JJ. , the majority said:

'That no narrow approach should be taken to the question of what is productive of a taxpayer's income is confirmed by cases which acknowledge that account should be taken of the whole of the operations of the business concerned in determining questions of deductibility.' (footnotes omitted) …"^[73] 2009 ATC ¶20-109 ; [2009] HCA 22 at [55]

69. The parties referred to an earlier case of
Steele v Deputy Commissioner of Taxation ^[74] 99 ATC 4242 ; (1999) 197 CLR 459 also decided by the High Court. It did so in relation to s 51(1) of the Income Tax Assessment Act 1936 (ITAA36), which is drafted in terms similar to those in s 8-1(1) for the purposes of this case:

"… All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income … , shall be allowable deductions …".

70. There are several principles to be drawn from the judgment of the majority, Gleeson CJ, Gaudron and Gummow JJ, with whom Callinan J agreed on these aspects:

"In deciding whether, in the present case, the interest was an outgoing 'incurred in gaining or producing the assessable income', it is unnecessary to become involved in seeking to distinguish between the purpose of the taxpayer in borrowing the money and the use to which the borrowed funds were put …. The respondent accepts the principle … that an outgoing may qualify for deduction even though no assessable income to which the outgoing is shown to be 'incidental and relevant' … is gained or produced in the year in which the outgoing is incurred, or at all. Bearing in mind that the assessable income of the taxpayer generally, it seems difficult to deny the relevance of the outgoing presently in question."^[75] 99 ATC 4242 ; (1999) 197 CLR 459 at 474, [43]

"… The temporal relationship between the incurring of an outgoing and the actual or projected receipt of income may be one of a number of facts relevant to a judgment as to whether the necessary connection might, in a given case, exist, but contemporaneity is not legally essential, and whether it is factually important may depend upon the circumstances of the particular case.

…

… [A] taxpayer may be entitled to a deduction after a business has ceased, provided the occasion of a business outgoing is to be found in the business operations directed towards the gaining or production of assessable income generally… However, cessation of business may be of factual importance. …"^[76] 99 ATC 4242 ; (1999) 197 CLR 459 at 474-475, [44]-[46]

"The respondent placed reliance upon the concept of commitment as an aid to the formation of a factual judgment … as to the sufficiency of the relevant connection between outgoing and income. The utility of that concept may vary with the circumstances of individual cases. … The present is not a case in which the appellant

---

ATC 3034

had in contemplation a variety of alternative possible uses of Tibradden, some of an income-producing nature and others not. There was no suggestion, for example, that she ever contemplated using the property for private or domestic purposes. That was never an option. … [W]hilst she was not financially committed to a motel development, and had not decided upon any particular development, she does not appear to have envisaged any use of or dealing with the property other than one which would produce an assessable income."^[77] 99 ATC 4242 ; (1999) 197 CLR 459 at 475-476, [47]

71. The parties also referred me to the judgment of the Full Court of the Federal Court in
Inglis v Federal Commissioner of Taxation.^[78] 80 ATC 4001 ; (1979) 40 FLR 191 ; 10 ATR 493 , St John, Brennan and Davies JJ Brennan and Davies JJ in their respective judgments both referred to an earlier case of
AGC (Advances) Ltd v Federal Commissioner of Taxation. ^[79] 75 ATC 4057 ; (1975) 132 CLR 175 ; 5 ATR 243; 5 ALR 208 In that case and in considering s 51(1) of the ITAA36, Barwick CJ had underlined the principle that the outgoing and the activities directed to gaining or producing the income need not be contemporaneous or in the same year. Brennan J, in Inglis, agreed:

"… The first limb thus provides for the deduction of an outgoing incurred in gaining or producing assessable income, whether the income is the income of a previous income year, the income of the current income year, or the expected income of a future income year.

There must, of course, be a connexion between the incurring of the outgoing and the gaining or production of the relevant income. Where income has been produced or is being produced, reference may be had to the means of its production in order to ascertain whether the necessary connexion with the incurring of the outgoing appears. If the incurring of the outgoing is 'incidental and relevant to the operations or activities regularly carried on for the production of income', the relevant connexion appears …"^[80] 80 ATC 4001 ; (1979) 40 FLR 191; 10 ATR 493; at 194, 495

72. The following passage from the judgment in Spriggs is based on the same principle. It illustrates the need to analyse the taxpayer's activities with some care and to identify the way or ways in which those activities lead to the production of income or in which they are expected to lead to the production of income. The loss or outgoing claimed as deductible under s 8-1 is then viewed against the background of the whole of the taxpayer's activities and the question asked: "Was the loss or outgoing incurred in the course of those activities and so in the course of gaining or producing that assessable income or of expecting to do so?" As the High Court said:

"While s 8-1(1)(a) of the ITAA 1997 does not, in terms, refer to the carrying on of a 'business', in considering deductibility under that provision, it may be 'useful and necessary' to consider whether the taxpayer is carrying on a business. This is because the conduct of a business is one of the ways, according to the 'ordinary concepts and usages of mankind', in which a person may earn income. Whether a particular loss or outgoing is deductible will depend on the way in which the taxpayer gains or produces their income. Where a taxpayer earns income from a business which they operate, a loss or outgoing may be incurred 'in the course of' gaining or producing their income, when the same loss or outgoing would not be incurred 'in the course of' gaining or producing income from service as an employee.

Section 8-1(1)(a) is available both to a taxpayer who earns income as an employee and also to a taxpayer who earns income from a business carried on by the taxpayer. If each of the appellants was engaged in the business of exploiting their sporting prowess and associated celebrity, as contended on their behalf, it becomes necessary to ask whether the management fees were incurred in the course of gaining or producing their assessable income from that business. The answer may be different from that which would apply if the appellants were not conducting businesses, but were no more than employees.

This distinction was recognised in Maddalena^[81] 71 ATC 4161 ; (1971) 45 ALJR 426 ; 2 ATR 541; at 427, 549-550 , where Menzies J, with whom the rest of the Court agreed, said:

'Had the taxpayer claimed as a deduction the expenses of changing from one job to another as an employee electrician his outlay would not have been an allowable

---

ATC 3035

deduction. The expenditure would have been incurred in getting, not in doing, work as an employee. It would come at a point too soon to be properly regarded as incurred in gaining assessable income. Nor would the expenditure have been an outgoing in carrying on a business. There is a difference of first importance for present purposes between an electrician who seeks work as an employee and an electrician who seeks contracts to do work as a principal. In the former case the electrician would not have a business; in the latter he would. In the latter, therefore, what he spent to obtain contracts to do electrical work would be properly regarded as an outgoing of his business. There is, however, a clear distinction between the two cases.'

The late Professor Parsons made the same point:

'Whether the applicability of the first limb or the second limb is in question, the inquiry must be concerned with the connection between the expense and the particular process of derivation of income.' (emphasis added)

The existence of a business is a matter of fact and degree. It will depend on a number of indicia, which must be considered in combination and as a whole. No one factor is necessarily determinative. Relevant factors include, but are not limited to, the existence of a profit-making purpose, the scale of activities, the commercial character of the transactions, and whether the activities are systematic and organised, often described as whether the activities are carried out in a business-like manner.

Where it is determined that a taxpayer is conducting a business, the next question will be the 'scope' of that business. It may be that the taxpayer pursues two separate fields of endeavour, which are properly described as two separate businesses or a business and some other non-business activity. In Payne, the taxpayer conducted a deer farming business and, quite apart from that business, was employed as a pilot by an airline: the two were activities of 'unrelated income derivation'. On the other hand, a taxpayer may pursue separate income-producing activities as part of a single business. The question is one of fact, turning upon the degree of connection and interdependence between the activities. One must consider 'the whole of the operations of the business concerned in determining questions of deductibility'. To determine whether a taxpayer is conducting a business and the scope of that business, as said in a different context, 'it is necessary to make both a wide survey and an exact scrutiny of the taxpayer's activities'."^[82] 2009 ATC ¶20-109 ; [2009] HCA 22 at [56]-[60] (footnotes omitted)

73. A passage from the judgment of Heerey J in
Guest v Commissioner of Taxation ^[83] 2007 ATC 4265 ; [2007] FCA 193 ; 65 ATR 815 illustrates the principle that the outgoing and the activities directed to the gaining or production of assessable income or of possibly doing so need not be contemporaneous:

• "71 This issue, which also arises under the carrying on business limb, raises the question whether Mr Guest has shown there was a sufficient nexus between his incurring of interest liabilities in 1998 to 2001 and the blueberry growing business in which, following the appointment of Receivers, he ceased to have any involvement after 1991.
• 72 A line of cases supports the proposition that a loss or outgoing may be deductible even if it is incurred some years after the associated business, or the taxpayer's involvement in it, has ceased:
  Placer Pacific Management Pty Ltd v Federal Commissioner of Taxation (1995) 31 ATR 253,
  Federal Commissioner of Taxation v Brown (1999) 99 ATC 4600,
  Federal Commissioner of Taxation v Jones (2002) ATC 4135, and
  R & D Holdings Pty Ltd v Deputy Federal Commissioner of Taxation (2006) ATC 4472. In Placer the claimed deduction was for a payment in settlement of litigation in respect of defective goods supplied. In the other cases it was for interest on a business related loan.

• ---

  ATC 3036

  73 That the gap in time may be considerable is demonstrated by the following table:
  

  Case	Business ceased	Deduction allowed
  Placer	1981	1989
  Brown	1990	1994
  Jones	1993	1998
  R & D	1990	1999

  In R & D there is the qualification that the business in question, the leasing of an office building, was still carried on, although not by the taxpayer but by a mortgagee in possession."

74. In
Commissioner of Taxation v Brown, ^[84] 99 ATC 4600 ; [1999] FCA 721 , Lee, RD Nicholson and Merkel JJ the Full Court of the Federal Court summarised observations made by the majority in
Steele v Deputy Commissioner of Taxation ^[85] (1999) 41 ATR 139 ; 99 ATC 4242 . Among those observations were those relating to the proper characterisation of interest payments in terms of whether they are a revenue item or a capital expenditure. They said in part:

"Interest paid on ordinary commercial terms for the use of money expended to acquire property held for an income producing purpose is a recurrent payment which secures, not an enduring advantage, but rather, the use of borrowed money during the term of the loan. Therefore, in the usual case, where interest is a recurrent payment to secure the use for a limited term of loan funds, it is proper to regard the interest as a revenue item and its character is not altered by reason of the fact that the borrowed funds are used to purchase a capital asset. Once it is determined that the interest paid during a relevant year is an outgoing incurred in gaining or producing a taxpayer's assessable income generally then, even though no assessable income is derived during that year and no such income may ever be derived, the circumstances that the capital asset has produced no income is not a reason to conclude that the interest is an outgoing of a capital nature: see Steele paras 25-29."^[86] 99 ATC 4600 ; [1999] FCA 721 at [20]

Claim for deduction of interest and costs of borrowing: Mr Willersdorf-Greene's claim

75. In the case I must consider, I am not satisfied that the activities in which Mr Willersdorf-Greene was engaged could be said to amount to a business. Had activities of the type he engaged in continued over a period of time and not been brought to an abrupt end by Mr and Mrs Vodopic's not carrying out their side of the arrangements, it might be that he could be said to have been conducting a business. That he was not is not fatal to his claim for a deduction. I find that he was engaged in activities that were clearly directed to producing or gaining income. His activities were those that led to his finding an investor, Tangalooma, to invest in the fuel scheme. His income would be produced or gained in the form of a commission and would be received over the life of the contract between Joton and Tangalooma. If that contract were completed successfully, Mr Willersdorf-Greene would become a consultant to Joton and would receive further payments of commission when he found investors prepared to invest in the fuel scheme.

76. In order to secure Tangalooma's investment in the fuel scheme, Mr Willersdorf-Greene had to give it a guarantee. I find that Mr Robson would not have made the investment through Tangalooma had Mr Willersdorf-Greene and the Vodoprics not given those guarantees. Therefore, I find that there is connection between Mr Willersdorf-Greene's giving the guarantee and Tangalooma's entering the contract that would lead to his gaining or producing income by way of commission.

77. The fact that his giving a guarantee leads to my finding that there is the necessary connection does not necessarily lead to my also finding that there is the necessary connection between that and his having to meet his obligations under the guarantee. If it does, it will do so because that finding is required by the application of the principles to which I have referred.

78. Generally:

"… A guarantee is essentially a promise to answer for the debt, default or miscarriage of another, and it does not include as such the case of a person incurring an additional liability in respect of a sum of money for which he is already liable."^[87] Bank of New South Wales v Permanent Trustee Co of New South Wales Ltd (1943) 68 CLR 1 at 11 per Latham CJ

79.

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ATC 3037

Therefore, it is a promise that is dependent upon the occurrence of specified events at some future time. Those events may not occur. A contingent liability is not, though, a future liability just as a contingent claim is not a future claim:

"… A future claim is distinguishable from a contingent claim in that, while both are founded on an obligation existing as at the commencement of the winding up or the deed of company arrangement, a future claim will arise at some time thereafter while a contingent claim may arise. A typical example of a future claim is a claim for rent which will become due in the future under a lease which is in existence at the commencement of the winding up: see
Molit (No 55) Pty Ltd v Lam Soon Australia Pty Ltd (Administrator Appointed) (1996) 19 ACSR 160, at 167ff; cf.
Silbermann v One.Tel Ltd (In liq) (2002) 167 FLR 274, at 279. …"^[88] Expile Pty Limited v Jabb’s Excavations Pty Ltd & Anor [2004] NSWSC 284 at [37] Palmer J

80. The fact that a contingent liability is dependent upon the occurrence of certain events and will not become an actual liability unless those events occur does not mean that it is a liability that can be ignored. Taxpayers maintaining books of account would record it as a contingent liability during the term of the guarantee and while those events have not yet come to pass. They do so because events may expose them to an actual liability and they must make provision for it.

81. The fact that this may occur is recognised in the Bankruptcy Act1966 and, more particularly, by s 82. Division I of Part VI identifies the debts and liabilities that may be provable debts in a person's bankruptcy. Provable debts are "all debts and liabilities, present or future, certain or contingent" to which a bankrupt is subject at the date of bankruptcy.^[89] Bankruptcy Act 1966 , s 82

82. The guarantee that Mr Willersdorf-Greene gave Tangalooma meant that he was contingently liable to Tangalooma from the moment he gave it. Had he become bankrupt, Tangalooma would have been able to prove it in his bankruptcy. Of course, when he gave it, matters such as these were far from his mind. Mr Willersdorf-Greene's confidence in the success of the fuel scheme was such that he thought that the event that would enable Tangalooma to demand payment from him in accordance with the terms of the guarantee would never happen. That is, he thought that Joton and those connected with it would keep their side of the arrangements and pay Tangalooma what was due. Whatever he thought would be the case, he had a contingent liability immediately upon his entering the contract of guarantee with Tangalooma and, later, an actual liability to pay Tangalooma in accordance with the terms of the guarantee.

83. To meet his actual liability, Mr Willersdorf-Greene was obliged to borrow two sums amounting to $125,000.00 and pay them to Tangalooma when Joton failed to return twice that amount to it in accordance with their contractual arrangements. I find that he borrowed the money for two reasons: first to meet the contingent liability he incurred under the guarantee; and second to avoid being the respondent in proceedings brought against him for its recovery. Had he not paid it, Tangalooma intended to commence legal proceedings for its recovery. Mr Willersdorf-Greene did not pay the money with any thought that it would lead to his gaining or producing assessable income then or at any time in the future or that it had done so. When Tangalooma exercised its rights under the guarantee, any possibility of Mr Willersdorf-Greene's gaining or producing assessable income from the fuel scheme was long gone. The best he could do was to help Mr Robson recover the funds from Joton, the Vodopics or other sources so that Tangalooma would repay some or all of what it had received from him under the guarantee.

84. Mr Nicholas referred me to the judgement of Hill J in
Kidston Goldmines Ltd v Commissioner of Taxation^[90] 91 ATC 4538 ; (1991) 30 FCR 77 in considering s 23(o) of the ITAA36. That provision exempted certain income from taxation "… where the working of the mining property by the taxpayer for the period … has been principally for the purpose of obtaining gold, or gold and copper …". At times, the mining company had surplus funds from the sale of its gold. It invested those surplus funds on the short term money market and received interest. Hill J considered whether the interest came within the exemption in s 23(o):

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ATC 3038

"… Although it can be said here that the investment on the short-term money market is an incident of the taxpayer's goldmining business, and represents the investment of moneys derived from gold sales, it is not sufficiently proximate to the activities which more directly generate that income and which are properly to be described as the working of the mining property. …"^[91] 91 ATC 4538 ; (1991) 30 FCR 77 at 82

85. Mr Willersdorf-Greene's costs of borrowing the money to pay his obligations under the guarantee may be regarded as an incident of the transaction he entered to gain or produce assessable income. They are not sufficiently proximate to those activities which were intended to produce that assessable income.

86. On the basis of his evidence, I find that Mr Willersdorf-Greene's making the payment meant that Mr Robson would continue his efforts to recover his investment from Joton and the Vodoprics. If he recovered more than $250,000.00, it was agreed between them that Mr Robson would reimburse Mr Willersdorf-Greene for the amounts he had paid under the guarantee. There is no evidence that Mr Robson has been successful in recovering any money from Joton and the Vodoprics let alone amounts that he has already recovered from Mr Willersdorf-Greene under the guarantee. If he should recover any, it could not be regarded as income in the hands of Mr Willersdorf-Greene but as the recovery of the capital he had outlayed earlier.

87. Mr Willersdorf-Greene said that Mr Robson had told him that he would pay a consulting fee if he were successful in recovering his investment. There is no mention of how that consulting fee would be calculated or whether it would be paid only if a certain amount were recovered. There is no evidence of the chances of success of any steps being taken to recover the investment. Those matters must also be viewed against a background of Mr Willersdorf-Greene's already being obliged to pay amounts to Tangalooma under the guarantee. In view of these matters, I am not satisfied that Mr Willersdorf-Greene's payment of $125,000.00 to Tangalooma was sufficiently proximate to the possibility of his gaining or producing assessable income in the form of commission payments to enable me to say that they were made to gain or produce assessable income. If they were successful in regaining any part of the moneys owed by Joton and the Vodopics, the money recovered would be a recovery of capital and not income.

88. On behalf of Mr Willersdorf-Greene, Mr Bamford drew my attention to s 25-25 of the ITAA97 but it is a statement of the outcome reached by the application of the general principles in s 8-1. It requires the borrowed money to be used for the purpose of producing assessable income. Only then may the expenses of borrowing the money be deducted.

89. On behalf of the Commissioner, Mr Nicholas drew my attention to the decision of Mr Hughes, Member, in
Re Pope and Commissioner of Taxation^[92] [2005] AATA 1085 in which Dr Hughes, Member, affirmed the Commissioner's decision disallowing Ms Pope's claim for a deduction for the interest and establishment fees paid in relation to a loan she had obtained from the Commonwealth Bank. She used that sum to honour a guarantee that she had given to the creditors of Jayz Pty Ltd, of which she was a director. In addition to the guarantee, Ms Pope had given the creditors a mortgage over real estate she owned. After she had given the guarantee and the mortgage, Ms Pope had also entered a partnership agreement with a person named "Coutts". The partnership agreement provided that an additional amount would be secured by a mortgage over Ms Pope's real estate. When the partnership proved less than satisfactory, she took steps to have Jayz Pty Ltd placed in provisional liquidation and then in liquidation. The Commonwealth Bank drew upon Ms Pope's loan account to pay itself some $75.000.00 it was owed by the company. It transferred further funds to the liquidator and to another bank.

90. Dr Hughes considered whether there was a nexus between the interest payments and establishment costs and the gaining or producing of income. He decided:

• "20. There is no evidence of such a nexus. All the available evidence points to the probability that the partnership operated independently - from a legal and accounting perspective - from Jayz Pty Ltd. Therefore, the Tribunal does not support the applicant's contention.

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  ATC 3039

  21. There are numerous indicators as to the correctness of this conclusion. In particular, there is no evidence that the partnership engaged in any business activity contemporaneously with Jayz Pty Ltd - it did not open a bank account when it was established, it did not apply for a tax file number, it did not lodge an income tax return and did not own or operate under the business name 'Jayz Interiors'. When Jayz Pty Ltd was placed into liquidation, the liquidator was not told of the existence of the partnership; and there was no mention of the partnership in the liquidator's report to creditors. The Better Business loan was taken out after Jayz Pty Ltd had ceased to operate; and significantly, there was no prospect of the business of Jayz Pty Ltd earning any income by that stage. There is no evidence of any agreement between Jayz Pty Ltd and the partnership. The loan was taken out only in the name of the applicant which, as contended by the respondent, is consistent with the loan being made to her alone for the purposes of discharging her personal liability under the guarantee.
• 22. The conclusion is inescapable that the loan was taken out by the applicant in order to discharge the debts of a company in liquidation. The loan was not taken out for the purpose of or in connection with income earning activities."^[93] Re Pope and Commissioner of Taxation [2005] AATA 1085 at [20]-[22]

91. Dr Hughes referred also to a decision by Senior Member Pascoe in Re Applicant and Commissioner of Taxation.^[94] [2001] AATA 831 ; 48 ATR 1007 The applicant, Senior Member Pascoe found, had incurred liability as a guarantor securing payment by H Pty Ltd of the loan it obtained from Countrywide Building Society in 1989 or 1990. In addition, he had secured payment by mortgaging his home. The loan was used to develop four shops but tenants could not be found for them on their completion. The payments under the loan could not be met and the shops were sold by the mortgagee in January 1992. A claim was made under the guarantee. Senior Member Pascoe decided:

• "11. It follows that any liability of the applicant to Countrywide was in his capacity as guarantor. As such, his liability arose only after H Pty Ltd defaulted, the mortgagee entered into possession of the property, sold the property and was left with a shortfall. It could be argued that the liability did not arise until the applicant and his wife accepted judgement against them on 9 November 1995 but, in any event, it was not until after sale of the property and when there was no prospect or possibility of deriving assessable income. Any payment by the applicant was by way of discharging a liability as guarantor and consequently, was of a capital nature. Further, it could not be said as expenditure incurred for the purpose of gaining or producing assessable income. At the time the liability arose, there was no prospect of generating income from the project and no income-producing asset. In this case the issues are quite different from those in
  Federal Commissioner of Taxation v Brown 99 ATC 4600. In Brown the taxpayer borrowed money and was liable for interest to enable the purchase of an income producing business. It was held that, notwithstanding the subsequent sale of the business, the occasion of the recurring liability for interest was the loan agreement, the purpose of which was for the taxpayer and his wife to acquire and carry on the business. In this case, the liability arose only after any income producing activity has ceased and the occasion of that liability was the meeting of a guarantee of the shortfall of H Pty Ltd."^[95] [2001] AATA 831 ; 48 ATR 1007; at [11]; 1112

92. I am mindful of these decisions and am reluctant to appear to reach a different decision on what might appear, at first glance, to be similar facts. Where the difference lies between the cases Dr Hughes and Senior Member Pascoe considered and that which I must consider is this; the guarantee that I must consider imposed a liability at the outset even though it was a contingent liability. Mr Willersdorf-Greene accepted that liability because, without it, Mr Robson would not have invested in the fuel scheme. Without that investment, made through Tangalooma, Mr Willersdorf-Greene had no prospect of gaining or producing assessable income. There was at that time a nexus between the liability and the activities directed at gaining or producing

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ATC 3040

assessable income. That nexus remained when Tangalooma exercised its rights under the guarantee. That is so even though, by then, Mr Willersdorf-Greene had no prospect of gaining assessable income from the fuel scheme in which he had encouraged Mr Robson to invest. Tangalooma's claim was a natural consequence of the loss of its investment. Even though it was not looked for and all persons involved would hope that it would not happen, Tangalooma's claim was a natural consequence, of Mr Willersdorf-Greene's giving the guarantee. While the claim was made after the fuel scheme had been revealed as a sham, it was a claim that had its foundation in the arrangements made for Tangalooma to invest in the fuel scheme in place and for Mr Willersdorf-Greene to gain or produce assessable income. It is a situation comparable with that in
Commissioner of Taxation v Brown in which the Full Court decided that there was no break in the nexus between Mr Brown's carrying on a business and the incurring of liability for interest under a bank loan on the one hand and his continuing to do so after his business had ceased on the other. Mr Brown's liability to meet the interest costs arose under the original loan negotiated while he was conducting his business at a delicatessen. So too did Mr Willersdorf-Greene's liability. That it was initially a contingent liability makes no difference. It was a liability he accepted for the purpose of producing or gaining assessable income and it makes no difference that he was not called upon to meet that liability until a date after there was any possibility of his ever gaining or producing assessable income under the fuel scheme.

Work related expenses: airfare

93. Mr Willersdorf-Greene claimed a deduction in the amount of $767.00 in the 2005 financial year in respect of an overseas trip. He provided two boarding passes^[96] T documents, ST 27 at 520 and supported them with copies of a receipts for the purchase of food and car rental and records of his having exchanged Australian currency for United States currency.^[97] T documents, ST 27 at 520-526 On the basis of these documents, I have no doubt that Mr Willersdorf-Greene travelled overseas as he states. That is only part of the issue if he is to be permitted to claim the relevant part of his travel expenses as a deduction for the year in which he incurred them. He must establish that he incurred them. A boarding pass does not establish that he paid the fare for the flight to which that boarding pass relates or that he did not. It is entirely silent on the matter. It speaks only to the fact that the person named on it had confirmed that he intended to travel. It would suggest that he in fact travelled at the time and to the destination named on it but it is not conclusive of that issue. The receipts for food and car rental are in the same category. They suggest, even strongly, that he was outside Australia but do not point to who paid the airfares to enable Mr Willersdorf-Greene to travel to that destination.

94. The submission made on behalf of Mr Willersdorf-Greene was to the effect that the nature and quality of the evidence should satisfy the Commissioner that the expense had been incurred. I have already expressed my view on that but Mr Bamford submitted that the Commissioner, and so I, have a discretion under TR 97/24 to accept the evidence presented as sufficient. I have already set out the relevant passages of that ruling.

95. As with any discretion conferred by legislation, it is important to try to work out the factors that are relevant in deciding whether or not to exercise that discretion and so work out the circumstances in which it may be exercised and those in which it may not. As a rule, the scope of any discretion given to a decision-maker under an enactment depends on the latitude of the subject matter, scope and purpose of the Act and of the particular power conferred on the decision-maker.^[98] Coal and Allied Operations Pty Ltd v Australian Industrial Relations Commission and Others (2000) 203 CLR 194; 174 ALR 585 at 205; 591 and see also Drake v Minister for Immigration and Ethnic Affairs (1979) 24 ALR 577; 2 ALD 60 at 590 ; 70 per Bowen CJ and Deane J and 602; 80 per Smithers J As the Commissioner has done in TR 97/24, a decision-maker is free to adopt a policy to guide it in the exercise of its discretion provided its policy is consistent with the Act^[99] Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634 at 640 per Brennan J and does not require the decision-maker to take irrelevant circumstances into account.^[100] Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634 at 641 A policy "… must leave … [the decision-maker] free to consider the unique circumstances of each case … [It] does not control the making of decisions … [but] is informative of the standards and values which a … [decision-maker] usually applies. …".^[101] Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634 at 641 and see also the general discussion of the principles by Mr SC Fisher, Member, in Re Gray and Australian Securities and Investments Commission [2004] AATA 1235

96. TR 97/24 carefully follows the substantive provisions of Subdivision 900-H of ITAA97 and gives examples of types of evidence that the Commissioner would accept as substantiating the claim for deduction of

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ATC 3041

particular expenses. Beyond that it does not go. The provisions of Subdivision 90-H are intended to ameliorate the substantiation provisions set out in Division 900 including, in particular, Subdivisions 900-E, 900-F and 900-G. Fundamental to the substantiation provisions are that, unless the expenses are small and do not exceed a prescribed amount, a taxpayer must obtain and retain evidence of the expenditure claimed as a deduction. That evidence must set out certain information and be obtained from the supplier of the goods or services. If it is too hard to obtain that evidence from the supplier, Division 900-E permits the taxpayer to create a record of the expenditure in certain circumstances. The discretion given to the Commissioner is not unfettered.

It may be exercised only in three circumstances:

• 1. The evidence satisfies the Commissioner that the expense has been incurred and that the person is entitled to deduct the amount claimed;
• 2. It was reasonable for the taxpayer to expect that substantiation would not be required; and
• 3. The documents that are evidence of the expenditure are lost but the taxpayer took reasonable precautions to prevent their loss or destruction but has taken steps set out in s 900-205.

97. I have already found that I am not satisfied on the evidence that Mr Willersdorf-Greene incurred the expense. This is not a case in which it was reasonable for him to expect that substantiation would not be required and he did not seek to suggest that it was otherwise. While I accept that the relevant written evidence substantiating the claim might have been thrown out during the division of property after his separation from his wife, I am not satisfied that he has made any effort to obtain written evidence from the airline to support his claim that he paid it. If he paid it on a credit card, I am not satisfied that he tried to obtain evidence from his credit provider. In short, I am not satisfied that Mr Willersdorf-Greene took steps to obtain evidence to support his claim for a deduction in respect of his overseas trip. As I am not satisfied of that, I am not satisfied that it was not reasonably possible for him to obtain a document in substitution for the original evidence supporting his claim for a deduction.

98. For these reasons, I am not satisfied that Mr Willersdorf-Greene's circumstances come within the provisions of Subdivision 900-H of Division 900 of Part 5-30 of Chapter 5 ITAA97. Therefore, I am not permitted to ameliorate the substantiation provisions of the ITAA and do not allow Mr Willersdorf-Greene's claim for a deduction.

Work related expenses: remaining claims for bank charges, internet, mobile and telephone expenses and computer expenses

99. I am not satisfied that Mr Willersdorf-Greene has provided written evidence to substantiate his claims for deductions for the amounts he claimed in relation to bank charges, internet, mobile and telephone expenses and computer expenses. For the reasons I have given in relation to the claim for a deduction in relation to the airfare, I have concluded that his circumstances do not come within Subdivision 900-H.

Motor cycle expenses: depreciation

100. On the basis of his evidence, I find that Mr Willersdorf-Greene purchased his motor cycle in approximately January 1998 for $12,000.00.^[102] T documents, TS20 at 413 Mr Willersdorf-Greene assessed the effective life of his motor cycle as 15 years.He claimed depreciation for his motor cycle of $1,985.00 in 2005, $1,966.00 in 2006 and $1,961.00 in 2007. In the Statement of Facts and Contentions lodged on behalf of Mr Willersdorf-Greene, it was said:

"… The taxpayer maintains that the Effective Working Life of his motorcycle is 15 years. In further documents provided on 12^th June, 2008, Depreciation at 13% prime cost was calculated. On the basis of an effective life of 6 years and 8 months, amounts of $834, $744 and $790 were allowed of $1,560 p.a. claimed. It is submitted that the error in calculation does not constitute a lack of reasonable care."^[103] Applicant’s Statement of Facts and Contentions, [2]

101. On behalf of the Commissioner, it was argued that the correct depreciation rate was 8% as Mr Willersdorf-Greene had acquired his motor cycle before 11.45 Eastern Standard Time on 21 September 1999. That rate was stipulated by s 42-135 of ITAA97 before it was repealed by s 40-10(2)(b) of the Transitional

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ATC 3042

Act and continues to apply. The Commissioner's calculation of the depreciation was:

Year	Opening written down value	Days held	% of original cost depreciated each year	Depreciation $	Business usage	Deduction
98	12000	151	0.08	397.1506849
99	11602.84932	365	0.08	960
2000	10642.84932	365	0.08	960
2001	9682.849315	365	0.08	960
2002	8722.849315	365	0.08	960
2003	7762.849315	365	0.08	960
2004	6802.849315	365	0.08	960
2005	5842.849315	365	0.08	960	80.70%	774.72
2006	4882.849315	365	0.08	960	85%	816
2007	3922.849315	365	0.08	960	90.90%	872.64

^[104] Respondent’s submissions, p 10

102. The position put on behalf of Mr Willersdorf-Greene reflected that which he had previously put to the Commissioner.^[105] See, for example, T documents, TS20 at 413 In material put to the Commissioner on 26 June 2008, it was asserted that the effective working life of the motor cycle was 13 to 30 years and that the rate of depreciation was 13% Prime Cost of $12,000. No explanation was given as to how the effective working life was assessed. Equally, it could be said that no explanation was given as to how the Commissioner reached the view that its effective working life was, initially, 6⅔ years and, by the time of the hearing, would seem to have accepted that it was 13 to 20 years. Initially, the Commissioner applied the prime cost rate of 15% but, later, the prime cost rate of 8%. The difference reflects the change in the Commissioner's position regarding the effective working life of the motor cycle to that taken by Mr Willersdorf-Greene. There is now no doubt that the effective working life of the motor cycle is between 13 and 20 years if not 18 years.

103. The two remain apart on the method that should be applied in calculating the depreciation on the motor cycle. I have set out the relevant positions at some length to outline the way in which they have operated at various times. I have concluded that, at no time, could Mr Willersdorf-Greene have been able to claim a deduction calculated by using a percentage of 13% in the prime cost rate. Given that he was beginning with the proposition that the effective working life of the motor cycle was 18 years, it would seem that those advising him looked to Item 6 of s 42-125. I say that because it is the only provision in which it appears in the scheme of depreciation, in its various manifestations.

104. Item 6 of s 42-125 is not the appropriate provision to apply. Section 42-125(2) expressly states that the general rates set out in s 42-125(1) do not apply to, among others, a motor cycle.

105. What is the appropriate provision to apply is s 42-135 and, in view of the effective life of the motor cycle, Item 6 of that section. Item 6 provides that the prime cost rate is 8%. Certainly, that provision has since been repealed but the transition provisions to which I have referred above make it clear that Mr Willersdorf-Greene was required to use the same cost, effective life and method that he had used under Division 42 as it previously applied under the ITAA97. For that reason, I find that the Commissioner has used the correct method and that the rate of depreciation must be 8% and not 13% as claimed by Mr Willersdorf-Greene.

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ATC 3043

Consideration regarding penalties

106. I have already set out the provisions of ss 284-75(1) and 284-90(1) of Division 284 of Schedule 1 of the TAA. It seems to me that s 284-75(1) is relevant in relation to Mr Willersdorf-Greene's claim that all of the interest and expenses connected with the three amounts he borrowed are deductible. The statement that he made that the interest and expenses connected with all three loans rather than with simply two that he obtained to pay Tangalooma was false or misleading in a material particular within the meaning of s 284-75(1).

107. In so far as Mr Willersdorf-Greene has not substantiated his claims for the deductions other than those relating to the interest and expenses relating to the third loan, are the provisions of s 284-75(1) applicable? They will clearly be applicable if he claimed as a deduction any expense he did not incur. Mr Willersdorf-Greene believes that he did incur every expense. That may well be the case but that is not enough for ITAA97. Only if he substantiates each expense in accordance with the rules set out in the legislation is it enough for ITAA97. That is the effect of s 900-110(1) and 900-110(2). Only then is he entitled to the deduction. By claiming a deduction, the claim itself must implicitly carry with it a statement that Mr Willersdorf-Greene had written evidence required by ITAA97 in support of the deduction or had good reason to expect that that he would be able to obtain that written evidence.

108. Given his failure to obtain and supply the written evidence to substantiate his claims for deductions as I have found, the opportunities that he has had to do so at the audit stage, as well as during the conference stage of these proceedings, and even the hearing and the absence of evidence regarding the basis on which he held any belief that he would be able to obtain evidence, I find that he did not have good reason to expect that he would be able to obtain it when he lodged his returns. As his meeting the substantiation provisions of the ITAA97 was essential to his being entitled to claim the deductions, I find that Mr Willersdorf-Greene made statements that were false or misleading in a material particular in relation those claims. I have said that Mr Willersdorf-Greene made those statements but it makes no difference whether he made them or whether his agent did so on his behalf.

109. As Mr Willersdorf-Greene has not substantiated his claims for deductions, he is left with a shortfall amount because, had he been able to substantiate them, the Commissioner would have had to credit him with an amount under ITAA97.

110. It follows that Mr Willersdorf-Greene's circumstances meet each of the three paragraphs in s 284-75(1) and it is left to me to decide the penalty amount that should be imposed. The Commissioner has relied on Item 3 in s 284-90(1) which is based on the shortfall amount having resulted from the failure of Mr Willersdorf-Greene or his agent to take reasonable care to comply with a taxation law. The failure to comply is the failure to substantiate his claims for deductions.

111. I considered what it means to take reasonable care to comply with a taxation law in
Re Confidential and Commissioner of Taxation:^[106] 2008 ATC ¶1-002 ; [2008] AATA 415

• "53. Whether the shortfall amount should be reduced depends on whether that entire amount or any part of it occurred even though the Trust or its agent took reasonable care in making the BAS. What is meant by the expression 'reasonable care in making the statement'? The expression 'reasonable care' is not defined in the TA Act.
  In Peco Arts Inc v Hazlitt Gallery Ltd,^[107] [1983] 3 All ER 193 Webster J considered a related expression. The question for his Honour was when the plaintiff could, 'with reasonable diligence', have discovered that the drawing she had bought from the defendant was not an original by a famous nineteenth century artist as both she, a specialist in nineteenth century drawings whom she consulted and the defendant had understood it to be at the time of the sale. Time under the Limitation Act 1980 began to run from the time that she could have done so. Webster J reviewed the authorities and said:

  'Taking into account these authorities I conclude, first of all, that it is impossible to devise a meaning or construction to put on those words which can be generally applied in all contexts because, as it seems to me, the precise meaning to be given to them must vary with the particular context in which they are to be applied. In the context to which I have to apply them, in my judgment, I conclude that reasonable diligence means not the doing of everything possible, not necessarily the using of any means at the plaintiff's disposal, not even necessarily the doing of anything at all, but that it means the doing of that which an ordinarily prudent buyer and possessor of a valuable work of art would do having regard to all the circumstances, including the circumstances of the purchase.'^[108] [1983] 3 All ER 193 at 199

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  ATC 3044

  54. The notion of 'reasonable care' is relevant in the law of torts where Lord Radcliffe, for example, explained it in this way:

  '… One may phrase it as "reasonable care" or "ordinary care" or "proper care" - all these phrases are to be found in decisions of authority - but the fact remains that, unless there has been something which a reasonable man would blame as falling beneath the standard of conduct that he would set for himself and require of his neighbour, there has been no breach of legal duty.'^[109] Bolton v Stone [1951] AC 850 ; [1951] 1 All ER 1078 at 868-869; 1087

• That is not to say that the reasonable man would require of himself a standard of conduct that ensures that no harm comes to another. As Mayo J said in
  Perry v Ellis :^[110] [1946] SASR 282

  '… Reasonable care does not connote the observance in its exercise of an unqualified duty to protect other members of the community, and to avoid harm to oneself. Persons are entitled to conduct themselves on the supposition that others will to a reasonable extent behave prudently and look out for themselves; that is to say, that those others will take proper steps to avoid known risks, that they will act in a non-negligent manner.'^[111] [1946] SASR 282 at 293

• 55. Until its amendment by A New Tax System (Tax Administration) Act (No 2) 2000 (TA Amendment Act), penalties were provided for in the Income Tax Assessment Act 1936 (ITA Act 1936). The TA Amendment Act inserted Division 284 in the TA Act.^[112] TA Amendment Act, s 4; Schedule 1, items 1 and 2 Section 226G of the ITA Act 1936 was not affected by the amendment and was in substantively the same terms as newly enacted item 3 of s 284-90(1) of the TA Act.^[113] Section 226G was retained as it, with others, was relevant in the application of the transitional provisions in TA Amendment Act, s 3; Schedule 1, item 3. It was later repealed by the Tax Laws Amendment (Repeal of Inoperative Provisions) Act 2006 , s 3; Schedule 1, item 164. Section 226G was considered by Dowsett J in
  Weyers & Anor v Federal Commissioner of Taxation.^[114] [2006] ATC 4523 ; (2006) 63 ATR 268 ; [2006] FCA 818 He first repeated its effect:

  '… For the purposes of s 226G it is necessary to identify conduct falling short of that expected of a reasonable person in the circumstances. …'^[115] [2006] ATC 4523 ; (2006) 63 ATR 268 at 4557; 307

• 56. In the Explanatory Memorandum to the A New Tax System (Tax Administration) Act (No 2) 2000, reference was made to the amendments made by that legislation to the TA Act with regard to penalties. Clause 1.67 refers to the states that:

  'The reasonable care test requires a taxpayer to exercise the care that a reasonable person would be likely to have exercised in the circumstances of the taxpayer to fulfil the taxpayer's tax obligations. Taxpayers must take reasonable care not only in the preparation of their tax returns, but throughout the year on matters that may impact on their tax obligations, for example, recordkeeping. A shortfall amount may be caused not only by the taxpayer being careless in making (or not making) taxation statements, but also by careless acts or omissions of the taxpayer which lie behind the statements that are (or are not) made. Whether a taxpayer has behaved reasonably will depend on all the facts of each case.'

• 57. The principles underlying cl 1.67 and those in the cases seem to me to be compatible regardless of the fact that some are concerned with what is described as 'due diligence' and others with 'reasonable care'. In all of them, regard must be had to the nature of the obligation requiring the exercise of reasonable care and the particular circumstances in which the person under that obligation finds him or herself. In this case, the obligation is that Pallantium, on behalf of the Trust, took reasonable care in complying with its obligations under the GST Act. Its obligation in this case was to provide the information in the approved form, and so on the BAS, as required by s 31-15 of the GST Act. The information that it was required to give was of the sale of the Property in the tax period covered by the BAS. Common to all of the authorities is that the obligation does not require the person to consult every possible specialist or expert or to ask and answer every conceivable question that might be asked of that person's affairs. The emphasis is upon what is reasonable and what is reasonable to do for a reasonable person in the circumstances of the person required to give the Commissioner the BAS. What is reasonable could depend, for example, upon the obscurity of the question that later proved relevant, the extent to which an ordinary person in the circumstances would expect to make further enquiries and even the depth of the person's pocket in pursuing the question.

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  ATC 3045

  58. There is a question whether regard may be had to the particular circumstances of the person making the statement. Senior Member Pascoe suggested that they could be when he considered additional tax imposed as a penalty under s 226G of the ITA Act 1936. He said:

  'The additional tax imposed by way of penalty under s 226G of the ITAA 1936 applies where there is a failure to take reasonable care. 'Reasonable care' is not defined but the Explanatory Memorandum to the Taxation Law Amendment (Self Assessment) Bill 1992 (Cth), which introduced the section into the ITAA 1936, states that: "The effort required is one commensurate with all the taxpayer's circumstances, including the taxpayer's knowledge, education, experience and skill." In a decision of this tribunal, reported as
  AAT Case 10,211 (1995) 30 ATR 1342;
  Case 34/95 95 ATC 319, the tribunal stated (at ATR 1347; ATC 324):

  "Given that the taxpayer's return was prepared by experienced tax agents, who objectively should have known, or at the very least, had the resources to find out, the requirements in respect of the deduction of superannuation contributions … it is difficult to find that reasonable care has been experienced.

  …" '^[116] Re Arnett and Federal Commissioner of Taxation 98 ATC 2137 ; (1998) 39 ATR 1095 at 1098

• 59. The Explanatory Memorandum accompanying the TA Amendment Act contained no suggestion that the taxpayer's individual circumstances are relevant. In
  Weyers & Anor v Commissioner of Taxation,^[117] (2006) 63 ATR 268 ; [2006] ATC 4523 ; [2006] FCA 818 Dowsett J referred to the conduct 'expected of a reasonable person in the circumstances' but there is no express suggestion in his judgment that regard may be had to matters such as the knowledge, education, experience and skill of the taxpayer. Indeed, his Honour expressly referred to the 'reasonable lay person' and, in its context, I understand that to be a reference to a reasonable person without the benefit of relevant expertise in taxation law. He said that the reasonable lay person would not have been satisfied by a particular explanation and would have asked further questions as to why his or her money was not being recorded as that but as a loan and, if it was a loan, why it was not to be repaid. It is in the passage regarding Mrs Weyers that there may be some suggestion that a taxpayer's individual circumstances may be relevant in determining what amounts to reasonable care. Dowsett J said:

  'It is tempting to exonerate Mrs Weyers from these criticisms on the grounds of her assumed lack of business experience and reliance on her husband. However it would be anachronistic to assume that a female taxpayer's duty in connection with the revenue is somehow of a lower order than that of a male taxpayer. Indeed, if her experience is less, her duty to inquire may be greater.'^[118] (2006) 63 ATR 268 ; [2006] ATC 4523 ; [2006] FCA 818 at 307; 4,557; [159]

• 60. Any suggestion that may be implied from this passage is dispelled by his following reference to the passage I have already set out i.e. '… For the purposes of s 226G it is necessary to identify conduct falling short of that expected of a reasonable person in the circumstances. …'.^[119] (2006) 63 ATR 268 ; [2006] ATC 4523 ; [2006] FCA 818 at 307; 4,557; [160] The focus is clearly upon the reasonable person in the circumstances of the taxpayer but not upon a reasonable person who has the personal attributes of the taxpayer and finds him or herself in the taxpayer's particular circumstances. That is a different test and not that which is set out in item 3 of s 284-90 of the TA Act. It is a subjective test whereas it seems to me that item 3 of s 284-90 is setting an objective test.

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  ATC 3046

  61. In coming to this conclusion, I have had regard to the understanding of 'reasonable care' in the context of the law of negligence. As Kitto J said in
  McHale v Watson, although in the context of a child's duty of care:^[120] (1966) 115 CLR 199

  'The principle is of course applicable to a child. The standard of care being objective, it is no answer for him, any more than it is for an adult, to say that the harm he caused was due to his being abnormally slow-witted, quick-tempered, absent-minded or inexperienced. But it does not follow that he cannot rely in his defence upon a limitation upon the capacity for foresight or prudence, not as being personal to himself, but as being characteristic of humanity at his stage of development and in that sense normal. By doing so he appeals to a standard of ordinariness, to an objective and not a subjective standard. …'^[121] (1966) 115 CLR 199 at 214 and see also Joslyn v Berryman (2003) 214 CLR 552 ; 77 ALJR 1233; 198 ALR 137

• 62. Having regard to the way in which the expression 'reasonable care' is ordinarily understood and its place in the TA Act, it seems to me that I should understand it to require me to consider whether Pallantium's conduct was that expected of a reasonable person in the circumstances in the sense I have understood it above. I should not attribute to that reasonable person any of the particular taxpayer's personal attributes such as his or her education, understanding of the law and outlook on life. It seems to me that this meaning accords with the scheme of the penalty provisions in the TA Act. There is a time and place for having regard to the personal attributes of the taxpayer and that comes when regard is had to the remission of any penalty that has otherwise been imposed."

112. I have already referred to the opportunities that Mr Willersdorf-Greene had to produce written evidence if he had it and to the paucity of evidence regarding his efforts to find that evidence in relation to the airfare, or part of an airfare, he claimed as a deduction. While those efforts relate to periods after he lodged his returns for each of the three financial years in question, they not only reveal that he did not produce appropriate written evidence but provide an insight into the minimal efforts he made to produce the written evidence in the first place.

113. I reach the same conclusion in relation to his other claims for deductions that have not been allowed on the basis he did not substantiate them. Not only were the claims not substantiated by written evidence when they were made in the relevant returns, I am not satisfied that Mr Willersdorf-Greene or his agent had a reasonable expectation that he would not need to substantiate them or that he had a good reason to expect to get written evidence of the expenses claimed within a reasonable time of lodging the returns.

114. In relation to all claims disallowed on the basis of Mr Willersdorf-Greene's failing to substantiate them, I find that a person exercising reasonable care would have had either the appropriate written evidence or, if not, one or other of the expectations to which I have referred. Mr Willersdorf-Greene has none and so I find that the shortfall amount associated with those claims disallowed on the basis of his failure to substantiate them resulted from his failure to take reasonable care to comply with a taxation law.

115. In so far as he claimed deductions for interest and expenses in respect of three loans rather than two, it is difficult to understand how he came to do so. The two loans related to his settlement with Tangalooma are clearly separate from the loan he had obtained for other purposes. I find that he did not exercise the care of a reasonable person in relation to that part of his claim relating to interest and expenses arising from the loan he had obtained for those other purposes. In claiming a deduction that he could not substantiate he failed to take reasonable care to comply with a taxation law.

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ATC 3047

Decision

116. The parties reached certain agreements between them as to certain claims for deduction and I am not aware of the precise amounts that the Commissioner has allowed. In view of that, I am unable to make a decision setting out precise figures. Instead:

• 1. regarding the objection decision of the respondent dated 10 July 2008 relating to the financial years ending 30 June 2005, 2006 and 2007, I:
  • (1) set aside the objection decision in so far as it relates to claims for deductions made by the applicant in respect of expenses relating to:
    • (a) home office expenses;
    • (b) internet and mobile and land line telephones;
    • (c) computer expenses; and
    • (d) bank and interest expenses associated with the loan or loans obtained by the applicant to meet his obligations under the guarantee to Tangalooma Nominees Pty Ltd;
  • (2) in respect of:
    • (a) items (a), (b) and (c), substitute a decision that the applicant's claims for deductions are allowed to the extent agreed upon between him and the Commissioner before or during the hearing of his application; and
    • (b) item (d), substitute a decision that, in so far as it has been substantiated as required by the Income Tax Assessment Act 1997, the applicant's claim for deduction is allowed in so far as it relates to interest and bank charges associated with the loan or loans obtained by the applicant to meet his obligations under the guarantee to Tangalooma Nominees Pty Ltd;
  • (3) otherwise affirm the objection decision; and
  • (4) adjourn further consideration of the substantiation of the bank and interest expenses associated with the loan or loans obtained by the applicant to meet his obligations under the guarantee to Tangalooma Nominees Pty Ltd if the parties are unable to reach an agreement regarding it; and
• 2. regarding the objection decision of the respondent dated 8 May 2008 relating to the imposition of penalties in respect of shortfall amounts resulting from various claims for deductions made by the applicant in the financial years ending 30 June 2005, 2006 and 2007:
  • (1) set aside the objection decision in so far as it relates to shortfall amounts previously found to relate to claims for deductions made by the applicant in respect of expenses relating to:
    • (a) home office expenses;
    • (b) internet and mobile and land line telephones;
    • (c) computer expenses; and
    • (d) bank and interest expenses associated with the loan or loans obtained by the applicant to meet his obligations under the guarantee to Tangalooma Nominees Pty Ltd;
  • (2) remit that part of the objection decision to the respondent to:
    • (a) recalculate the penalties on the basis that the shortfall amounts have been reduced in light of:
      • (i) the further deductions agreed upon between the parties; and
      • (ii) the decision allowing a deduction for bank and interest expenses associated with the loan or loans obtained by the applicant to meet his obligations under the guarantee to Tangalooma Nominees Pty Ltd; and
  • (3) otherwise affirm the objection decision.