WATERS v FC of TJudges:
C Walsh SM
Administrative Appeals Tribunal, Perth
MEDIA NEUTRAL CITATION:
 AATA 846
C Walsh, Senior Member
1. Mr Waters normally lives in Perth, Western Australia with his wife and two sons. However, since November 2009 Mr Waters and his wife have been living in Panama while he works for United Kingdom company, Malcolm Dunstan Associates, on the construction of a hydroelectric dam located in a remote area near the city of Changuinola. That project is expected to take approximately 20 months. Mr Waters' two sons have remained living in his Perth home since he and his wife moved to Panama.
2. Before commencing work in Panama, Mr Waters applied to the Commissioner for a private binding ruling on his residency status for Australian tax purposes for the income tax years ending 30 June 2010 and 30 June 2011. The Commissioner found that Mr Waters was a resident for Australian tax purposes in respect of those income years. Mr Waters did not object to that ruling.
3. Mr Waters subsequently applied to the Commissioner for a private binding ruling on his entitlement under Australian tax law to deductions for certain expenditure incurred by him in relation to living and working in Panama in the income tax years ending 30 June 2010 and 30 June 2011.
4. The Commissioner subsequently issued Mr Waters with a private binding ruling which included the following answers to the following questions:
- "1. Are you entitled to a deduction for the expenses you incur in respect of you and your spouse's travel between Australian and Panama, including air fares, passport, certificates, travel insurance and visas?
- 2. Are you entitled to a deduction for the expenses you incur in respect of your son's travel between Australia and Panama when visiting you?
- 3. Are you entitled to a deduction for the expenses you incur in respect of your recreational travel within Panama?
- 4. Are you entitled to a deduction for the expenses you incur in respect of your household items purchased for your private use while in Panama?
- 5. Are you entitled to a deduction as your spouse is not allowed to work in Panama?
5. Mr Waters lodged an objection, on 17 May 2010, against the private ruling, disputing the answers given by the Commissioner to questions 1, 2 and 4 above. Mr Waters' objection was disallowed by the Commissioner on 1 June 2010 and he now seeks a review of the Commissioner's objection decision by this Tribunal.
Deductions under s 8-1
6. It is clear from Mr Waters' objection and his application for review that he considers that because the Commissioner found him to be a resident for Australian tax purposes, and therefore subject on Australian tax on his worldwide income (including any income he earns in Panama), he should be entitled to deductions for the expenses claimed in order to, as he puts it, bring him back to a "level playing field". Mr Waters stated "If I am fully subject to an Australian taxation liability, then surely my situation must be compared to my life as if I were living and working in Australia". That approach is, in Mr Waters' opinion, the only reasonable and sensible one and, in his view, is well within the meaning and intent of the law. Mr Waters also claimed that the law was being applied "too literally" for his particular situation in Panama.
7. Mr Waters also contended that the Commissioner had placed an obscure emphasis on the word "private" whereas all of the costs he claimed were incurred as direct result of his employment in Panama and were not costs that he would have incurred if he lived and worked in Australia. That is, in Mr Waters' opinion, the costs concerned were costs necessarily incurred in gaining or producing assessable income. He considers that he was "getting 'jipped' all around" and that the "whole situation is grossly inequitable".
8. The deductions Mr Waters has claimed in relation to living and working in Panama can only be allowed in Australia if they fall within the general deduction provision in s 8-1 of the Income Tax Assessment Act 1997 (Cth) (the Act). The first limb of that section, which is relevant to Mr Waters, allows a deduction for a loss or outgoing to the extent that it is incurred in gaining or producing assessable income: s 8-1(1)(a) of the Act.
9. The construction of s 8-1(1)(a) of the Act necessitates that some link or nexus be established between the loss or outgoing incurred and the production of assessable income. The courts have interpreted s 8-1 such that in order to be deductible, a loss or outgoing must be incurred "in the course of" gaining and producing assessable income. This test has been developed by the courts, in a long line of cases, as requiring that the loss or outgoing: (i) be "incidental and relevant" to the taxpayer earning assessable income (
Amalgamated Zinc (De Bavay's) Ltd v Federal Commissioner of Taxation (1935) 54 CLR 295;
W Nevill & Co Ltd v Commissioner of Taxation (1937) 56 CLR 290;
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47;
Charles Moore & Co (WA) Pty Ltd v Federal Commissioner of Taxation (1956) 95 CLR 344); and (ii) possess the "essential character" of an income producing expense (Charles Moore;
Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478).
10. Expenses incurred by an employee in seeking, obtaining or changing a job are generally not deductible under s 8-1 of the Act for the reason that the expenses are incurred at a point in time too early to be regarded as being incurred "in the course of" gaining or producing assessable income.
11. In the leading case
Federal Commissioner of Taxation v Maddalena (1971) 71 ATC 4161, Mr Maddalena, who earned his living as an employee electrician as well as a professional footballer, claimed deductions for travel and legal expenses he incurred in seeking and obtaining a contract with another Rugby League club. Mr Maddalena incurred travelling expenses attending interviews with officials of various clubs and incurred legal expenses by engaging a solicitor to negotiate and settle his employment contract with the new club. In finding that the expenditure claimed by Mr Maddalena was not deductible under s 51(1) of the Income Tax Assessment Act 1936 (Cth) (the 1936 Act) (s 51(1) of the 1936 Act being the predecessor to s 8-1 of the Act), Menzies J, who delivered the principal judgment, stated (at p4163):
"It is, I think, worthwhile looking at the taxpayer's earnings as an electrician to illustrate what I regard as the decisive difference to be observed here. Had the taxpayer claimed as a deduction the expenses of changing from one job to another job as an employee electrician his outlay would not have been an allowable 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......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.
What I have said about the taxpayer as an electrician, is, I think, equally applicable to him as a professional footballer, and moneys spent to obtain a new employment are not allowable deductions for income tax purposes under s 51." (See also Taxation Ruling TR 2000/5)
12. In Lunney, the Full High Court held (at (1981) 100 CLR 478 at pp488-489) that deductibility under s 51(1) of the 1936 Act (now s 8-1 of the Act) depend on the "essential character" of the expenditure itself, rather than either the purpose of the expenditure or the fact that, had the expenditure not been incurred, the income could not have been derived. The Full High Court also laid down the principle that, for a deduction to be allowable, it is not enough for the expenditure to be an essential prerequisite to the derivation of assessable income. In their joint judgment, Williams, Kitto and Taylor JJ relevantly held (at p499):
"....to say that expenditure on fares is a prerequisite to the earning of a taxpayer's income is not to say that such expenditure is incurred in or in the course of gaining or producing his income. Whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred by an employee or a person pursuing a professional practice will not even begin to engage in those activities from which their respective incomes are derived."
13. Section 8-1(2)(b) of the Act (the second negative limb of s 8-1) denies a deduction for a loss or outgoing that is of a "private or domestic nature". What constitutes "private" or "domestic" expenses is not defined in the Act. However, under ordinary concepts, expenditure that is "private" in nature is generally considered to relate to the taxpayer in his or her personal or private capacity and expenditure that is "domestic" in nature is ordinarily associated with the taxpayer's household or other domestic affairs.
14. Private or domestic expenses are generally not deductible under s 8-1(1) in any event, since they are not normally "incidental and relevant" to earning assessable income and their "essential character" (being to live, rather than to generate assessable income) logically severs them from any income-producing activity:
Federal Commissioner of Taxation v Hatchett (1971) 125 CLR 494, per Menzies J (at p498). That is, expenditure which is "essentially" of a private or domestic nature will not generally be deductible under s 8-1(1) as it will not have been incurred by a taxpayer "in the course of" gaining or producing assessable income, even though the taxpayer may, as a matter of practicality, need to incur the expenditure to earn assessable income. For example, in
Lodge v Federal Commissioner of Taxation (1972) 128 CLR 171,
Martin v Federal Commissioner of Taxation (1984) 2 FCR 260 and
Jayatilake v Federal Commissioner of Taxation (1991) 91 ATC 4516, child minding expenses incurred to enable the respective taxpayers to engage in work were held not to be deductible on the basis that they were "private" in nature: see also
Fullerton v Federal Commissioner of Taxation (1991) 91 ATC 4983.
Is Mr Waters entitled to a deduction for expenditure incurred on his and his wife's travel from Australia to Panama, including: (i) airfares, (2) visas etc and (3) travel insurance?
15. In his application for review, Mr Waters asserted that the costs he incurred on airfares for him and his wife to travel from Australia to Panama were outgoings incurred to "place [him] in a position to derive assessable income".
16. Mr Waters further submitted that:
"The cost of airfares for myself and my wife are significantly greater than the annual costs of travelling down the freeway each morning to a workplace and the circumstances and costs are obviously markedly different.
........under normal circumstances, the company pays for the cost of airfares but in this instance, I am required to pay for all travel between Australia and Panama (although all internal business flights are paid for by the company). Many Australians, such as those working in the mining industry, work on a fly-in, fly-out basis and the cost of airfares are born[e] by the companies. Is the cost of those airfares added to the assessable income of those workers, yet they live a great deal of time in their own homes? I have left my home in Australia on a semi-permanent basis. Are the costs associated with business travel, born[e] by the companies, added to the income of the taxpayers undergoing such travel?"
17. In his objection, Mr Waters maintained that whilst travelling between Australia and Panama, "the time is considered the company's time and that he is effectively at work" and that his annual leave starts when he lands in Australia, not before.
18. The Tribunal considers that the expenditure Mr Waters incurred on airfares for him and his wife to travel from Australia to Panama is not deductible under s 8-1(1)(a) of the Act. It is not enough for s 8-1 purposes that Mr Waters' expenditure on the airfares was a prerequisite to him earning income in Panama or, as he put it, to "place [him] in a position to derive assessable income.": Lunney applied. The fact is that the expenditure on the airfares was incurred by Mr Waters at point in time too which is too early to be regarded as being incurred by him "in the course of" gaining or producing assessable income: Maddalena applied.
19. Mr Waters' situation cannot be properly compared, as he has, to someone working in the mining industry on a fly-in fly-out basis, where the costs of the associated airfares are borne by the employer company. The evidence before the Tribunal was that under his contractual arrangements with his employer, Malcolm Dunstan Associates, Mr Waters was required to cover the cost of his airfares from Australia to Panama and not his employer. In those circumstances, whilst it may be said that Mr Waters, as a matter of practicality, must necessarily incur expenditure on airfares in order to travel to Panama to earn income, that expenditure has not been incurred by him "in the course of" gaining or producing assessable income and is therefore not deductible under s 8-1 of the Act.
(2) Visas etc.
20. Before leaving Australia for Panama, Mr Waters was required to arrange a work visa. This involved him:
- • obtaining a medical certificate for himself and his wife;
- • having various documents (e.g. passports) certified by the Panamanian Consul in Sydney;
- • having identification photographs taken and sent with those documents; and
- • obtaining national (Australian) police clearance certificates.
21. In his application for review, Mr Waters asserted that arranging visas and incurring the associated expenditure was something which was required by the Panamanian Government. He submitted that that expenditure was not necessary for private or domestic reasons but, rather, was necessarily incurred to gain or produce assessable income. Mr Waters further contended that those costs related directly to obtaining permission to work in a foreign country and that any:
"reasonable or sensible analysis of the situation must surely conclude that these costs should be tax deductible. Also, these costs are not 'generally private in nature' as stated in the original Private Ruling. If I did not work in Panama, I would have no need for these documents and these are not documents that I do not need if I wanted to travel to Panama on a private holiday."
22. The costs incurred by Mr Waters on arranging visas, including obtaining medical certificates, passport photographs and certification and police clearances are costs which were clearly necessary to the commencement of his work for Malcolm Dunstan Associates in Panama. Unfortunately, that is an insufficient nexus for the purpose of s 8-1 of the Act. To be deductible, the expenditure must have been incurred by Mr Waters "in the course of" earning income from his work on the construction of the dam. Clearly, that expenditure was incurred at a point in time which is too soon to be so regarded: Maddalena and Lunney applied. The fact that Mr Waters would not have needed the visas and associated documents if he did not work in Panama or if he were to travel to Panama on a holiday is irrelevant for s 8-1 purposes.
(3) Travel insurance
23. In his application for review, Mr Waters submitted that he obtained travel insurance for no other reason than to obtain medical insurance. That is, he claimed that his expenditure on travel (including medical) insurance was necessary in the event that he or his wife became critically ill and had to be evacuated to the United States, where medical expenses are notoriously high.
24. Further, Mr Waters contended that "Australian Medicare and my private health insurance are not applicable outside Australia so to have no insurance would leave me exposed to significant (and perhaps extremely prohibitive) financial outlays. Accordingly, it only makes sense to maintain insurance; it is not primarily for travel purposes but to provide medical insurance cover. This is not cover I require if I were living in Australia and it is an 'outgoing' incurred simply for no other reason than working in Panama; it is a necessary outgoing incurred for the purpose of gaining or producing assessable income in a foreign country"
25. Mr Waters' expenditure on travel (including medical) insurance before the commencement of his work in Panama cannot be regarded as an outgoing incurred by him "in the course of" gaining and producing assessable income and is therefore outside the scope of s 8-1(1)(a) of the Act. Such expenditure is otherwise not deductible under s 8-1(2)(b) of the Act since it represents a loss or outgoing of a "private or domestic" nature as it relates to the health and well-being of Mr Waters and his wife. The fact that Mr Waters would not have incurred expenditure on travel insurance had he not accepted the job in Panama is irrelevant to determining the deductibility of that cost under s 8-1 of the Act.: Lodge, Martin and Jayatilake applied. See also
Case T78 (1986) 86 ATC 1094 wherein the Tribunal held that the cost of travel insurance is private in nature, as the policy generally covers illness, loss of baggage, and theft or damage to belongings, which are expenses that are private or domestic in nature.
Is Mr Waters entitled to a deduction for expenditure incurred on his son's travel between Australia and Panama to visit him and his wife?
26. In his objection and application for review, Mr Waters stated that since he fully incurred Australian taxation liabilities, his situation must be compared directly with his circumstances in Australia or, if not, to a "reasonable facsimile of living and working within Australia". He noted that his two sons previously lived with him and his wife in their home in Australia. Therefore, ".... if we are to consider a 'level playing field', then surely such expenses must be tax deductible or, if not, the difference in cost between travelling within Australia and travelling to Panama (which is obviously considerably more)".
27. The expenses Mr Waters incurred to enable his son(s) travel from Australia to Panama to visit him and his wife is not deductible under s 8-1(1) of the Act for the reason that they do not represent expenses incurred by Mr Waters "in the course of" gaining or producing assessable income in Panama. There is no nexus between Mr Waters' expenditure on airfares etc for his son(s) and the production of assessable income by him and as such the expenditure is outside the scope of s 8-1(1)(a) of the Act: Amalgamated Zinc, W Nevill, Ronpibon, Charles Moore and Lunney applied. That expenditure is otherwise not deductible under s 8-1(2)(b) of the Act as it constitutes expenditure of a "private or domestic" nature as it relates to his personal family affairs: Lodge, Martin and Jayatilake applied. If Mr Waters was living and working in Australia and he incurred expenditure on airfares etc on his son(s) that expenditure would not be deductible under s 8-1 of the Act for the same reasons.
Is Mr Waters entitled to a deduction for expenditure incurred on household items for his use in Panama?
28. In order to live and work in Panama, Mr Waters acquired various household items, including a television, a microwave and a number of other household goods. Mr Waters asserted that since his home in Perth already contained such items, the only reason for his expenditure on similar goods was for the purpose of "maintaining some semblance of a similar life in Panama as I enjoy in Australia" and that they should therefore be tax deductible.
29. Mr Waters further contended that "These additional items only bring me back to a 'level playing field'.....I only needed these items because I moved to Panama for work purposes...In the normal course of events, I would not have purchased such items at this time....they were essentially outgoings needed to the extent of gaining and producing assessable income".
30. Mr Waters expenditure on household items (e.g. television, microwave etc) for his and his wife's use in Panama do not constitute expenses incurred by Mr Waters "in the course of" gaining or producing assessable income in Panama and consequently they cannot be deducted under s 8-1 of the Act. There is no connection between Mr Waters' expenditure those household items and the production of assessable income by him and as such the expenditure does not fall within s 8-1(1)(a) of the Act: Amalgamated Zinc, W Nevill, Ronpibon, Charles Moore and Lunney applied. Mr Waters' expenditure on the household items is otherwise not deductible under s 8-1(2)(b) of the Act as it constitutes expenditure of a "private or domestic" nature: Lodge, Martin and Jayatilake applied. It is irrelevant, for s 8-1 purposes, that Mr Waters' home in Perth already contains such items and that he would not have incurred expenditure on such items if he had not gone to work in Panama.
Is Mr Waters entitled to a deduction for his Panama expenses as a consequence of living in remote region?
31. In his request for a private ruling, Mr Waters queried whether there was any scope for a tax deduction for the expenses he incurred in relation to living and working in Panama because he was living in a very poor and remote part of Panama. In his private ruling the Commissioner responded to that query by stating that whilst "it is acknowledged that you may be in a very poor and remote region.... unfortunately these conditions do not affect deductibility."
32. In his application for review, Mr Waters noted that issue was not addressed by the Commissioner in his objection decision and that he would like clarification on that issue by this Tribunal.
33. Unfortunately, the fact that Mr Waters has been living and working in a very poor and remote part of Panama has no bearing on questions of deductibility under s 8-1 of the Act. The tests for whether a particular expense is deductible under s 8-1 of the Act have been detailed above.