• The impact of this case on ATO policy is discussed in Decision Impact Statement: Taxpayer and Commissioner of Taxation (Published 22 December 2011).

CASE 7/2011

Members:
BJ McCabe SM

Tribunal:
Administrative Appeals Tribunal, Brisbane

MEDIA NEUTRAL CITATION: [2011] AATA 359

Decision date: 27 May 2011

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Bernard J McCabe (Senior Member)

1. The taxpayer is a consultant horticulturist who provided expert advice through a company. The Tribunal has already decided that the income received by the company from the consulting business in the 2003, 2004 and 2005 years of income was to be treated as personal services income in the hands of the taxpayer pursuant to s 86-15 of the Income Tax Assessment Act 1997 (ITAA97): see
The Taxpayer and Commissioner of Taxation [2009] AATA 906. The assessments for the relevant years of income were remitted to the Commissioner pursuant to s 42D of the Administrative Appeals Tribunal Act 1975 so that the taxpayer could argue whether any losses or outgoings he incurred in the course of earning that personal services income could be deducted pursuant to s 86-20. The Commissioner substantially allowed some deductions but many others were disallowed. The taxpayer has returned to the Tribunal to contest those conclusions.

2. There were several false starts to the hearing of this matter because the documentary evidence was not in a satisfactory state. The taxpayer's agent provided a large volume of documents in support of the claims for a deduction but it took several attempts before they were appropriately martialled and presented. In the end, I relied on a spreadsheet prepared by the Commissioner's officers which was set out in Appendix D to his submissions. I have appended an electronic copy of the schedule to these reasons that sets out my decision in relation to each of the expenses that was claimed.

3. Some of the taxpayer's claims have been allowed. To that extent, the objection decision is set aside and the claims are allowed. But the decision in respect of the bulk of the claims has been affirmed. I decided (in
The Taxpayer and Commissioner of Taxation [2009] AATA 906) that a penalty is applicable to the amount of the shortfall at the rate of 50% on the basis that there has been recklessness. It remains for the Commissioner to assess the quantum of penalty.

Background facts

4. I have already explained that the taxpayer is a consultant horticulturist. He provides advice to businesses that cultivate different kinds of commercial forest plantations. He lives in Brisbane but his family company operates a rural property near Rosebank in New South Wales. There is some residential accommodation on the property that houses an office. The taxpayer stays in the accommodation occasionally when he is visiting the farm - in connection with his work, he says. The property includes a macadamia nut plantation that generates a crop for sale each year. There are also a number of trees that the taxpayer says he grows on an experimental basis. He explained that the property was, in effect, a laboratory in which he could test his ideas. Those tests and the experience he obtained were required for the purposes of his consulting business. The expenses he incurred in conducting the tests and maintaining his "laboratory" were therefore deductible against the personal service income he derived, he argued.

5. The Commissioner accepts the taxpayer may have incurred some expenses in connection with the farming operation that are properly deductible against personal services income, but the Commissioner says many of the claims are:

• (a) unrelated to the taxpayer's personal services business, or related only in part so that they should be apportioned; or
• (b) inadequately substantiated.

6. In those instances where a share of an expense might be claimable against personal services income, the Commissioner argues it is incumbent on the taxpayer to suggest a defensible basis for apportionment. When invited to do so, the taxpayer's representative, Mr O'Brien, insisted that all (or substantially all) of each expense claimed should be attributed to the personal services business and therefore claimed against the personal services income. He did so on the basis that the bulk of the income derived in connection with the farm was derived through the personal services business: only a relatively small amount was derived by the farm owner from the sale of the macadamia crop. Mr O'Brien appeared to waver at one point during the hearing when he suggested a 50:50 apportionment might be an alternative, but that split was essentially an arbitrary one without any foundation in the evidence. He quickly reverted to a dogmatic view and refused to countenance a more conservative approach that would result in a different portion of the expenses associated with maintaining the farm being claimed against the personal services income. In his view, the claim was "all or nothing".

7. The Commissioner relies on s 14ZZK of the Taxation Administration Act 1953 to argue that the taxpayer cannot succeed unless he demonstrates the assessment is wrong and that an alternative figure or approach is preferable. On this analysis, the Commissioner says the taxpayer's "all or nothing" approach must result in the objection decision being affirmed if I am not satisfied that all or substantially all of an expense should be attributed to the taxpayer's personal services income.

8. I agree that I must affirm the objection decision in relation to each expense unless I can point to evidence that would enable me to conclude that apportionment on a different but identified basis is appropriate. In other words, it is not enough that I have the uncomfortable sense - or even a fixed view - that the Commissioner is wrong. I must be able to settle on the right answer. That is hard to do when the taxpayer declines to assist in the identification of alternatives that are open to me.

9. The taxpayer's approach at the hearing was unfortunate. The taxpayer is not entitled to claim all of the costs associated with holding and maintaining the rural property given that (a) it is plainly held by the family company for a variety of purposes apart from the consulting business (eg, producing a macadamia crop), and (b) the "test crop" of trees grown in connection with the consulting business covers less than an acre of a 70 acre property. But I was not provided with an evidentiary basis for apportioning the expenditure in a different way. Where an expense might be deductible in part if it were apportioned, I have noted:

"The objection decision is affirmed in relation to this claim because there is not enough evidence to establish that the entire amount of this expenditure was incurred in connection with gaining or producing personal services income."

10. That note has been made in relation to:

• • holding and operating costs associated with owning a property that is used for a number of purposes. Those expenses include rates, interest, insurance and electricity;
• • the costs associated with acquiring and operating farm machinery and vehicles that are used for a number of purposes, including fuel and maintenance, registration and insurance;
• • the cost of farming and office supplies used in the course of the overall farming operation, including fertilisers and hardware;
• • the cost of labour used on the farming operation;
• • the cost of clothing which might be worn on the farm;
• • the cost of telephone and internet access to the property and other services that might be used for a number of purposes;
• • labour costs incurred for work done on the property.

11. Some of the claims for deductions are startling. I note, for example, that claims have been made in respect of expenses incurred at liquor stores and flower shops. It was unclear how those expenses related to the taxpayer's personal services income. Other claims were startling on their face but some attempt was made to demonstrate how they related to the taxpayer's business. For example, the taxpayer claimed a deduction in respect of his Foxtel subscription because he claimed he needed access to the Weather Channel, although it is unclear whether he also watched the television for recreational purposes.

12. I should also say something about the substantiation requirements. I take a common sense view of what is required. Where the taxpayer claims a loss or outgoing is deductible, it is incumbent on him to provide evidence establishing that the expenditure (a) was actually incurred, and (b) it had the requisite connection with gaining or producing the personal services income. If it is unclear why a particular expenditure occurred, it is not allowable. Sadly, the taxpayer has failed to meet that challenge in respect of many of the expenses he has claimed. In those cases where it is unclear why a particular outgoing should be deductible, I have remarked:

"The objection decision is affirmed in relation to this claim because there is not enough evidence to establish that this expenditure was incurred in connection with gaining or producing personal services income."

13. The respondent has conceded that a number of expenses are deductible. It follows that the objection decision must be set aside insofar as it relates to those expenses. I have indicated in the schedule below where the decision has been set aside, and the decision that is to be made in substitution in each case. The decision is otherwise affirmed.

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