Federal Commissioner of Taxation v. Vogt.Judges:
Supreme Court of New South Wales
Waddell J.: The assessable income of the respondent taxpayer during the years ended 30th June 1970 and 30th June 1971 was derived from working as a professional musician. In his income tax returns for both these years he claimed as a deduction three-quarters of the expenses and the depreciation of a motor vehicle used by him. In addition, in the 1970 return he claimed three-quarters of a loss incurred on the sale of a motor vehicle when he replaced it. Each of the motor vehicles was used by the taxpayer to drive himself and his instruments between his place of residence and the various places where he worked and between the places where he worked. The Commissioner disallowed five-sixths of the deductions claimed, apparently allowing one-sixth as being attributable to the use of a motor vehicle between places of work. The taxpayer's objection to this disallowance was referred to Taxation Board of Review No. 1 which determined that the deduction should be allowed as claimed and directed that the assessments be amended accordingly. The Commissioner appeals from this decision under sec. 196(1) of the Income Tax Assessment Act 1936-1974.
The question of law involved in the Board's decision is whether the amounts claimed to be deductible come within the provisions of sec. 51, 54(1) and 59 of the Act, as the case may be,
ATC 4075bearing in mind that they relate to the use of a motor vehicle between the taxpayer's place of residence and his work. It is agreed that the evidence before the Board is to be evidence in this proceeding. In addition there is some short evidence on affidavit.
During both years the taxpayer lived at Darlinghurst, Sydney, and worked at the Marrickville R.S.L. Club and with the Daly Wilson Big Band. In addition, in the 1971 year he earned some commissions by playing at E.M.I. (apparently for television commercials) and at the Musicians Club. The taxpayer played the acoustic bass and the electric bass, both of which have associated amplifying equipment. He also played the trumpet and flugel horn. He owned all these instruments with their equipment. As at the 30th June 1971 they had a value, depreciated for tax purposes, of $1,626. The instruments and equipment were very bulky. During the 1972 year the taxpayer found that they could not conveniently be fitted into the Volkswagen ``beetle'' vehicle which he then had. He sold this, incurring the loss claimed to be deductible, and bought a Volkswagen Squarelock wagon, which is a station sedan vehicle, in order to accommodate them.
Before the Board it was submitted for the taxpayer that he was not an employee of either the Marrickville R.S.L. Club or of the Daly Wilson Big Band. The Board found that he was an employee of each and this finding is accepted in these proceedings by both parties.
The employment of the taxpayer, by both Marrickville R.S.L. Club and the Daly Wilson Big Band, was upon terms that he was to provide his own instruments and to bring them to performances and rehearsals.
With the exception mentioned below, the taxpayer kept his instruments and their associated equipment at home. He did so because it was essential to practise on them and because it was the only practicable place to keep them. He used his motor vehicle to take his instruments from home to the R.S.L. Club, where he performed some six nights and Sunday afternoon and also rehearsed on other occasions, and from there back to his residence. He used it to take his instruments from home to rehearsals and performances of the Daly Wilson Big Band, these being at a variety of places, and back to his residence. He used it to take his instruments from home to the recording sessions at E.M.I., concerts and rehearsals at the Musicians Club, and to sessions with a rehearsal band and back to his residence. On a number of occasions he used it to take his instruments between some of the places mentioned. He ordinarily took all his instruments with him except that when he was returning home and not going to perform elsewhere he left one of the two basses at the Marrickville R.S.L. Club and took the other with the amplifying equipment because he had time during a day only to practise on one. There were no facilities for leaving any of his instruments at the other places where he worked or rehearsed. He also used the motor vehicle to take instruments and equipment to be repaired.
The Board held, in effect, that the income of the taxpayer had been earnt not only by performing as a musician but also by providing, as well, valuable musical instruments and that the expense of transporting these instruments between his place of residence and where he worked was an outgoing incurred in the course of earning his remuneration. The fact that he drove the vehicle in which the instruments were carried, and so arrived at his place of work with the instruments, did not make the expenses associated with the vehicle outgoings of a private or domestic nature. The Board distinguished cases such as
Lunney v. F.C. of T. (1958) 100 C.L.R. 478;
Lodge v. F.C. of T. 72 ATC 4174; (1972) 46 A.L.J.R. 575; and
F.C. of T. v. Maddalena 71 ATC 4161; (1971) 45 A.L.J.R. 426 as being concerned with expenditure which comes at a point too soon to be properly regarded as incurred in gaining assessable income.
I turn first to the question whether the expenses of the two vehicles were allowable deductions under sec. 51(1) of the Act. This is whether these expenses were ``incurred in gaining or producing the assessable income'' or were ``outgoings...of a... private or domestic nature''.
The authorities before the decision of the High Court in Lunney v. F.C. of T. (1957-1958) 100 C.L.R. 478 are summarised in the joint reasons for judgment of Williams, Kitto and Taylor JJ. In that case the Court was concerned with the question whether the fares paid by the taxpayer in travelling between his home and his place of work were deductible under sec. 51. Their Honours said -
``The language (i.e. of sec. 51(1)) is simple enough and, in the main, little difficulty is encountered in recognising those items of business expenditure which qualify as deductions. But in the nature of things it has
ATC 4076been impossible to devise, as a substitute for the words of the section, a simple formula which will readily and precisely mark the limits of the operation of the section. Yet, in the course of dealing with individual cases, it has been necessary to devote particular attention to the words `in gaining or producing the assessable income' and `incurred in carrying on a business for the purpose of gaining or producing such income' and to attempt to express precisely what these words mean.
For the purpose of advancing the appellants' cases counsel, naturally enough, seized upon observations which have been used from time to time in attempts to elucidate the meaning of these expressions. In particular, it was said, expenditure is invested with the requisite character if it may properly be regarded as `incidental or relevant' to the derivation of assessable income. This expression has been used in a variety of cases where it has been necessary to deal with problems arising under the section. For instance in dealing with the immediate predecessor of sec. 51 in
Amalgamated Zinc (De Bavay's) Ltd. v. F.C. of T. ((1935) 54 C.L.R. 295), it was said: `The expression `in gaining or producing' has the force of `in the course of gaining or producing' and looks rather to the scope of the operations or activities and the relevance thereto of the expenditure than to purpose in itself' ((1935) 54 C.L.R. at p. 309). In dealing with the same section in
W. Nevill & Co. Ltd. v. F.C. of T. ((1937) 56 C.L.R. 290) it was said that `it is necessary that the expenditure should have been incurred in gaining or producing the assessable income, that is the assessable income of the given financial year or accounting period. This means that it must have been incurred in the course of gaining or producing the assessable income. It does not require that the purpose of the expenditure shall be the gaining or production of the income of that year. The condition the provision expresses is satisfied if the expenditure was made in the given year or accounting period and is incidental and relevant to the operations or activities regularly carried on for the production of income' ((1937) 56 C.L.R. at p. 305). The same expression was again used in
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. ((1949) 78 C.L.R. 47) when it became necessary to solve a problem arising under sec. 51. In that case it was said that `For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end' ((1949) 78 C.L.R. at p. 56). This passage was repeated in
Charles Moore and Co. (W.A.) Pty. Ltd. v. F.C. of T. ((1956) 95 C.L.R. 344, at p. 350). Examination of these cases, however, readily shows that the expression `incidental and relevant' was not used in an attempt to formulate an exclusive and exhaustive test for ascertaining the extent of the operation of the section; the words were merely used in stating an attribute without which an item of expenditure cannot be regarded as deductible under the section. That this is so appears from some of the brief passages already quoted and is made quite clear by consideration of the reasons in the cases referred to. In Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. ((1949) 78 C.L.R. 47) the passage quoted above ((1949) 78 C.L.R. at p. 56) was immediately followed by the observation `The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income' ((1949) 78 C.L.R. at pp. 56, 57). Thereafter, it was said: `In brief substance, to come within the initial part of the sub-section 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' ((1949) 78 C.L.R. at p. 57). In the context in which they have been used the expressions relied upon by the appellants have been intended as a reference, not necessarily to the purpose for which an item of expenditure has been incurred, but, rather, to the essential character of the expenditure itself. In each of the cases except the last the expenditure in question was essentially expenditure of a business character but the question was whether it was expenditure `incurred in gaining or producing the assessable income' or necessarily `incurred in carrying on a business for the purpose of gaining or producing such income' whilst in the last-mentioned case the occasion of the loss in question was properly regarded as an `incident' of the carrying on of the business which produced the taxpayer's assessable income.''
In relation to the question before the Court their Honours said -
``The question whether the fares which were paid by the appellants are deductible under sec. 51 should not and, indeed, cannot be solved simply by a process of reasoning which asserts that because expenditure on fares from a taxpayer's residence to his place of employment or place of business is necessary if assessable income is to be derived, such expenditure must be regarded as `incidental and relevant' to the derivation of such income. No doubt both of the propositions involved in this contention may, in a limited sense, be conceded but it by no means follows that, in the words of the section, such expenditure is `incurred in gaining or producing the assessable income' or `necessarily incurred in carrying on a business for the purpose of gaining or producing such income'. It is, of course, beyond question that unless an employee attends at his place of employment he will not derive assessable income and, in one sense, he makes the journey to his place of employment in order that he may earn his income. But 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 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.''
``Expenditure of this character is not by any process of reasoning a business expense; indeed, it possesses no attribute whatever capable of giving it the colour of a business expense. Nor can it be said to be incurred in gaining or producing a taxpayer's assessable income or incurred in carrying on a business for the purpose of gaining or producing his income; at the most, it may be said to be a necessary consequence of living in one place and working in another.''
Reference should be made to several subsequent decisions. In
F.C. of T. v. Finn (1961) 106 C.L.R. 60 the question was whether the expenses of an overseas tour made by a senior design architect employed by the Public Works Department of Western Australia were deductible under sec. 51(1). Dixon C.J., after referring to some of the decisions mentioned in the passage cited above, concluded that the taxpayer's ``journey abroad and what he did while in Europe, as well in South America in the following year of income, was therefore in a correct sense incidental to his employment and most relevant to it'' (68). Kitto J. said ``It is, I think, a correct application of the terminology of sec. 51 to say that he was engaged in `gaining' that salary whenever and so long as he acted in the fulfilment of his office: for the salary payable was his remuneration for everything comprised in or incidental to his service'' (69). This decision is relevant because it is an application to circumstances not previously considered of the principles set out in the earlier passage from Lunney's case cited above.
In Lodge v. F.C. of T. 72 ATC 4174; (1972) 128 C.L.R. 171, a decision of Mason J., the question was whether child-minding expenses incurred by a taxpayer who derived income through the preparation as a contractor working at her home of solicitors' bills of costs were deductible under sec. 51(1). In his reasons for judgment his Honour said -
``The expenditure was incurred for the purpose of earning assessable income and it was an essential prerequisite of the derivation of that income. Nevertheless its character as nursery fees for the appellant's child was neither relevant nor incidental to the preparation of bills of cost, the activities or operations by which the appellant gained or produced assessable income. The expenditure was not incurred in, or in the course of, preparing bills of cost.''
(72 ATC 4176; 128 C.L.R. 175-176).
His Honour thus approached the question in the same way as was taken in the joint judgment in Lunney's case.
F.C. of T. v. Green (1950) 81 C.L.R. 313 one of the questions was whether travelling expenses incurred by the taxpayer, a resident of Brisbane, in visiting Townsville to inspect premises from which he derived income were deductible under sec. 51(1). In the joint reasons for judgment given by the Court it was simply said, after referring to the fact that there was evidence to support the finding of the primary Judge that it was reasonably necessary to inspect and supervise from time to time these properties, ``the expenditure, a deduction of which is claimed, was incurred in relation to the management of the income-producing enterprises of the taxpayer'' and went on to conclude that the expenditure was deductible.
The distinction made in Lunney's case is that it is not enough to show that the expenditure
ATC 4078was an essential prerequisite to the derivation of assessable income, deductibility turns rather ``upon considerations which are concerned more with the essential character of the expenditure itself'' (ibid 499). The result reached by applying this distinction to the facts of that case has not gone uncriticised. Indeed, in that case, in his reasons for judgment, Dixon C.J. said, after referring to the course of previous decisions, ``I confess for myself, however, that if the matter were to be worked out all over again on bare reason, I should have misgivings about the conclusion''. In F.C. of T. v. Maddalena 71 ATC 4161; (1971) 45 A.L.J.R. 426 the Court was concerned with the question whether the expenses of seeking employment were deductible under sec. 51(1) and held that they were not. In his reasons for judgment Menzies J., with whom Barwick C.J. and Windeyer and Owen JJ. agreed, said that he accepted the authority of Lunney's case and Finn's case but that he did not regard either of them ``as providing a basis for proceeding further either in the restriction of, or the extension of, allowable deductions under sec. 51''. He went on to say that the proposition that fares paid for travel between the taxpayer's residence and his place of work are not allowable deductions, as was recognised in Lunney's case, ``may be somewhat anomalous and is to be explained by a long standing line of decisions''.
Having regard to the various expressions of opinion mentioned above I consider that the first step in determining whether the expenditure in the present case is deductible under sec. 51(1) is to state what are the relevant aspects of the operations carried on by the taxpayer for the production of his income. These are that he earnt his income by performing, at several places, on musical instruments and associated equipment upon terms that he brought the instruments and equipment to the place of performance; the instruments and equipment were of substantial value; they were of a bulk which meant they could be transported conveniently only by the use of a motor vehicle; the taxpayer kept the instruments and equipment at his residence for justifiable reasons of convenience and for the purpose of practising on them. This step must first be taken in order to take the next step which is to determine what was the essential character of the expenditure itself. Three matters are, I think, relevant to this character. Firstly, the expenditure was incurred as part of the operations by which the taxpayer earnt his income. Secondly, it was essential to the carrying on of those operations: there was no other practicable way of getting his instruments to the places where he was to perform. Thirdly, in a practical sense, the expenditure should be attributed to the carriage of the taxpayer's instruments rather than to his travel to the places of performance. The mode of his travel was simply a consequence of the means which he employed to get his instruments to the place of performance, that is by carrying them in the motor vehicle which he drove. In the light of these matters it is my opinion that the essential character of the expenditure was such that it should be regarded as having been ``incurred in gaining or producing the assessable income''.
In the course of argument reference was made to the analogy of a violinist who kept his violin at home and took it with him to various places where he played. It was submitted for the Commissioner that clearly in such a case the expense of the violinist travelling from his residence to the place of performance could not become deductible because he took with him his violin which he kept at home for safe keeping and for the purpose of practising. This is, I think, clearly correct. The reason why such expenditure would not be deductible is that it could not be said to arise from, nor could it be attributed to, the necessity of getting the violin to the place of performance. Another example, not mentioned in argument, which illustrates what I consider to be matters relevant to the proper categorisation of the expenditure, is that of a concert pianist who insists upon playing on his own piano. If he were to keep this at a studio where he practised, the expense of carrying it from the studio to the place where he was to perform should clearly be regarded as a business expense and deductible under sec. 51(1). Would it be any the less deductible if he were to keep it at home and travel with it in the same vehicle to the place of performance? I think not. There may well be cases where, as a matter of fact, the size and bulk of an instrument or the reasons for keeping it at home may make it difficult to determine whether expenditure incurred in circumstances similar to the present is deductible. However, I do not think that such hypothetical difficulty indicates that the approach which I have taken is wrong.
The considerations which I have already mentioned are, I think, sufficient to dispose of the submission that the expenditure in question is of a private or domestic nature. I do not overlook that there may be a ``question whether expenditure which is incurred in gaining or producing assessable income may
ATC 4079nevertheless be of a `private or domestic' nature'': Lodge v. F.C. of T. supra 72 ATC 4176. However, in my view, the expenditure in this case clearly could not be said to be of such a nature.
My conclusion that the expenditure in question was incurred ``in gaining or producing the assessable income'' is decisive of the remaining questions in the case. So far as the claim for depreciation is concerned, this is governed by the same considerations (sec. 54(1)) as is also the claim for the loss incurred in the sale of the first of the two vehicles (sec. 59(1)).
For the foregoing reasons, I am of opinion that the amounts claimed by the taxpayer as deductions were allowable in full. The appeal is dismissed.