Commissioner of Inland Revenue v. Banks.Judges:
Court of Appeal (New Zealand)
Judgment of Woodhouse, Richardson and Quilliam JJ. delivered by Richardson J.: This is a case stated by the Taxation Review Authority for the opinion of the Supreme Court pursuant to sec. 50(5) of the Inland Revenue Department Act 1974 which was removed into this Court under sec. 44 of that Act.
The Taxation Board of Review, the predecessor of the Taxation Review Authority, upheld an objection by the respondent taxpayer to an amended assessment by the appellant Commissioner of the amount on which, in the judgment of the Commissioner, income tax ought to be levied under the Land and Income Tax Act 1954 and of the amount of that tax for the year ended 31 March 1973.
One of the questions arising on the objection, and the only question now in issue, concerns the deductibility, in calculating the assessable income of the taxpayer for that year, of an amount of $21.64 claimed in respect of the use of the taxpayer's home for income earning purposes.
The essential facts as found by the Board of Review may be shortly stated. At all material times the taxpayer resided at Wellington where he was employed as a chartered accountant by a private employer, and also as a part-time tutor at Wellington Polytechnic. In that latter capacity he derived an income of $1,265.08 assessable income in that year for his services for tutoring and marking weekly assignments and examination papers. Except for actual tutoring times, the Wellington Polytechnic did not provide study, classroom, office or other accommodation for the use of the taxpayer. Part-time tutors, including the taxpayer, were required to provide, from their own pockets, all things necessary for the performance of their duties. As part-time tutor for two, two hour classes per week for 35 weeks per year, and as market of between 25 and 30 scripts per week for 35 weeks each year, the taxpayer required a suitable room in which both lecture preparation and marking could be carried out. The taxpayer literally had no place other than the dining room of his house to which he could resort in order to carry out the necessary preparation for his lectures and the marking of papers. The work performed at his house was performed there by him as a matter of necessity, and not merely to meet his personal convenience. In the relevant year he used the dining room in his home solely and regularly for that purpose from six to eight hours per week for 35 weeks of the year. That usage was by no means insubstantial. Although he had not set apart and made use of a room in his home exclusively for purposes connected with his employment as a tutor, he made regular use of the dining room to such an extent as to warrant the view that part of his expenses in relation to that room were exclusively incurred in the production of his assessable income for the relevant income year.
The $21.64 for which the deductions were claimed, was calculated by the taxpayer as follows: $ Depreciation on dining room table - calculated at 20% of the diminishing value 34.60 Depreciation on carpet in dining room - calculated at 20% of the diminishing value 12.40 Depreciation on house - portion attributable to dining room calculated on a space basis, the area of the dining room being 75 975ths of the total area of the house, with depreciation at 21/2% per year on the calculated cost price of the house 22.70 Interest on mortgage - portion attributable to dining room calculated on a like space basis 24.15 Rates, insurance and maintenance - portion attributable to dining room calculated on a like space basis 9.77 Heating and lighting - portion attributable to dining room calculated on a like space basis 4.61 ------- $108.23 -------
Twenty per cent of the total was claimed as a deduction as being a conservative estimate of the proportion of the total use of the dining room in that year for tutoring purposes. While expressing reservations as to the formula adopted by the taxpayer, on the evidence before it the Board of Review accepted that the amount claimed was reasonable. Accordingly, it allowed the objection in that respect.
The Land and Income Tax Act 1954 has been repealed and replaced by the Income Tax Act 1976 and the Land Tax Act 1976 but this case falls to be determined under the relevant provisions of the 1954 Act. Before the Board of Review the argument turned on the application of sec. 111(a) and sec. 112(1)(i) to the facts as found. But on the hearing in this Court it was common ground that other provisions of the Act, notably sec. 112(1)(g) as to interest and sec. 113(1) as to depreciation and repairs also required consideration.
The statute provides a code in relation to deductibility. Section 110 prohibits the deduction of any expenditure or loss except as expressly provided in the Act. The general authority for deductions in calculating assessable income is contained in sec. 111. It provides:
``Expenditure or loss incurred in production of assessable income - In calculating the assessable income of any taxpayer, any expenditure or loss to the extent to which it -
(a) Is incurred in gaining or producing the assessable income for any income year; or
(b) Is necessarily incurred in carrying on a business for the purpose of gaining or producing the assessable income for any income year
may, except as otherwise provided in this Act, be deducted from the total income derived by the taxpayer in the income year in which the expenditure or loss is incurred.''
The next step is to consider the application of the specific provisions of sec. 112 and subsequent deduction provisions, either modifying in particular classes of cases the right to a deduction which would otherwise exist under sec. 111, or authorising deductions not allowable under that section. The portions of the sections particularly relevant for present purposes are sec. 112(1)(g) and (i) and sec. 113(1) which respectively provide as follows:
``112. Certain deductions not permitted - (1) Notwithstanding anything to the contrary in section 111 of this Act, in calculating the assessable income derived by any person from any source, no deduction shall, except as expressly provided in this Act, be made in respect of any of the following sums or matters:
(g) Interest (not being interest of any of the kinds referred to in paragraph (ff) of this subsection), except so far as the Commissioner is satisfied that -
- (i) It is payable on capital employed in the production of the assessable income; or
- (ii) It is payable by one company included in a group of companies in respect of money borrowed to acquire shares in another company included in that group of companies:...
(i) Any expenditure or loss to the extent to which it is of a private or domestic nature:...
113. Deductions for repair, maintenance, and depreciation - (1) Notwithstanding anything to the contrary in section 111 of this Act, in calculating the assessable income derived by any person from any source no deduction shall, except as expressly provided in this Act, be made in respect of any of the following sums or matters - namely, the repair of premises or the repair of plant, machinery, or equipment used in the production of income, beyond the sum usually expended in any year for those purposes:
Provided that in cases where -
(a) Depreciation of any such asset, not being plant, machinery, or equipment, or a temporary building, is caused by fair wear and tear:
(b) Depreciation of any such asset, being plant, machinery, or equipment, or a temporary building, is caused by fair wear and tear or by the fact of the asset becoming obsolete or useless, -
and, in either case the depreciation cannot be made good by repair, the Commissioner may, subject to section 113A and also to section 117 of this Act, allow such deduction as he thinks just:
Provided also that where the Commissioner is satisfied that any repairs or alterations of any such asset do not increase the capital value of the asset, or that the repairs or alterations increase that value by an amount less than the cost of the repairs or alterations, he may allow such deduction as he thinks just.''
The final feature of the statutory scheme calling for comment at this point is the provision for apportionment of expenditures and losses and the allowing of a deduction of the part of the expenditure or loss attributable to the assessable, or non-assessable income of the taxpayer, as the case may be. It is not necessary on the facts of this case to refer further to non-assessable income. The respondent's income as tutor was assessable income and, so far as assessable income is concerned, sec. 110A provides:
``Apportionment of expenditure or loss - (1) Subject to this section, any expenditure or loss which is deductible under this Act and is incurred in gaining or producing assessable income shall be deducted in calculating the assessable income...''
For the sake of completeness we add that the language of authorising provisions, such as ``to the extent to which'' in sec. 111 and sec. 112(1)(i) and (j) and ``so far as'' in sec. 112(1)(e) and (g) expressly contemplates apportionment.
It will be seen that the items in respect of which deductions are claimed in this case fall into four categories:
- (i) Interest, the deduction of which is subject to the express provisions of sec. 112(1)(g).
- (ii) Depreciation, the deduction for which is subject to the express provisions of sec. 113.
- (iii) Repairs, the deduction of expenditure on which is subject to the express provisions of sec. 113.
- (iv) Other expenses, which fall for consideration under sec. 111.
There are two features of sec. 111 and its place in the scheme of the deduction provisions which are of particular importance in this case. The first is that the expenditure must meet the statutory standards in relation to the assessable income of the taxpayer claiming the deduction. The deduction is available only where expenditure has the necessary relationship, both with the taxpayer concerned and with the gaining or producing of his assessable income. Relationship with the taxpayer is not, in itself, sufficient, as the prohibition of a deduction for capital expenditure (sec. 112(1)(a)) and private and domestic expenditure (sec. 112(1)(i)) makes clear. There must be the statutory nexus between the particular expenditure and the assessable income of the taxpayer claiming the deduction. In this respect, the three references to ``the assessable income'' in sec. 111 referring to the assessable income of the particular taxpayer and to that income alone, are reinforced by the separate treatment of non-assessable income and the contrast between
ATC 6006assessable and non-assessable income in sec. 110A and sec. 111A and the contrast with exempt income in sec. 112(1)(j).
The second feature of sec. 111 is that, as has already been noted, the statutory language expressly contemplates apportionment. A deduction is allowed to the extent that the statutory standard of deductibility is met. Furthermore, this is not restricted to expenditure which can be dissected with distinct and severable parts being directly referable to the production of assessable income. It extends to outgoings not capable of such dissection but which serve both income earning and other purposes indifferently (
Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47).
The language of sec. 111 is deceptively simple. The width and generality of the statutory language has posed problems for courts and tribunals faced with applying the provisions in a practical way. There has been an understandable unwillingness in the cases to attempt to establish hard and fast rules to cover all situations in an area of the law which, so far as possible, should reflect commercial realities. There are constant reminders in the judgments that each case of this kind depends on its own facts and the dividing line between deductibility and non-deductibility is blurred. It will often be helpful, in determining and applying the statutory criteria, to consider the analysis and exposition of the statutory provisions in the decisions of the courts and review tribunals and the considerations regarded as particularly significant in individual cases. However, this is not an area of the law where it is possible to devise a judicial formula which, as a substitute for the statutory language, could be applied in all cases and, in the end, a decision in a particular case must be reached on the application of the statutory language to its particular circumstances. The focus of the inquiry necessarily shifts, depending on the circumstances of the particular case.
By way of illustration, it does not advance the argument in the present case to emphasise the character of the expenditure for which deduction is sought - rates, insurances and so on. This is because unlike, for example, nursery fees paid for looking after the taxpayer's child which in the ordinary case are inherently of a private rather than a business character (
Lodge v. F.C. of T. 72 ATC 4174 (1972) 128 C.L.R. 171), rates and insurances are not inherently, or prima facie, of either an income related or non-income related character. It all depends on the relationship between the particular premises or asset in respect of which payment is made and the income earning process. And to say that they are home expenses and of that character begs the critical question for determination, namely, whether they are properly characterised as exclusively private home expenses or whether as to part they are income related expenses. So in this class of case, as in others, further analysis of the relationship between the expenditure and the income earning activities is required.
The statutory requirement is that the expenditure be ``incurred in gaining or producing the assessable income''. That has to be judged as at the time that the taxpayer became definitively committed to the expenditure for which deduction is sought (
F.C. of T. v. Flood (1953) 88 C.L.R. 492;
King v. C. of I.R. (1973) 1 NZTC 61,107. Where the expenditure involves an element of volition and is itself of a revenue rather than a capital character, consideration of the object or purpose of the expenditure may, in many instances, be determinative of deductibility. In other situations that will not be so. For example, rates are imposed on a taxpayer in respect of his occupation of property and it may not be helpful to answer the narrow question ``what was the taxpayer's purpose in incurring the expenditure?'' Again, where the expenditure for which deduction is claimed is a servicing expenditure in relation to property (for example, interest on an advance by way of mortgage), the purpose for which the property was initially acquired which in turn affects the character of the initial capital outlay, while a relevant consideration, will not be determinative of deductibility of current outgoings under sec. 111. The concern of the section is with the relevant factual situation at the time the expenditure for which deduction is sought is incurred, rather than what may have been the position in respect of the property at an earlier date.
For reasons such as these it seems clear that the application of the first limb must involve an amalgam of considerations. In the Australian cases under the counterpart of sec. 111(1) there has been considerable stress on the character of an outgoing in the sense of its
ATC 6007being incidental and relevant to the gaining or producing of the assessable income. Statements to that effect emphasise the relationship that must exist between the advantage gained or sought to be gained by the expenditure and the income earning process. They do not, and cannot, specify in concrete terms the kind and degree of connection between the expenditure and the gaining or producing of assessable income required in individual cases for the expenditure to qualify for deduction. As was observed in
Lunney v. F.C. of T. (1958) 100 C.L.R. 478, at p. 497 per Williams, Kitto and Taylor JJ.:
``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.''
Putting it positively, Dixon J. said in
Amalgamated Zinc (de Bavay's) Ltd. v. F.C. of T. (1935) 54 C.L.R. 295, at p. 309 and we respectfully agree:
``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.''
It then becomes a matter of degree, and so a question of fact, to determine whether there is a sufficient relationship between the expenditure and what it provided, or sought to provide, on the one hand, and the income earning process, on the other, to fall within the words of the section. The factual question is complicated where, as here, the asset or advantage, in respect of which expenses are incurred, may be and is used for both private and income earning purposes. These problems have produced a division of views in the courts. In
I.R.C. v. Castle (1971) 2 A.T.R. 481, Beattie J. upheld the deduction of the part of expenses relating to the business use of a taxpayer's home under sec. 111, the test applied under the first limb being that (p. 489):
``... the particular activity (namely, the use of the house) was of a character which was relevant and incidental to the gaining of the assessable income.''
In that case, the taxpayer (partner in a firm of barristers and solicitors) claimed a deduction of part of the expenses and depreciation of his residence in relation to the use of the ``dining room'' for professional purposes. It was one of six rooms in the house and the deduction claimed represented approximately one-sixth of the expenses incurred in connection with the residence and of the depreciation. Beattie J. emphasised the finding of fact by the Board of Review that the principal use to which the dining room was put in the relevant years was for professional purposes. Although used for this purpose only some 36 times a year, the room was available for that use whenever required and its private use as a dining room was limited to approximately six occasions a year. Beattie J. concluded that the important question was ``what was the use of the particular room?'' He went on to say (p. 490):
``It, surely, cannot turn on a mere name given to the room and, in this particular case, makes no difference in my opinion if the family called the room `the study' - nor can the conclusion be affected if law books were placed in the dining room to give it some semblance of a study. The room suits the respondent for the work he does and the primary use is for that purpose.''
In the present case the Board of Review applied Castle, and as we have said, upheld the taxpayer's objection in that respect.
Mr Sorensen for the Commissioner submitted that Castle was wrongly decided and invited us to follow certain later Australian decisions where deduction for home office expenses was refused. As to Castle, his principal submission was that Beattie J. erred in linking use with deductibility - use being a matter going to apportionment and not, he submitted, being determinative of deductibility. We consider Beattie J. properly and correctly weighed up the considerations in this respect. As we have said, it is necessary to focus on the particular expenses in respect of which a deduction is sought. We shall refer later to depreciation, interest and repairs which raise different or other considerations. The remaining items - rates, insurance, lighting and heating - are current outgoings in relation to the premises. They may be quantified on a day to day basis
ATC 6008and, in the case of lighting and heating, the amount of the charge is directly affected by the extent to which the premises are used. Broadly speaking, the taxpayer's object in meeting these expenses is to secure the continued use and enjoyment of the premises. The assets involved are capable of use for business purposes as well as for private purposes. The legal work carried out by the taxpayer in Castle and the tutorial work carried out by the taxpayer in this case were part and parcel of the income earning process. Section 111 is to be applied to the taxpayer's actual income earning activity and it is not for the court, or the Commissioner, to say how much a taxpayer ought to spend in obtaining his income (
C. of I.R. v. Europa Oil (N.Z.) Ltd.  N.Z.L.R. 641;
Cecil Bros. Pty. Ltd. v. F.C. of T. (1962-64) 111 C.L.R. 430). In any event, on the findings of the Board of Review, the use of part of the premises for that purpose was not only reasonable and proper, it was necessary for the carrying out of the work. That work was carried out over a period involving the use of an identifiable part of the premises. The two uses were mutually exclusive in the sense that when the dining room was in use for tutorial purposes, it was not in use, or available for use, for private purposes. The factual use of part of the premises for work related activities provides an immediate nexus between the expenditure and the gaining or producing of the taxpayer's assessable income. We see nothing in the statute, or in principle, to differentiate a ``house'' from other assets. Certainly there can be no basis in principle for saying that, once a building is erected or occupied as a home, it must always thereafter be characterised exclusively as a home. Clearly an asset may change its character. An asset initially held for private purposes may become a business asset. If over a period it is used for business and private purposes, whenever it is used for business purposes it has that character, but not when it reverts to private use.
So far as home office expenses are concerned, there is a further provision which is in point. Section 112(1) provides that, notwithstanding anything to the contrary in sec. 111, in calculating the assessable income derived by any person from any source, no deduction shall be made in respect of ``(e) Rent of any dwelling house or domestic offices, save that, so far as any such dwelling house or offices are used in the production of the assessable income, the Commissioner may allow a deduction of such proportion of the rent as he may think just and reasonable''. Apportionment of the rent of dwellings and other domestic premises is allowed and the extent of the deduction is relative to the use of the premises in the production of income. Of course, it does not follow that all expenses in relation to dwellings are deductible on the same basis. Rent has been singled out for special reference. It is not profitable to speculate on the reasons for that. But, to put it at its lowest, the treatment of rent in sec. 112(1)(e) is entirely consistent with the proposition that there is nothing inherent in the nature of a house to require the conclusion that expenses in relation to the house and the occupation of the house are essentially and exclusively private and domestic and are unrelated in character to the income earning process.
Mr. Sorensen was disposed to agree that where a building ceased to be used as a dwelling its use for business purposes would give it the character of a business asset and that, in principle, part of the premises set up and used exclusively for income earning purposes could properly be characterised as a business asset in respect of which deductions would be available under sec. 111. In our view the concession was properly made but it does not go far enough. In the case of premises serving as a family home there are many instances where a workshop, surgery or study, or other part of the premises, is physically set up for income earning activities. That may be cogent evidence of an intention to use that part of the premises for income related purposes and may support the contention that to that extent the premises have that character. But physical change is not always necessary to allow the use of premises in the income earning process. The physical setting will doubtless be a consideration in determining whether the claimant for a deduction has established that he qualifies under sec. 111. But it cannot be determinative, at least where the assets are reasonably capable of use for the income earning purposes of the taxpayer. We see no distinction in principle between two cases; one, where a room is formally set aside for income purposes and the other, where it is simply used for income related activities. Nor is it essential that its primary use be for income earning purposes. There is no such qualification in the statute. Indeed, the
ATC 6009expressions ``to the extent'' and ``so far as'' demonstrate the absence of a statutory minimum applicable in all cases.
But it is not sufficient that income related activities take place in the premises. A purely temporal connection between expenditure and income earning on the premises is insufficient. As Turner J. observed in considering the deductibility of losses under the earlier sec. 111 (
C. of T. v. Webber  N.Z.L.R. 552, 559):
``... it cannot be sufficient if the loss is incurred simply in the time when the income is being earned. There must be an inquiry into `the degree of connection between the trade or business carried on and the cause of the liability for damages'.''
So, too, in this class of case there must be an inquiry into the degree of connection between income related activities and the asset or advantage gained or sought to be gained by the expenditure. The income related activities must be of sufficient and practical relevance so that, whilst not necessarily affecting the overall quantum of the expenditure (and bearing in mind that certain expenses are relatively fixed regardless of use or extent of use), they may be regarded as giving an identifiable part of the premises the character of use for income earning purposes during those times. The extent of that kind of use would, of course, be reflected in the quantum of the deduction. The character of an asset, and so of an outlay in relation to the asset, may, of course, change from day to day, or even from hour to hour. But there may be an air of unreality in a claim that such a change in character has taken place. The impact of the income related activities must be real enough to warrant the conclusion that expenses associated with that part of the premises ought to be apportioned. In that regard it will not always be easy for the taxpayer to discharge the onus on him. Even so, it is a question of fact and degree: and there is no reason, in principle, why a sufficiently substantial use from time to time for income related activities of part of the premises used as a family home, should not qualify current revenue expenses in relation to the premises as having, in part, a revenue character.
Mr. Sorensen referred us to a number of recent Australian decisions and invited us to follow the approach taken in
Thomas v. F.C. of T. (1972) 72 ATC 4094; 3 A.T.R. 165;
F.C. of T. v. Faichney (1972) 72 ATC 4245; 129 C.L.R. 38; and
F.C. of T. v. McCloy 75 ATC 4079; (1975) 5 A.T.R. 315, where deductions in respect of home office expenses were refused. In Thomas, interest on money borrowed to enable additions to the home of a barrister to be made was held not to be deductible under the Australian counterpart of sec. 111, although one of the rooms was added to the house as a study for professional purposes. Walsh J. said at 72 ATC 4097; 3 A.T.R. 168:
``The appellant seeks to support his claim mainly by saying that one of the three rooms then added has been and is used by him as a study for professional purposes. But, in my opinion, the house should not be regarded in the circumstances of this case as being or as including part of the business premises of the appellant and the loan should not be regarded as having been raised for the purpose of providing him with business premises.... The appellant did not spend money in erecting premises suitable only for use as business premises. He added rooms to his house.''
In Faichney, a research scientist employed by the C.S.I.R.O., claimed deductions in respect of expenses incurred and depreciation on furniture and furnishings in respect of one room of his four bedroom home. The room had been set up as a study and was used by him during evenings and weekends for the preparation of material for publication, the writing of reports and papers, and the reading of current technical literature. The Board of Review allowed the objection, arriving at an apportionment on the basis of the proportion of the floor area of the room to the total floor area of the house. On appeal it was held that the room was a part of the home and a proportion of mortgage interest attributed to it was not an allowable deduction. However, the appeal in respect of other items of expenditure was dismissed. Mason J. expressed the view that the interest fell outside the counterpart of the first limb of sec. 111, and went on to conclude that the interest payment was an outgoing of a private or domestic nature. He said at 72 ATC 4248; 129 C.L.R. 43:
``To my mind, a study in a taxpayer's home, no matter how great the extent of its dedication in point of use to the pursuit of those activities from which the taxpayer earns his income, is a part of that home.
ATC 6010Expenditure incurred in the erection of a study or in its renovation is as much an outgoing of a capital, private or domestic nature as expenditure on any other part of the home.''
Later in his judgment, in the course of giving his reasons as to why part of the cost of lighting and heating referable to the use by the taxpayer of the study was deductible under sec. 51, he said (72 ATC 4250; 129 C.L.R. 45):
``It is enough that light and heating was provided in the study whilst the taxpayer was working on matters which fell within the scope of his employment. In that respect the expenditure differs from costs incurred in providing the study, for in that case what is provided retains its essential character as part of the taxpayer's home.''
In McCloy Helsham J. applied Thomas and Faichney in upholding an appeal by the Commissioner against a decision of a Board of Review allowing an objection by a sales representative in respect of the deduction of interest and insurance payments referable to an office in his residence set aside for business use. He said at 75 ATC 4082; 5 A.T.R. 319:
``The purchase money was not outlaid in the first place to purchase a place of business; it was outlaid for the purchase of a home, although the choice of that home was made because it had facilities that would enable the taxpayer to carry on with greater advantage to himself his income-earning activity. In this respect the case is no different from any expenditure on a home either chosen because it provides, or altered or adapted to provide, facilities which promote income because a person carries on part of his income earning activity there. And if the initial expenditure was of this character, it is difficult to see how money necessary to be paid in order to service that expenditure, or to insure what was acquired as a result of that expenditure, can assume any other or different character, or how a portion of it can be said to assume a different character such as would make it an outgoing incurred in gaining or producing the taxpayer's assessable income.''
With the greatest respect we are unable to accept the reasoning in these decisions. First, and this applies particularly to the passage from the judgment in McCloy, we consider that it is not the character of the initial outlay for the property which is in question under the deduction provision. The focus must be on the particular outlay for which deduction is sought and that necessarily involves considering the nature and use of the property in that income year in order to determine whether or not the necessary relationship exists between the expenditure (in the McCloy case, interest) and the carrying out of income related activities on the premises. Second, for reasons already given, we are unable to agree that a property used as a home cannot also, in part and for part of the time, have the character of business premises. As we see it, the essential question for consideration in this respect is whether part of the premises - whether set up as a workshop or surgery or study (cf.
Caffrey v. F.C. of T. 76 ATC 4117, 4118-4119; 6 A.T.R. 230, 232), or whether simply used for income related activities - has a sufficient connection with the taxpayer's income earning process to justify the conclusion that expenditure referable to that part of the premises is incurred in the course of gaining or producing the assessable income.
Mr. Sorensen argued in the alternative that the outgoings in this case were wholly of a private or domestic nature and, therefore, were non-deductible under sec. 112(1)(i). In some cases sec. 111(a) and sec. 112(1)(i) may raise different considerations. On the facts of this case one is the corollary of the other. And the finding of deductibility under sec. 111(a) for the same reasons involves a finding that the deduction is not barred under sec. 112(1)(i).
We turn now to the claim to deduct interest on the mortgage secured on the property, the loan moneys having been expended in the purchase of the property. A preliminary question that arises here concerns the relationship between sec. 111 and sec. 112(1)(i). Section 112(1) opens with the words ``notwithstanding anything to the contrary in section 111 of this Act''. It might be considered that the section only modifies sec. 111 and that a deduction must satisfy both provisions. A challenge to the deduction of an expenditure or loss is often made on the alternative grounds that it is barred under sec. 112(1)(a) and does not satisfy sec. 111 (
Levin & Co. Ltd. v. C. of I.R.  N.Z.L.R. 801;
Nicholls v. C. of I.R.  N.Z.L.R. 836). Indeed, an expenditure held to be of a revenue kind and thus not barred by sec. 112(1)(a) may still fail
ATC 6011under sec. 111 and an expenditure satisfying sec. 111 may fail under sec. 112(1)(a) (e.g.
Broken Hill Theatres Pty. Ltd. v. F.C. of T. (1952) 85 C.L.R. 423). The position may well be different under paragraphs of sec. 112(1) which provide an affirmative test of deductibility. Thus, although the point was not finally determined by this Court in
Harley v. C. of I.R.  N.Z.L.R. 482, it may well be that sec. 112(1)(g) gives rise to a claim for deduction of interest independently of sec. 111. But, it was not submitted and could scarcely be argued that sec. 111(a) imposes a more stringent test of deductibility in this class of case.
Section 112(1)(g) speaks in the present. It is concerned with how the capital was employed during the period in which the interest claimed as a deduction was incurred, not how the capital was employed when first raised. Having regard, too, to the statutory language ``in the production of the assessable income'' in sec. 112(1)(g) and ``in the gaining or producing of the assessable income'' in sec. 111(a), an inquiry under the former provision will ordinarily involve essentially the same considerations in determining whether or not there is a sufficient connection between the expenditure of interest and the income earning activities involving the use of the property, for the interest to qualify for deduction. We say ``ordinarily'' because, of course, sec. 112(1)(g) is expressly concerned with the employment of the capital and it may be that in some cases that may involve further considerations not confined to the manner in which the property is used (Harley, p. 498). Finally, under sec. 112(1)(g), as in sec. 111, the statutory language makes it quite clear that the interest is apportionable to reflect the manner in which the capital was employed in the income year.
The remaining items are maintenance and depreciation. Section 113 is concerned with deductions for repairs and depreciation. It is obscure and awkwardly drafted and for a number of reasons it is a difficult provision to interpret and apply. One is that the relationship of the two provisos to sec. 113(1) to the substantive part of sec. 113(1) and to sec. 111 and sec. 112 is not clear, particularly as there is no mention of sec. 112 in sec. 113 (see
Auckland Trotting Club (Incorporated) v. C. of I.R.  N.Z.L.R. 967). An inquiry which is of some significance in this case is the relationship between sec. 111 and the first proviso to sec. 113(1). Depreciation does not involve an expenditure. It results in a reduction in the value of the asset and it does not give rise to the incurring of an actual loss. And the proviso empowers the Commissioner to allow a deduction for depreciation. With respect to the contrary view expressed by Wilson J. in
Clifford v. I.R.C. (1966) 10 A.I.T.R. 229, at pp. 280-281, we consider that the depreciation deduction is an ``allowance'', not an expenditure or loss, and that sec. 111 has no application.
The condition precedent to the allowing of depreciation is expressed in the alternative limbs (a) and (b) of the proviso, namely, that in the case of plant, machinery, equipment and temporary buildings, depreciation is caused by fair wear and tear and by the fact of the asset becoming obsolete or useless, and in the case of other assets, notably permanent structures, is caused by fair wear and tear and, in either case, the depreciation cannot be made good by repair. Wear and tear is directly related to the use of the asset. Where the qualifying conditions of the proviso are satisfied, the Commissioner may allow ``such deduction as he thinks just''. It is implicit in the proviso that, where an asset has been used in the income year both in the production of income and for private purposes, in order to arrive at a just determination, apportionment of the total depreciation for the year and the allowance of a deduction of that part referable to business use of the asset is both permissible and proper. In the same way the section does not preclude deduction where part only of the premises is used for income related activities. In such a case the considerations discussed earlier in this judgment in relation to deductibility under sec. 111 are equally relevant.
As to the maintenance item, it is not necessary to decide the difficult questions relating to the meaning of ``repair'' and the relationship of the provisions of sec. 113 in that respect with sec. 111 and 112. If sec. 111 is applicable, we consider that as a current outgoing, and for the reasons discussed earlier in relation to other items of expenditure, expenditure on maintenance of a dual purpose asset may be deductible in part and that, as in the case of depreciation, there is nothing in the language of sec. 113 to preclude the allowing of a deduction in respect of repair to such assets otherwise meeting the general requirements of that provision.
It is not necessary to deal with the facts in any detail. The basic argument for the Crown was that, as a matter of principle under the statutory provisions, no deductions were allowable in respect of the various items. The Board of Review's findings have been set out earlier in this judgment. It concluded its analysis with the statement that:
``The Board is satisfied on the evidence before it that - although the Objector had not set apart and made use of a room at his home exclusively for purposes connected with his tutoring duties - he nevertheless made regular use of the dining room to such an extent as to warrant the view that part of his expenditure in relation to that room was exclusively incurred in the production of his assessable income for the relevant income year.''
It was not suggested in this Court that, if deductions of the kind in question were allowable under the Act, the Board of Review was not entitled on the evidence to make those findings of fact, or to reach that conclusion. Nor was it argued that, if they were deductible items, the Board of Review had erred in upholding the quantum of the amount apportioned to the income related activities of the taxpayer in this case. That being so we refrain from any comment on the difficult question of apportionment in this class of case.
For the reasons given the appeal is dismissed. We were informed by counsel that, this being a test case involving a modest sum for the respondent taxpayer, the Commissioner has agreed to meet the costs and that no order as to costs is required.