• The impact of this case on ATO policy is discussed in Decision Impact Statement: Applicant and Commissioner of Taxation (Published 5 September 2012).

CASE 3/2012

Members:
G Ettinger SM

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2012] AATA 174

Decision date: 21 March 2012

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G Ettinger (Senior Member)

Summary

1. The Applicant owns various rental properties in regional areas of New South Wales. In the 2007 financial year the Applicant originally claimed a deduction for interest deductions of $4,170 and other rental deductions of $2,500, a total of $6,670. Subsequently, the Applicant made a request for the rental expenses to be increased by an additional $5,208.47. She seeks review of the decision of the Commissioner of Taxation (the Commissioner) to disallow various deductions which she has claimed in relation to a particular rental property for the financial year 2007 in regard to the additional $5,208.47. The Commissioner held that the Applicant did not earn income from the rental property which I shall call ANSW, and that ANSW was not available for rental at the relevant time. I noted that it has now been vacant for five years, and that the Applicant has not substantiated many of her claims adequately.

2. The Applicant was self represented, the Commissioner represented by Ms A Rogers of the Legal Services Branch, ATO.

3. My findings are that the decision under review is to be varied. My reasons follow.

The issues in dispute

4. The issues in dispute before me were:

• • Whether the property at ANSW was available for rent in the financial year 2007;
• • If it was available for rent, whether the Applicant incurred rental expenses of $11,878.47 or $11,936.41 (T12-72) or a similar figure, and whether the Applicant is entitled to claim rental expenses in excess of $6,670.

Legislation

5. The relevant legislation in this matter is the Income Tax Assessment Act 1997 (ITAA), in particular section 8-1(1) which follows:

"(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."

Background

6. The Applicant owns a number of properties, and, over the years, has made claims for tax deductions in regard to their maintenance. The properties appear to generally be in regional areas, and in need of renovation. She described ANSW as derelict when she purchased it, and said that although it may have been worth $68,000, she purchased it for $20,000 in 2002 using three credit cards, because she could not obtain a loan. She described it as uninhabitable until she had installed a new roof, a new hot water system, and had made other major repairs. The Applicant says that she did not claim tax deductions for those capital items.

7. The Applicant also said that when she was purchasing ANSW, she thought she was buying two lots, but ended up with only Lot 9, which is ANSW. However, she does own two other vacant blocks, Lot 7 and Lot 8, on which horses and cows are agisted. The Applicant claims she does not receive income from that activity, and that no maintenance is required on those vacant blocks. She complained that the only tenant she has had on Lot 9, also agisted cows and horses, but without her permission. She claims that that activity caused damage to the property.

8. The Applicant submitted that the Commissioner had accepted her returns without question for the years 2008, 2009 and 2010, whereas Ms Rogers submitted that with self assessment, claims were accepted unless, and until, audited.

9. The Commissioner disallowed the Applicant's additional claims for deduction in connection with the rental of the property ANSW for 2007 on the basis he was not satisfied that there was a nexus between the expenses the Applicant claimed she had incurred, and any income producing activity. He also found that the Applicant did not earn income from the property in the relevant year, as the $450 declared as rental was a refund of the rental bond from the tenants who left in March 2006. Accordingly the Commissioner held that the expenses as claimed were not incurred in the course of gaining or producing the Applicant's assessable income, (section 8-1 of the ITAA). Further, the Commissioner was not satisfied the property was available for rent in the financial year 2007, or that expenses claimed as deductions had been substantiated to his satisfaction.

10. The Applicant acknowledged when giving her evidence, that her record keeping had not been as meticulous as it could have been, and indicated that she now has spreadsheets and a better system.

11. I noted that there had been correspondence between the Applicant and the Commissioner in regard to the 2007 tax year, and an extension of time granted by him, to lodge an objection in regard to the income tax assessment for the year ended 30 June 2007.

Whether the property at ANSW was available for rent in the financial year 2007

12. The Applicant argued that she had done repairs and maintenance to the property following the departure of the tenants in March 2006. She first claimed that her outgoings in relation to renting the property, were $11,936.41, which she said she reduced by the $450 obtained from the rental bond (in order to do repairs).

13. The Applicant gave evidence of her efforts to relet the property after the departure of the tenants in March 2006. She said that she advertised in several newspapers, (invoices to support advertising in a local newspaper and in the Trading Post were in the T-documents at T12), but that the most effective way was word of mouth.

14. The Applicant said that because of the location of property which was in a place with only a few other houses, and no longer a township or village, estate agents did not want to take on the leasing. She said that she rejected the only prospective tenants back in April 2007, because she had it on good authority that they were undesirable. The Applicant also explained that the internet was nowadays a more effective way of advertising than in newspapers or through agents. I am mindful that the total expenditure on advertising the property was somewhere between $102.20 as calculated by the Respondent, or $139.25, or indeed $167.75 as calculated by the Applicant. Either way that is not very much for the period involved, particularly as there had been little or no response.

15. The Applicant gave evidence and provided receipts for electricity consumption and telephone records as part of the substantiation of her claims for tax deductions. However, the Commissioner, in analysing those accounts, submitted that they pointed to evidence of intermittent occupancy of the property.

16. Ms Rogers submitted that on the basis of the evidence before the Commissioner, the property at ANSW was not available for rent in the 2007 year. I am mindful that it was not in dispute that the property has not been tenanted for the last five years.

17. In her written submissions Ms Rogers referred to
Case R118 84 ATC 773 in which the Board of Review stated at 775:

"The taxpayer's representative emphasised the house was available for letting at any time and that the taxpayer has at no time refused a tenant because of her own occupation of it. There is, however, a significant distinction in purpose between investing in a house that one is prepared to let and investing in a house for letting."

18. Ms Rogers also referred in her written submissions to the case of
Re Inglis and Federal Commissioner of Taxation 87 ATC 2037 , where the taxpayer sought review of the Commissioner's disallowance of expenditure in relation to a beach property. The Commissioner had held that the property was not available for rent. He held that the major part of the outgoings were not for the production of income, but for a private purpose as the house was not let for periods adequate to support the claims made. The AAT had affirmed the decision of the Commissioner.

19. Returning to the case before me; I am satisfied from the evidence that the Applicant purchased ANSW for purposes of letting, and gaining income from it. She told me that it was derelict when she purchased it, and that she made improvements, and that she had had tenants for 18 months until March 2006. Inglis can be distinguished on the facts. I am satisfied that when the Applicant's subjective purpose such as is discussed in
Fletcher v Federal Commissioner of Taxation 91 ATC 4950; (1991) 173 CLR 1, is considered, the Applicant can be found to have the intention of producing assessable income from the property ANSW.

20. I am mindful that the Commissioner, in analysing the Applicant's electricity and telephone accounts, submitted that they pointed to evidence of intermittent occupancy of the property. The evidence before me indicated that that useage coincided with periods where the Applicant claims she and her son were at the property carrying out maintenance such as cutting grass and doing repairs. I accepted that. However, I have noted that the electricity accounts were for another of the Applicant's properties, and that the telephone accounts obtained under summons showed joint billing for the Applicant's home number as well as for the number at ANSW, and I deal with that below.

21. I am mindful of the Applicant's evidence and the submissions of both parties. I am prepared to find from the evidence that although the efforts to find suitable tenants did not appear to have been vigorous, the location of the property is likely to have been a factor. I am satisfied that the property was available for rent in the financial year 2007. Accordingly, I allow the figure of $102.20 for advertising the property as a deduction.

22. The Applicant told me at the hearing that she has recently negotiated with an authority which is making improvements to the railway line in the vicinity of the house, and that its workers may be renting the house in the near future. Although it has taken some five years to lease the house, (provided the railways workers take it), that somewhat vindicates her submissions that word of mouth is more effective given the location of ANSW.

Consideration of the deductions claimed by the Applicant

23. As I am prepared to accept that the house at ANSW was available for rent at the relevant time, I moved to consider the deductions claimed by the Applicant, noting that the only income from the house for the relevant period, was $450 (from the rental bond of the previous tenants). According to the Applicant's letter dated 14 March 2006 to the Department of Fair Trading requesting bond moneys, (Exhibit A4), there were numerous problems following the tenancy. According to her letter at Exhibit A4, $432 was to be spent on replacement of an insect screen door, replacement of a damaged laundry door, and repair/repainting in a bedroom and the kitchen.

24. I have considered all the documents produced by the Applicant in substantiation of her claims for deductions in regard to the house at ANSW, and in particular the Applicant's schedule at T12-72, and the Respondent's schedule at Exhibit R2. Unfortunately, as the Applicant admits, the records have not been in good order, and are not easy to decipher.

25. The most contentious items were the amounts claimed for inspections, $500 on each of two occasions, and the interest payments.

Inspection costs

26. The Applicant claimed that during the relevant period, she and her son had attended the property and stayed there a few days in December 2006, February 2007, and April 2007. She said she was claiming $500 a time for two of the three occasions. The $500 was a conservative figure for the time spent, she submitted, mowing, disposing of trees which had fallen down, and for the repairs done during those periods.

27. The Applicant was asked by Ms Rogers about an invoice for lawn mowing by a Mr Thompson, for the amount of $100 in December 2006. Her reply was that he was not a relative, and that he did not do a satisfactory job. The Applicant and her son accordingly did the work themselves, she said. I accepted that explanation, but that of course does not amount to expenditure of $1,000.

28. Ms Rogers also suggested to the Applicant that the maintenance may have been for the adjoining lots, 7 and 8, which she also owns. The Applicant denied that stating that cattle and horses were agisted on Lots 7 and 8, and that they did not require any maintenance.

29. Ultimately the Applicant was unable to substantiate the outgoings as claimed which were $1,000, being $500 a time for two of the three inspection periods. For my part, I cannot accept a general estimate of the worth of the inspections. I allow the sum of $100 for lawn mowing.

Interest payments

30. The most difficult figure and largest amount to discern was the claim for interest payment of $7,800. In considering the additional claim, I am mindful that the Respondent had already accepted interest deductions in the 2007 tax return to the value of $4,170. Ms Rogers helpfully provided a folder with documents, certain of which were tendered. At Tab 4, were documents from summons issued to AMS Mortgage Services Pty Ltd, a company owned by the GE group of companies. GE Capital Finance Australia informed the Tribunal that the loans relating to AMS Mortgage Services were sold to Pepper Australia Pty Ltd, (Pepper). The documents tendered, (pages 6, 20, and 26, Exhibit R4), were on Pepper letterhead.

• • Page 6 related to 2004; the Applicant told me that the $15,000 drawdown in 2004 from the line of credit of $50,000, was for work carried out before a tenant was found. I am satisfied it was outside the relevant period, and cannot be considered.
• • Page 20 related to a drawdown of $30,000 in December 2005, also before the relevant period. I find similarly.
• • Page 26 related to a drawdown of $3,000 on 5 June 2006, also before the relevant period. I find similarly.

31. It was also not clear from the documentation to which of the Applicant's properties the drawdowns and interest payments related.

32. Exhibit R5 was a document from Wizard Mortgage Corporation Ltd, which when read with document Exhibit A3, appears to have been dated mid-2003. The purpose of the loan given at Exhibit R5 was to refinance a home loan, $178,000 secured over the Applicant's residence, and provide the line of credit of $50,000 as mentioned above. That stated it was intended for future investment use and make available $5,000 to assist with renovations to existing investment property … (ANSW) … and provide remainder of funds to assist with renovations to roof of home property.

33. The Applicant conceded that the document which referred to renovations to roof of home property referred to her own residence, and not ANSW, but submitted that the document was incorrectly annotated. Unfortunately, I could not accept this explanation, and preferred what was written in the contemporaneous documents.

34. In summary I am unable to be satisfied to the requisite standard that the Applicant has discharged her duty in regard to the payment of all the interest she has claimed. I refer back to the Commissioner's finding regarding deductions for interest, being $4,170, and agree with it.

Telephone

35. The Applicant gave evidence that she maintained a telephone line continuously at ANSW. Ms Rogers provided a summary of the number of telephone calls made for periods in December 2006, January/February 2007, and April 2007 which appear to me to coincide with the times the Applicant says she was at the property with her son, carrying out maintenance. Unfortunately, the billing is for two telephone numbers, one of which is the Applicant's home number. I understand that given the remote site of the property, the connection was necessary in 2007, and that the calls made at ANSW are more likely than not to have been associated with genuine attempts to keep the property in order, and to lease it. However, from the evidence before me, I do not have the information to make any decision in regard to the apportionment of the charges, the Applicant has not discharged her duty to substantiate her claim, and that claim must fail.

Electricity

36. The Applicant says that for similar reasons such as the remote location of the property and, to provide electricity for operation of a pump for water, electrical connections were maintained throughout 2007 at ANSW. Ms Rogers referred to the electricity bills at paragraph 19 of her written submissions. Certain of the accounts in the T-documents, for example, at pages 88, 92, 102 and 108 refer to ANSW but others refer to other properties owned by the Applicant, and are clearly not able to be deducted in connection with expenses for ANSW. I am satisfied that as the property ANSW was available for rent, the amounts in the accounts which refer to ANSW may be claimed as tax deductions. I calculate the relevant amounts on the available documentation to be $100.

Landlord insurance

37. As to insurance; document T12-84 indicates landlord insurance for 2007-2008 (policy valid until 9 April 2008), with the premium being $491.01. The Applicant told me that following that period, she discontinued landlord insurance because she had no tenants. Some of the period of insurance referred to above is outside the relevant dates and can therefore not apply.

38. At paragraph 21 of the Respondent's submissions, Ms Rogers submitted that the insurance documents for 2002 indicated owner lives in the home, and that policies for later years, from 2009, showed it as owner's holiday home weekender. Those periods are outside the period under discussion at the Tribunal, and I decline to comment.

39. The Commissioner summonsed documents from NRMA insurance in relation to the property at ANSW, and made submissions about the NRMA insurance, but did not tender any of those documents.

40. I am satisfied that the Certificate of Insurance for Landlord Insurance for 2007-2008 refers to the property ANSW, and that the $491 may be apportioned for the 2007 period, and that amount claimed as a tax deduction. I would allow approximately half the amount claimed being $245 for the insurance.

Carpet

41. I have noted the Applicant's information that the carpet was to replace carpet damaged by water and the elements. However, I agree with the Commissioner's finding regarding the carpet, as it is not clear for which property that was designated, and whether it was capital expenditure. It is therefore not deductible in any case. I am not satisfied that the claim for the carpet has been substantiated, and do not allow a deduction for the carpet.

Further unsubstantiated items

42. I am mindful that there are several claims for purchases at Woolworths and other retailers. In the absence of evidence about those, and substantiation of the expenses, they cannot be allowed. I reject the claims for those.

Application of section 8-1(1)(a) of the ITAA

43. In order to establish the nexus between expenditure incurred and the production of assessable income for the purposes of section 8-1(1)(a) of the ITAA, the Commissioner, and the Tribunal standing in his shoes, must determine objectively the purpose to which funds were put. Unfortunately for the Applicant, this is difficult to decide because she derived no rental income in the relevant year, 2007. I am satisfied however, that notwithstanding a low level of promotion, the property ANSW was available for rent.

44. Pursuant to section 8-1(1) of the Act, in order to be deductible from assessable income, any loss or outgoing must be incurred in gaining or producing the assessable income, or necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income. The provisos are that the outgoings are not of a capital nature, or a private or domestic nature. A well known case associated with these principles is
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47.

45. In coming to a decision regarding the Applicant's expenditure, I have already noted that the issue of her interest payments is problematic for her, because she is unable to show that the loan facility was solely for the ANSW. She has also been unable to demonstrate to my satisfaction that the drawdowns on the line of credit were for ANSW as she has claimed. The Commissioner has not queried the earlier $4,170 claimed. In summary I am unable to be satisfied to the requisite standard that the Applicant has discharged her duty in regard to the payment of any further interest she has claimed. I refer back to the Commissioner's finding regarding that item, and agree with it

46. I find that the Applicant has failed to discharge the burden of demonstrating a sufficient nexus between all the expenditure incurred, and the deductions claimed relating to the property for the production of assessable income for the purposes of section 8-1(1)(a) of the ITAA.

47. I have noted that the Commissioner did not accept that the Applicant did incur expenses to a total of $11,878.47 in the 2007 year. The Commissioner has allowed expenses of no greater than $6,220, being $4,170 for interest, less $450 from the rental bond repayment, and $2,500 for other items for which I have no details in the 2007 year. At the Tribunal, the figure of $2,500, and what it included, was not argued. Given that the Commissioner appears to have accepted the figure, I do not disturb that finding and accept it. However, from the evidence before me, I find the only additional items which may be claimed are $100 which I have found substantiated, and allowed for lawn mowing, $245 for insurance, $100 for electricity, and $102.20 for advertising.

48. I am satisfied from the evidence before me that the Applicant has not been able to substantiate any other expenditure which may be allowed as a deduction for various other items in the schedule of expenses which appears at T12/72.

49. My findings are based on the fact that where I am not satisfied that a particular item is not substantiated and therefore not deductible, it may be because the item does not relate to the relevant period, or that the information about the expenditure was insufficient to satisfy me in regard to its deductibility. That includes items such as the replacement carpet, blinds (2006), Council rates (2007/8), and others which I have not detailed here, but are discussed in the paragraphs above.

50. The Tribunal varies the Commissioner's Decision on Objection dated 2 March 2011, and relies on its findings above.

Decision

51. The Tribunal varies the Commissioner's Decision on Objection dated 2 March 2011 and finds that further items which can be held to be deductible are $100 for lawn mowing, $245 for insurance, $100 for electricity, and $102.20 for advertising. In doing so, the Tribunal accepts that the Commissioner allowed $4,170 for interest and $2,500 for other deductible items in the Applicant's 2007 tax return, and affirms that part of the decision.