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Case J59

Judges:
JL Burke Ch
RE O'Neill M
CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 11 October 1977.

J.L. Burke (Chairman) and R.E. O'Neill (Member): Taxpayer carries on and was at all relevant times carrying on a very active and successful practice as a barrister. From early in September 1973 he lived in a house which had been purchased by a Trust of which he and his wife were the Trustees. In his return for each of the years ended 30 June 1974 and 1975 he claimed deductions for ``home office'' expenses as follows: -

                                             1974             1975

      Rent of study and ancillary

      area at (address of

      property)                               $840            $1,040

      One-sixth of outgoings at

      (address of property)

      attributable to study                    180               215

As will appear, the so-called ``rent'' is really a licence fee, but it is convenient to continue speaking of rent.

2. In assessing the taxpayer for each year the Commissioner disallowed the claim for rent, but for 1974 he allowed the claim for other outgoings in full ($180) and for 1975 to the extent of $30. The Board now has for review the Commissioner's decisions rejecting the taxpayer's objections to disallowance of the respective claims for rent and to non-allowance of the 1975 outgoings to the extent of $185.

3. To appreciate the facts it is desirable to refer to the terms of the trust. By deed of settlement made on 30 June 1971 between the taxpayer's father as settlor and the taxpayer and his wife, the settlor settled a sum of money for the benefit of the beneficiaries defined in the deed and the taxpayer and his wife agreed to act as trustees of the sum and any moneys or investments into which it might from time to time be converted and any additions or accretions thereto. The term ``beneficiaries'' is

ATC 507

defined as meaning named persons and classes of persons, and a reference to any class is to the beneficiaries classified in the order set out in the deed, there being listed eight separate classes with the taxpayer as class A and his wife as class B and the children of either the taxpayer or his wife as class D. Other classes include the taxpayer's sister and the brothers and sisters of his wife.

4. The Trust Fund is to be held upon trust until the specified date of distribution, as to the income thereof, to be paid or applied on behalf of such of the beneficiaries (and if thought fit for one or more to the exclusion of others or another) and in such shares and proportions as the trustees shall in their absolute discretion from time to time think fit. The trustees might determine to accumulate income, such to be added to the corpus and be part of the Trust Fund. But on and after the date of distribution, the corpus of the Trust Fund is to be held for such of the beneficiaries (other than the taxpayer) as the taxpayer shall in his absolute discretion by deed or will appoint. To the extent that any part of the corpus might not be effectively appointed by the taxpayer the Trust Fund is to be held for ``the following beneficiaries'' none of whom includes the taxpayer.

5. The taxpayer personally and not as a trustee has power (i) to remove any existing trustee from office, and (ii) to appoint any new trustee either in addition to or in substitution for any existing trustee.

6. Clause 10 provides: -

``The Trustees shall have power to invest the Trust Fund as they shall in their absolute discretion think fit without being limited to the investments authorised by law for Trustees or any other particular form of investments or by any implication from the circumstance that the Trust Fund is held upon trust. In particular and without prejudice to the generality of the foregoing the Trustees may invest the whole or any part of the Trust Fund in any part of the world:

  • (a) in shares and debentures of any company, whether listed on a Stock Exchange or not, and whether a mining company or not;
  • (b) in the purchase of land in fee simple or of any other estate or interest in land, whether freehold or leasehold;
  • (c)-(g)...''

7. Clause 12 provides: -

``The Trustees shall have full powers of management of the investments from time to time constituting the Trust Fund, and full powers to do all such things as appear to them to be necessary or desirable or convenient in relation thereto. In particular, and without prejudice to the generality of the foregoing they shall have power

  • (a)-(i)...
  • (j) to grant any easement, option or other right or privilege over any land;
  • (k)-(l)...; and
  • (m) to enter into any contract or other instrument for any purpose whatsoever.''

8. Early in 1973 taxpayer and his wife decided to look for a larger house and to buy it on behalf of the trust of which they were then the trustees (subsequently, on 17 August 1975, a corporate trustee was substituted for them). They expected that the value of the house would appreciate and considered it desirable for estate planning purposes that it should be an asset of the trust. On the taxpayer's evidence, which we accept, that decision was made before the contract of sale was signed by the taxpayer and his wife although it was formalized on the same day as they signed the contract, that is, on 6 April 1973. Thus taxpayer said in evidence ``...although my wife and I do not have formal meetings, I do say to her from time to time, let us now as trustees do something or let us now as directors do something and I am conscientious in ensuring that there is an actual discussion between my wife and I as to something, and there was on this occasion'' and he tendered minutes of the meeting held on 6 April 1973 which, so far as relevant, read: -

``Resolved that the Trust purchase (address of property) for the sum of $...

Resolved that the Trust accept a loan of $... from (taxpayer) to pay the deposit; and that it seek to raise a large loan secured by mortgage on the property, to finance as much of the balance as possible. (Taxpayer) intimated that he would advance to the Trust any further funds necessary on the terms that the moneys

ATC 508

advanced should be repayable on demand.''

9. In the contract taxpayer and his wife are named as purchaser without reference to their capacity as trustees and the transfer was to them, again without reference to their capacity as trustees. A term of the sale was that: ``The Purchaser shall pay a deposit equal to ten per centum of the total purchase price on the signing hereof and shall pay the residue of the purchase money as follows: - on the 15th November 1973 or earlier by mutual arrangement.'' The receipt for the deposit is dated 9 April 1973. The contract provided that: ``The Purchaser shall be entitled to vacant possession of the Property sold upon acceptance of title and upon payment of the whole of the purchase money or earlier by mutual arrangement.''

10. Settlement of the purchase took place on 3 September 1973 on which day taxpayer and his wife moved into the house. At that time his wife was pregnant with her first child who was born on 26 March 1974. A second child was born on 27 May 1975. Before moving into the house taxpayer and his wife had held a meeting as trustees on 20 August 1973. The minutes thereof signed by taxpayer and his wife, and which we accept as a correct record of the trustees' decisions, read: -

``1. Resolved to borrow $... at 9% per annum from (Life Assurance Company), repayable by instalments over a period of 31 years, to finance the purchase of (address of property); and to execute all necessary documents accordingly.

2. It was agreed between the Trustees and (taxpayer) that the balance of moneys required to complete the purchase (including all stamp duties, legal costs and the like) were to be lent to the Trustees by (taxpayer) to be repayable 7 days after demand in writing.

3. It was agreed that the Trustees would permit (taxpayer) to occupy one room in the said premises as a study, together with such ancillary space and facilities as he might reasonably require from time to time for the purposes of his professional practice as a barrister; and that he would pay therefor the sum of $20 per week or such other sum as might be mutually agreed from time to time.

4. It was agreed that the Trustees would permit (taxpayer) to occupy the remainder of the premises as a residence upon the terms that so long as he was the occupier of the property:

  • (a) he paid all outgoings, and kept the premises in proper repair;
  • (b) he paid the interest under the said mortgage; and
  • (c) he made no demand for the moneys advanced by him to the Trustees.''

11. The taxpayer in fact paid respective sums of $840 and $1,040 into the trust bank account being $20 per week in each relevant year. The trust also derived other income - $80 for 1974 and $243 for 1975 - under an arrangement whereby taxpayer and his wife as trustees allowed a neighbour to garage his car on the property for $5 per week. The whole of that income and no doubt any dividends received - at 30 June 1975 shares costing $26,000 plus were trust assets - were included in returns of income derived by the trust and assessments were duly made accordingly.

12. Since his admission to the Bar the taxpayer has always, both before and after his marriage in 1969, had a room set aside as a study fitted up with a desk, filing cabinets, etc., and law books where he frequently worked at night and to a lesser extent at week-ends. In his words, he works very hard and the work he does ``involves lots of papers and lots of books''. He works about 11 hours a day but tries to avoid working at week-ends. His practice consists as to about two-thirds in advising in conference and in written opinions in the field of revenue law, estate planning, commercial and company law, and he said in evidence that to him a room properly fitted up where he can work away from his city chambers is both incidental and relevant to his practising as a barrister.

13. The house is a well-built 19th century terrace house occupying the full width (26 ' 6 " ) of the land. Downstairs the entrance to it leads into the largest room in the house - the living room running the full width and behind which is the bar near the stairs and behind that a dining room and kitchen are side by side. There is also a bathroom and two small rooms in a short narrow wing going out to the back. The stairway goes up into the middle of the upstairs area into a lobby with two rooms to the front and two to the rear on either side. The

ATC 509

four rooms, of which the study is one, are of approximately equal size. There are also two bathrooms.

14. The room which taxpayer had in his personal capacity agreed with himself and his wife as trustees should be for his use as a study with ancillary space and facilities was one of the four upstairs rooms together with a niche at the side of the living room at the foot of the stairs which was regarded as being an ideal place for a desk. Apart from his use of the study room he often works at that desk.

15. The study is a room 16 ' 4 " x 13 ' 2 " . From floor to ceiling is 11 feet. Cupboards to a height of 2 ' 6 " stretch the full length of the long wall and above them are book shelves up to the ceiling. The book shelves are almost all full with ``quite a number'' of law reports, superseded text books (e.g., the 3rd edition of Jacobs on Trusts of which the taxpayer has the 4th edition in his chambers) and Acts and papers relating to his practice. ``Whilst it is not a good library it is a reasonable working collection from which one can find out the answer to a lot of points...'' In the room there is a table of substantial size with a desk chair. There are also a couple of other chairs. There is a full sized four-drawer filing cabinet and three other small filing cabinets containing cards entered up by taxpayer with notes of cases and all cross-indexed to which the taxpayer constantly refers. Large windows looking over ``quite a pleasant view'' are curtained and there is a rug on the floor. The shorter inside wall has inbuilt floor to ceiling cupboards in the lower of which the taxpayer keeps his personal clothes and he dresses in the room.

16. He often works in the room reading and studying briefs and researching problems when he makes use of the library and materials he keeps in the filing cabinets, but he tries to confine his dictating and drafting to when he is in his city chambers. There were times during the relevant period when clients and/or solicitors came to the house and he interviewed them in the study.

17. The study is about one-tenth of the total floor area of the house, but the taxpayer founded his claim for one-sixth of the outgoings paid by him pursuant to the terms on which the trustees had agreed he should occupy as a residence the premises other than the study, on the basis that the study was one of the six principal rooms in the house. Counsel for the Commissioner informed the Board (transcript p. 55) that he and the taxpayer had agreed that the one-sixth fraction for apportionment of such outgoings would stand whether or not the Board thought that any apportionment should be on an area rather than a principal room basis. We will deal separately with the question of the disputed claim for 1975 outgoings when we have disposed of the problem of the rent payments.

18. The the course of taxpayer's submissions to the Board our colleague queried with him whether or not the property was trust property and at a point in ensuing discussion between our colleague and the taxpayer, learned counsel for the Commissioner volunteered: ``I am instructed that the attitude which is taken by the Commissioner is that the reality of what has taken place is not denied... My instructions do not go so far as to say that in any way there is any unreality or aspect of sham or legal ineffectiveness in what has been done as a matter of private law.'' Our understanding is that the Commissioner through his counsel recognizes that the property was acquired as and is property of the trust and that the agreement made between the taxpayer in his personal capacity and himself and his wife as trustees and recorded in the minutes of 20 August 1973 is a valid and binding contract. With that view we agree.

19. The house being property of the trust of which taxpayer and his wife were the trustees, he had no right to occupy or use it or any part of it without a breach of trust unless the trustees acting jointly agreed to allow him as an individual to use it or parts of it upon agreed terms. The trustees jointly agreed with him to permit him to occupy one part of the premises for the purposes of his professional practice for $20 per week and to occupy the remainder as a residence for the consideration set out in para. 4 of the minutes of 20 August 1973.

20. We quote here for its usefulness the following statement at p. 341 of Jacobs' Law of Trusts in Australia 4th Edn. (1977) as to statutory law in the several States governing an agreement made by a person with himself and another: -

``... in all States except South Australia a covenant or agreement made by a person with himself and another or others shall be

ATC 510

construed and be capable of being enforced in like manner as if the covenant or agreement had been made with the other or others (N.S.W., Conveyancing Act 1919 sec. 72; Vic., Property Law Act 1958 sec. 82; Qld., Property Law Act 1974 sec. 50; W.A., Property Law Act 1969 sec. 52; Tas., Conveyancing & Law of Property Act 1884 sec. 72). Also, in all States except Western Australia, a person may assure property to himself or to himself and others (N.S.W., Conveyancing Act 1919 sec. 24; Vic., Property Law Act 1958 sec. 72; Qld., Property Law Act 1974 sec. 14; S.A., Law of Property Act 1936 sec. 40; Tas., Conveyancing & Law of Property Act 1884 sec. 62). The result is that a sale by co-trustees to one of themselves is usually good at law but is absolutely voidable in equity.''

21. In opening his address for the Commissioner learned counsel outlines his submission as being (a) that the Board must first look generally at such cases as
Thomas v. F.C. of T. 72 ATC 4094 ; (1972) 46 A.L.J.R. 397 and
F.C. of T. v. Faichney 72 ATC 4245 ; (1972) 129 C.L.R. 38 and ask whether, apart from the separate rental aspect, it feels compelled to follow those cases or to apply them here and (b) that it is then necessary to consider whether the fact that here we have not an apportionment case but a case where there is a separate rental for a separate use of an area does in any event make those cases inapplicable. The alternatives he said are: -

``In my submission, in the present case it is not necessary to go into matters of trust law to any great extent because the fact does appear from evidence that (taxpayer) entered into what he regarded as a contract between the trustees and himself, and that he paid certain moneys believing that it was necessary that he pay those moneys under that particular contract.... But the second way in which one looks at the matter is to say that whether or not the agreement which is contained in clause three of the minutes of 20 August was effective to give some proprietary interest in the land, it did nonetheless operate as a contract which would be enforceable in a court of law by damages or otherwise, and that that is sufficient to found a deduction under sec. 51.''

22. Although it was not mentioned at the hearing and an appeal therefrom by the Commissioner to the Federal Court is still pending, we are of opinion that the decision in
Phillips v. F.C. of T. 77 ATC 4169 affords guidance in considering whether or not the rent payments in the present case are deductible. There a firm of chartered accountants caused to be set up a unit trust pursuant to a trust deed the parties to which were a company as trustee (Holdings), a company as manager (Secretariat), and collectively persons who became unit holders. Each partner in the firm could nominate a person to take up a number of units and in fact all but one partner had his entitlement issued to his wife or to one of his children or to a company as trustee for a family trust or to a company as beneficial owner. On 31 July 1971 Secretariat purchased for the Trust from the partnership the whole of the partnership furniture, office machines, etc. The whole of the non-professional staff of the partnership accepted as of 1 August 1971 transfer to employment by Secretariat acting on behalf of the Trust. Acting through Secretariat the Trust offered its services to the partnership by way of hiring to it office furniture and equipment, and providing secretarial and clerical staff and share registry services at specified rates which were not in excess of commercial rates. The partnership accepted the offer thereby increasing its expenses over what they would have been if it had continued to provide the services itself. The partnership made available, at a charge to the Trust, in its Melbourne and Sydney offices space for the Trust's managers and for employees engaged in share registry activities. After 1 August Secretariat rendered monthly accounts for the Trust's services to the partnership. Such accounts as were not paid were accrued and, as agreed with the partners, carried interest. In calculating the net income of the partnership the Commissioner disallowed the amount incurred for secretarial charges and for interest in respect of such charges as remained owing to the Trust.

23. Phillips, a partner whose wife had taken up his unit entitlement, appealed to the Supreme Court (N.S.W.) from the Commissioner's decision disallowing his objections to the amount assessed as his individual interest in the net income of the partnership of each of the years ended 30 June 1972 and 1973. In substance the issue was whether or not, in calculating the net income of the partnership, the secretarial charges and

ATC 511

interest paid to or owing to the Trust were allowable as deductions under sec. 51 either as to any part or, alternatively, only to such extent as would exclude the profit made by the Trust on the services it provided. It was held that the outgoings incurred were wholly deductible.

24. In reaching his conclusion the learned judge applied the test of legal enforceability worked out in
Europa Oil (N.Z.) Ltd. (No. 2) v. Commr. of I.R. (N.Z.) 76 ATC 6001 . There the majority of the Privy Council stated at p. 6006 that what was determinative of whether expenditure was deductible or not under the New Zealand counterpart of sec. 51(1) ``is the legal rights enforceable by the taxpayer that he acquires in return for making it.'' Here by performance of his obligation to pay $20 per week the taxpayer acquired the legally enforceable right ``to occupy one room in the (house) as a study, together with such ancillary space and facilities as he might reasonably require from time to time for the purposes of his professional practice as a barrister.'' Taxpayer's evidence, which we accept without qualification, is that he did use the room and the desk in the niche downstairs and ancillary space in and for the purposes of carrying on his professional practice and we find that whilst avoiding a breach of trust his sole purpose in contracting with the trustees was to have the use of the study, etc., in the pursuit of his profession. That he might obtain a tax advantage was only an inducement to enter into the agreement; it was not a purpose of so doing. We find further that his predominant use of the study and ancillary area was for his professional purposes. Accordingly, the expenditure must, in our opinion, be regarded as having been incurred in gaining or producing assessable income.

25. On the foregoing view the case is clearly distinguished from, and is not governed by anything said in, Thomas's case or in Faichney's case, or in
F.C. of T. v. McCloy 75 ATC 4079 ; (1975) 1 N.S.W.L.R. 202 where the principal issue in each case was whether or not interest paid on money borrowed to extend or buy the taxpayer's private residence was apportionable because of the use made by the taxpayer of a room as a ``home office'' so as to permit deduction of some part of the interest payment. It may be noted that in
Caffrey v. F.C. of T. 73 ATC 4144 ; (1973) 21 F.L.R. 427 , decided after Faichney, the Supreme Court of Western Australia allowed such proportion of the rent of an employee's residence as was found attributable to a room used as a home office, and that in Caffrey v. F.C. of T. (No. 2) 76 ATC 4117, decided after McCloy, a different judge of the same Court would clearly have allowed a similar claim if he had had ``reliable material before me upon which (to) properly assess any lesser sum'' than the sum claimed by the taxpayer.

26. In the view we take the rent payments have the prima facie character of expenditure deductible under sec. 51(1). Is the amount thereof to be abated because the taxpayer in fact kept his clothes and dressed in the room itself?

27. In
Ronpibon Tin N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at pp. 59-60; 8 A.T.D. 431 at p. 437 the Court remarked that there are at least two kinds of items of expenditure that require apportionment: -

``One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services.''

In the field of ``home office'' cases examples of apportionment of that kind of expenditure are to be found in Caffrey v. F.C. of T. 73 ATC 4144; (1973) 21 F.L.R. 427 and in this Board's decision in Case F53,
74 ATC 294 both decided after Faichney, where rent payments were apportioned and part allowed on a room or area basis.

28. In Ronpibon the Court went on: -

``The other kind of apportionable items consist in those involving a single outlay or charge which serves both objects indifferently. Of this, directors' fees may be an example. With the latter kind there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income. It is an indiscriminate sum apportionable, but hardly capable of arithmetical or rateable division, because it is common to both objects.''

In the present case the expenditure in question represents a single outlay which, on the view we take, has the prima facie character of expenditure deductible under sec. 51(1); in

ATC 512

principle it does not differ from the rent taxpayer paid for his city chambers. In answer to Mr. O'Neill counsel for the Commissioner said that he did not question on any basis the reasonableness of the $20 per week.

29. Although we think that the expenditure is within the second kind of apportionable outgoings referred to in Ronpibon, it is nevertheless difficult to isolate it from what, in ¶ 23-400 issued in September 1977 for the CCH publication Australian Federal Tax Reporter, is called the ``highly vexed question'' of whether a single outgoing which is of a character usually wholly deductible - e.g., rent, trading stock purchases, etc. - is apportionable on the basis that, because it is excessive, or for some like reason, part of it was not incurred in gaining or producing the assessable income. That problem is most informatively discussed in the paragraph mentioned.

30. Here there is no reason for considering apportionment other than that the taxpayer kept his clothes and dressed in the room he used as a work study. That use of the room for private purposes is akin to the use made of their offices by many professional people who regularly read the daily newspapers there. Addressing on the point now being considered counsel for the Commissioner acknowledged the possibility that the Board might ignore taxpayer's use of the room for dressing as being within the de minimis principle (transcript p. 73). In light of the overall approach we have taken in regard to the rental payments we have come to the conclusion that it would not be improper on our part so to treat it. Accordingly, we conclude that there should be no abatement of the amount claimed by the taxpayer in either year.

31. The 1975 claim for $215 was for one-sixth of the total of the following excluding $37 insurance of house contents: $163 oil heating the house, $30 wood burnt in the living room, $24 gas used in the kitchen, $249 electricity; insurance on house $128 and on furniture, etc., $37; repairs electrical $8 and heating $31; window cleaning $42; $613 to a painter/handyman made up of an estimated $400 painting and maintenance of the general structure, $30 for repair of study window, and $183 for work on stairway and other principal rooms.

32. At the hearing the taxpayer virtually abandoned his claim insofar as it was based on $30 for the wood and $24 for the gas. The decision in McCloy precludes any allowance in respect of the $128 insurance of the house. Taxpayer estimated the value of the furniture and furnishings in the study and niche as being one-twelfth of the value of the contents of the house and of the $37 insurance thereof we allow $3. We think that the terms of sec. 53(2) deny the claim in respect of the $613 for what we take to be repairs, other than the sum of $30 for repair of the study window which is allowable under sec. 53(1) as being expenditure for repairs to ``part of premises... held, occupied or used by him'' in the carrying on of his business. The evidence as to the $31 heating repairs and $8 electrician is so vague that we give it no further consideration. In light of the Commissioner's agreement with the taxpayer as to adoption of the fraction of one-sixth (see para. 17) we would allow that proportion of the outgoings for oil heating $163 and for electricity $249. The windows of the study room are at the front of the house and on a broad-brush approach we allow one-sixth of the $42 window cleaning.

33. In the result we would allow for the year ended 30 June 1975, in respect of the outgoings mentioned in the preceding paragraph, the following: insurance of contents $3; repairs to study window $30; oil heating $27; electricity $41; and window cleaning $7 - a total of $108 as against the $30 allowed by the Commissioner in his assessment.

34. The assessment for the year ended 30 June 1974 is to be amended to allow as a deduction $840 for rent. The assessment for the year ended 30 June 1975 is to be amended to allow as deductions $1,040 for rent and the additional amount of $78 in respect of other outgoings.


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