Case N30

KP Brady Ch

LC Voumard M
JE Stewart M

No. 2 Board of Review

Judgment date: 1 May 1981.

K.P. Brady (Chairman); L.C. Voumard and J.E. Stewart (Members)

In this reference the taxpayer, a school teacher and poet, claimed as deductions under sec. 51(1) and sec. 54 of the Income Tax Assessment Act 1936 a net amount of $4,344 which had

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been expended by him during the income year in issue in respect of writing and publishing activities.

2. The Commissioner disallowed the taxpayer's claim and his objection to the assessment. Resulting from that action, the taxpayer has requested that the decision on the objection be referred to a Board of Review.

3. At the hearing of the reference, the taxpayer appeared in person and gave evidence. He was represented by his tax agent.

4. From the evidence it appeared that the taxpayer commenced his present occupation as a teacher in 1965 after completing a Masters Degree in Arts. It appeared also that he commenced a career as a poet in the same year. His first book of poems was published in 1971, and since then he has published a number of books, and a pamphlet which was designed to create a favourable climate for his poetry with the Australian public. For similar reasons he has contributed over the years to book reviews and has written articles and letters to the press.

5. In evidence the taxpayer sought to demonstrate that his activities as a poet amounted to more than a hobby and that, even though they have failed so far to produce a level of income comparable to that derived by some businesses or by him as a teacher in English, French and History, they were nevertheless of a business kind. Those activities were said to be closely related to, and intermingled with, his duties as a teacher and the work of research and of preparation required to be undertaken by those in the teaching profession who sought to attain prominence in their field of activity. While the taxpayer acknowledged that teaching and the sale of published works represented two separate sources of income for him, he resisted any suggestion that his activities as a poet were other than a businesslike extension of his occupation as a teacher, which had been undertaken by him systematically and continuously for many years for monetary reward as well as for personal satisfaction. Throughout his evidence, the taxpayer maintained that he had sought to exploit his talents for monetary gain and that he had both hoped for and expected to make profits from his publications which would in his opinion become commercially viable in time.

6. Before us, a close scrutiny was made of the various items and of amounts comprised within the amount of $4,344 above-mentioned. One consequence of that was that the taxpayer reduced his claim by $672 to the resultant amount of $3,672 in issue before us. The reduction of $672 comprised an amount of $140 which reduced a claim for telephone expenses from $175 to $35, an amount of $100 which eliminated his claim for air fares, and an amount of $432 which reduced a claim for vehicle expenses from $720 to $288.

7. In relation to the amount of $3,672 abovementioned, particular attention was devoted to the cost of publishing books, $2,550, and to the cost of book launching, $127, which were directly related to the business aspects of the taxpayer's activities as a poet during the year. It appeared that the amount of $2,550 was the taxpayer's two-thirds share of the total publishing cost of $3,825, one-third of which was borne by the Commonwealth Government. It was said that, unless an author or poet was the recipient of a literary grant or some other foundational or government grant, the costs of publication were usually borne by the former unless they enjoyed an established reputation, in which event the publisher might accept the risks of financial loss attendant upon publication.

8. One thousand copies of a book were published on the advice of the publisher in the year in issue, of which 125 were sold at a book launching function and a similar number were sold subsequently through outlets organised by the taxpayer's publisher. The proceeds from books sold at the launching passed wholly to the taxpayer, while proceeds from other sales entitled him only to a royalty of 331/3% of the price of each copy sold.

9. While the ownership and copyright of all books published resided in the taxpayer, the publisher retained possession of them until they were transferred to sales outlets or forwarded to the taxpayer at his request for gifting to friends. Outside the launching and the making of gifts, the taxpayer had no control over the disposal or sale of any particular publication. To achieve the latter, he relied upon the quality of his own work, the goodwill associated with the publisher's name and the normal selling expertise to be found with the latter or with outlets selected

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by the latter. In normal circumstances, matters concerned with second or further editions were only considered and decided upon as they became necessary in the light of public demand for a particular work.

10. The cost of the book launching was borne wholly by the taxpayer, and the function itself was considered to be a necessary adjunct to the successful promotion of a new publication. The cost was associated with the hire of a hotel room and bar, the provision of drink and savouries, and the printing and posting of some 350 invitations to people in the media and others considered to be important in the literary world. A function of that kind appeared to provide the taxpayer with funds from the sale of books with which to defray the expenses so incurred and, more importantly, with an opportunity to meet people who might be interested in his work and prepared to discuss it, and who might also be helpful in the wider fields of providing favourable reviews and sales promotion. In the experience of the taxpayer, that form of activity together with his own book reviews and press articles, combined to bring his name under public notice and to attract general acceptance of him as a person whose works possessed literary merit and which were deserving of financial support.

11. For present purposes it is not necessary to examine in any great detail the nature of the various other items which gave rise to claims for expenses incurred and for depreciation and which were also associated with the taxpayer's activities as a poet. Included in this category were professional journals and books, stationery, telephone, vehicle running costs, accountancy fees, typewriter repairs and depreciation of a typewriter, a reference books library and of a recorder.

12. However, it is convenient to dispose of several matters here which concern two of those items and a further item, subscriptions $10, which incorrectly found its way into the taxpayer's specific and separate claims as a poet and not into those which concerned him as a school teacher. It was conceded by the taxpayer that that outgoing did not form part of his claims in relation to his activities as a poet, and on the evidence it appeared that the cost of professional journals and books to the extent of $40 and a portion of the total depreciation claim of $289, in respect of the reference books library to an extent not determined, were also referable to his activities as a teacher and not to those carried on by him as a poet.

13. Dealing, first, with the item, subscriptions $10, we consider that, although the amount may be deductible under the provisions of sec. 73 of the Act in relation to the income derived by the taxpayer as a teacher, he failed completely in his grounds of objection by the omission of relevant details in relation to that item to satisfy the provisions of sec. 185 of the Act which provide that an objection shall state fully and in detail the grounds on which the taxpayer relies. Section 190 of the Act provides that, on every reference to a Board of Review or on an appeal to a Court, the taxpayer shall be limited to the grounds stated in his objection. This requirement cannot be waived or varied by a Court or by a Board (see
Lancey Shipping Co. Pty. Ltd. v. F.C. of T. (1951) 9 A.T.D. 267). The taxpayer did not in any event make any submissions to us under sec. 73, or in the alternative under sec. 51(1), in relation to that item. In the circumstances we cannot take the matter any further, and we concur with the submission by the Commissioner's representative that the taxpayer's claim must fail.

14. For similar reasons, we have concluded that the cost of professional journals and books to the extent of the $40 said to relate only to teacher activities cannot be allowed as a deduction. And, likewise, the portion of depreciation which related to the reference books library, even if quantified, must suffer a similar fate. However, as intimated, that portion was not quantified, with the consequence that no part of the total depreciation claimed may therefore be allowed as a deduction against the income derived by the taxpayer either as teacher or as a poet (even if the activities in the latter capacity should be accepted as constituting a business from which assessable income was derived). Before a Board can substitute some other amount for that used by the Commissioner, which in the instant case was ``nil'', there must be evidence to support that other amount on the civil standard of proof as in
Briginshaw v. Briginshaw (1938) 60 C.L.R. 336 at p. 361 et seq. As Dr. Gerber said (and Dr. Beck agreed) in Case K54,
78 ATC 523 at p. 532:

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``It goes without saying that it is not the function of a Board of Review to `third guess' and supply its own calculations in the absence of any satisfactory evidence on which to base such calculations.''

However, it should be observed that the conclusions reached by us in relation to subscriptions, the cost of professional journals and magazines and in relation to depreciation, arose out of the application of the statutory provisions to be found in Pt. V of the Act and from decisions of the Courts which are relevant thereto. Our conclusions in those matters do not otherwise impinge upon the claims made by the taxpayer or upon the efficacy of the submissions put to us in support of those claims.

15. Turning to the substantive issues arising before us, it was submitted for the Commissioner that the taxpayer was not carrying on a business as an author of poetry because his activities in that respect lacked any significant commercial purpose or character. It was submitted that, at the time of publication, the taxpayer could not have had any real expectation that his books would sell in large numbers and that, because of the substantial costs involved, profits could not have been expected from that activity.

16. It was also submitted that the taxpayer had not been successful in establishing his name as a poet or in creating a market for his books. It was said that the evidence before us supported only the drawing of conclusions adverse to the taxpayer's case. In particular, attention was invited to the taxpayer's need to bear his own publishing costs and to the absence of any formal arrangements whereby publication of second and further editions of books (if successful) would be undertaken.

17. While it was conceded that success in the profit-making sense was not an essential element for it to be determined that a business was being carried on, it was said to be of some relevance and that its absence must be regarded as being detrimental to the taxpayer's case.

18. In support of those submissions, we were referred to the following observations of Williams A.C.J. and Kitto and Taylor JJ. in the High Court case of
Martin v. F.C. of T. (1952-53) 90 C.L.R. 470 at p. 479, which concerned a distinction made by their Honours between a pastime and the carrying on of a business, in support of the proposition that the publication of the taxpayer's works amounted to no more than an extension of his personal interest in the writing of poetry:

``The definition of income from personal exertion includes the proceeds of a business carried on by the taxpayer, but the pursuit of a pastime, however vigorous the pursuit may be, does not usually amount to carrying on a business and gains and losses made in such a pursuit are not usually considered to be assessable income or allowable deductions in computing the taxable income of a taxpayer.''

19. The circumstances of this case are unusual. However, we have had no difficulty in accepting the evidence of the taxpayer, which remained unshaken despite close questioning of him by the Commissioner's representative. We accept as a fact that the Commonwealth Government defrayed one-third of the taxpayer's publishing costs and that, by inference, it did so because in its view his works were regarded as being meritorious and deserving of financial support. We also accept as a fact that the taxpayer, in paying the remaining two-thirds of those costs himself, did everything within his power as a comparatively unknown poet to ensure that his works would be available to the public and printed in sufficient numbers so that any immediate demand that may have followed publication could be met. The evidence indicated that the taxpayer sought and obtained professional advice as to how publication and distribution techniques might be utilised in the best possible way to maximise the impact of his works on the public. From the evidence it is also apparent that the taxpayer, through such events as the book launching function and approaches to the media, sought help wherever he could in those matters. It would appear that the more successful his works were the less he would be required to personally intervene in matters concerned with publication and promotion.

20. There was no evidence before us which could have assisted us in determining whether or not the activities of the taxpayer as a poet fell short of those which should be expected if profits are to be derived from that

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source. It is not for the Board to say what may or should have been done in that respect. Neither is it for us to say that, in the light of hindsight, the taxpayer may perhaps have been unwise to have pursued a course of conduct in the year before us that proved to be unprofitable.

21. The taxpayer spent long hours over many years in research and in the writing of his books as well as in the pursuit of activities concerned with their publication and sale. We are satisfied on the evidence, therefore, that those activities were ``considerable and systematic and organized'' to the extent that they should be regarded as amounting to the carrying on of a business (see
Shepherd v. F.C. of T. 75 ATC 4244) and that they were not merely ``the [vigorous] pursuit of a pastime'' (see Martin's case (ante)). In our opinion, general support for this finding may also be found in the High Court case of
Thomas v. F.C. of T. 72 ATC 4094, where Walsh J. found that the activities of the taxpayer, a barrister, in growing fruit and nut trees, were not carried on merely for the purpose of recreation or as a hobby and that he was in fact carrying on a business of primary production. In so finding, his Honour was not deterred by an apparent lack of business efficiency with which the taxpayer conducted his operations, nor by the fact that a harvest had not yet been obtained.

22. For the foregoing reasons, we would uphold the taxpayer's objection to the extent of allowing a deduction for the amount of $4,344 less the amounts of $140, $100 and $432, totalling $672, which were withdrawn by the taxpayer at the hearing, and less the further amounts of $10, $40 and $289, totalling $339, which the Board considers were correctly disallowed as deductions by the Commissioner. As a consequence, the taxable income shown in the assessment before us should be reduced by the net amount of $3,333.

Claim allowed in part

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