Case N57
Members: HP Stevens ChJR Harrowell M
BR Pape M
Tribunal:
No. 1 Board of Review
B.R. Pape (Member)
The references forwarded to the Board relate to decisions of the Deputy Commissioner of Taxation in respect of the objections lodged by the taxpayer against the 1975 and 1976 assessments of income tax.
2. Both references were heard together on the day of the hearing.
3. The taxpayer claims that part of the telephone expenses incurred by him, amounting to $57 for 1975 and $135 for 1976 are allowable deductions pursuant to sec. 51(1) of the Act. He also claims an amount of $800 incurred by him during 1975 is an allowable deduction pursuant to sec. 69 of the Act.
4. I deal firstly with the issue of whether the taxpayer is entitled to an allowable deduction pursuant to sec. 69 of the Act.
5. The facts are reasonably simple. The taxpayer received a letter from the Deputy Commissioner of Taxation dated 4 June 1973. For convenience I set out the terms of this letter:
``An investigation of your income tax affairs has been commenced in this office. So that this investigation may be completed as soon as possible, you are asked to -
- 1. Set out on the enclosed Inv. 25 full details of the assets and liabilities, both business and private, of yourself, wife and dependent children, as at 30 June each year 1967 to 1972 inclusive. Assets should be shown at cost price.
- 2. Furnish a supplementary list indicating, in respect of each asset -
- (a) date of acquisition,
- (b) cost price, and
- (c) date and cost of any additions, improvements and alterations.
- 3. State, where an asset has been disposed of -
- (a) sale price or trade-in value, and
- (b) date of disposal.
- 4. Furnish a list of any items of a non-
ATC 291
taxable nature received during the above periods (e.g. gifts, legacies, matured life assurance policies), showing -
- (a) date received,
- (b) amount or value,
- (c) source from which derived, and
- (d) what supporting documentary evidence is available.
- 5. Furnish a complete statement of your cost of living and personal expenditure for each year ended 30 June 1968 to 1972 inclusive.
It is suggested that these records be forwarded under registered cover, with the enclosed label attached. They will be returned to you by registered post in due course.''
6. There were two blank forms enclosed with this letter. One was a form headed ``Statement of Assets and Liabilities'' (Inv. 25) and the other was a form headed ``Statement of Cost of Living and Personal Expenditure'' (Inv. 15).
7. On 17 December 1974, an officer from the investigation section of the Taxation Office called upon the taxpayer's agents. At this meeting the following handwritten documents were furnished to the investigation officer:
- (a) A statement of assets and liabilities of the taxpayer as at 30 June 1968 to 30 June 1972. This statement was dated 17 December 1974 and was the completed form Inv. 25 which had been sent to the taxpayer with the letter of 4 June 1973. At the bottom of the form the following certification was made:
``I hereby certify that the above is a true and complete statement of the assets and liabilities of myself, wife and children (dependants) as at the above dates.
For Taxpayer (Signed) (Tax agents Signature) ...................... (Date) 17-12-74''
- (b) A schedule which showed the taxpayer's ``notional income'' for each year from 1969 to 1972 inclusive. In a note on the schedule the taxpayer agreed ``to have the amount of $1,300 added to his income'' for the 1968 year.
- (c) Attached to the schedule described in (b) were a further six handwritten schedules. These documents appear to be supporting schedules on which were made an allocation of cheques drawn by the taxpayer from 1969 to 1972 into the following classifications:
- concessional deductions;
- capital;
- sundries;
- living expenses.
8. The schedules described in para. 7(b) and 7(c) above were prepared on multi-column stationery which is commonly used in accountants' offices.
9. It would appear that the schedule described in para. 7(b) above was incomplete. This is illustrated by the last few lines of the schedule which I have reproduced below:
1969 1970 1971 1972
$ $ $ $
Notional income 6,296 7,226 4,743 (3,643)
Taxable income
returned 4,200 4,707 5,218 2,383
------ ------ ------ ------
Shortages 2,096 2,519 (475) (6,026)
+ 131 156 159
------- ------ -------
2,227 2,675
The last two lines were written in pencil and reflect an adjustment apparently agreed to between the tax agents and investigation officer on 17 December 1974.
10. Notices of amended assessment of income tax were issued on 7 April 1975 in respect of the 1968 to 1970 income years. The amended taxable income in respect of each
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year was in accordance with the figures submitted on 17 December 1974. The adjustment sheet referred to the amendments as ``Other income now included in accordance with the schedules furnished by you''.11. Mr. Patterson of counsel submitted on behalf of the taxpayer that the documents described by me in para. 7 constituted a return within the meaning of sec. 69 of the Act. Section 69 provides as follows:
``(1) Expenditure incurred by the taxpayer in the year of income for the preparation by a registered tax agent of a return required by or under this Act to be furnished to the Commissioner in respect of income of the taxpayer shall be an allowable deduction.
(2)-(3)...''
12. The taxpayer's objection against the 1975 assessment of income tax said inter alia:
``As the information required by the Commissioner in respect of our client's investigations constituted `returns' within both sec. 162 and sec. 163, it is considered that this expenditure is an allowable deduction under sec. 69 of the Act...''
Section 162 provides as follows:
``(1) Every person shall, if required by the Commissioner, whether before or after the expiration of the year of income, furnish to the Commissioner, in the manner and within the time required by him, a return, or a further or fuller return, of the income or any part of the income derived by him in any year, whether on his own behalf or as agent or trustee, and whether a return has or has not previously been furnished by him for the same period.
(2)...''
Section 163 provides as follows:
``Every person, whether a taxpayer or not, if required by the Commissioner, shall, in the manner and within the time required by him, furnish any return required by the Commissioner for the purposes of this Act or of any State income tax law.''
13. The Board was referred to the following Income Tax Regulations which in so far as they are relevant are set out as follows:
``9. (1) Except as otherwise prescribed, every return under the Act shall -
- (a) be made and furnished in such of the forms provided by the Commissioner for the purpose as is applicable;
- (b) contain the information and particulars mentioned or referred to in that form;
- (c) be verified by declaration as therein set forth; and
- (d) be accompanied by all such balance-sheets, profit and loss accounts, statements and other documents, as are mentioned in the form or as are requisite.
(2)-(3)...
10. (1) The form of return applicable in the case of persons other than companies shall -
- (a) itemise the income derived from various sources and the deductions claimed;
- (b) provide for separate Parts as follows:
- Part A - Income from Personal Exertion (when Part C or Part D is unsuitable);
- Part B - Income from Property;
- Part C - Income from a profession, trade, business, manufacture or concern, not shown in Part A or Part B;
- Part D - Income of a farmer, pastoralist or horticulturist, & c., not shown in Part A or Part B;
- (c) provide in each Part for particulars to be supplied under separate headings relating to income derived and deductions claimed;
- (d) provide for the following particulars or such modifications or extensions thereof as the Commissioner from time to time requires, namely:
- Sources of Information and
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- Certificate to be signed by Tax Agents;
- Live stock schedule;
- Statement of wool and wheat produced and sold or otherwise disposed of;
- Statement of salaries, wages, and commission paid, and allowances to employees;
- Statement of interest paid or credited to non-residents;
- Statement by trustee or partnership;
- Statement of dividends received;
- Statement of interest received;
- Statement of concessional deductions; and
- (e) provide for a declaration by the person making the return that the particulars shown therein and also those stated in the accompanying statements are true and correct in every particular and disclose without reservation or exception a full and complete statement of the total income derived during the year of income from all sources in and out of Australia.
(2)...
...
11A. Notwithstanding anything contained in Regulations 10 and 11, the Commissioner may provide forms of returns which omit any of the items, parts, particulars or statements specified in those regulations.
...
18. Returns required by the Commissioner otherwise than by notice published in the Gazette shall be made and furnished in the form required by the Commissioner.
19. The Commissioner may at any time accept a return or form which is substantially in accordance with a prescribed form or a form provided by the Commissioner.
...
25. A return shall not be deemed to have been duly furnished to the Commissioner unless and until -
- (a) the proper form signed as required by the Act and Regulations and containing a full, true and complete statement of all matters and things required to be stated therein by the Act and Regulations, the Commissioner, and the form itself; and
- (b) all balance-sheets, profit and loss accounts, statements, notices, and other documents which, by the Act, the Regulations, or the Commissioner, are required to accompany the return -
have at the place where under these Regulations the return is to be furnished, been received by an officer authorized by the Commissioner to receive returns.''
14. It was submitted on behalf of the Commissioner that -
- (a) the additional information requested during the course of the investigation was authorised by sec. 264 of the Act and the information provided did not amount to a further, fuller or special return.
- (b) alternatively, if the Board held that the information supplied is held to be a return it, nevertheless
-
- (i) is not a return required by or under the Act to be furnished to the Commissioner and/or
- (ii) is not a return in respect of income of the taxpayer.
Section 264 provides as follows:
``(1) The Commissioner may by notice in writing require any person, whether a taxpayer or not, including any officer employed in or in connexion with any department of a Government or by any public authority -
- (a) to furnish him with such information as he may require; and
- (b) to attend and give evidence before him or before any officer authorized by him in that behalf concerning his or any other person's income or assessment, and may require him to produce all books, documents and other papers whatever in his custody or under his control relating thereto.
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(2) The Commissioner may require the information or evidence to be given on oath and either verbally or in writing, and for that purpose he or the officers so authorized by him may administer an oath.
(3) The regulations may prescribe scales of expenses to be allowed to persons required under this section to attend.''
15. In my view the provisions of sec. 161 and 162 of the Act contemplate the furnishing to the Commissioner of a return of income which is in accordance with the Income Tax Regulations . More particularly reg. 10(1)(a) provides that -
``The form of return applicable in the case of persons other than companies shall -
- (a) itemise the income derived from various sources and the deductions claimed.''
The schedules which were furnished to the investigation officer on 17 December 1974 fail to disclose this information. It was contended by the counsel for the taxpayer that the provisions of reg. 11A would assist the taxpayer's case. In my view this submission is not tenable as the Commissioner did not provide any ``forms of returns'' which bear any resemblance to the handwritten schedules furnished on 17 December 1974. The only form which was provided by the Commissioner was a ``statement of assets and liabilities'' referred to as ``Inv. 25''.
16. Whilst I am of the view that the forms ``Inv. 15'' and ``Inv. 25'' are returns within the meaning ascribed by the Shorter Oxford Dictionary as ``a report of a formal or official character giving information as to the numbers amounts etc. of the subjects of inquiry'', they are not returns which have been prescribed by the Act or the Regulations.
17. It may be that sec. 163 is wide enough to include the returns covered by the ``statement of assets and liabilities'' and ``statement of cost of living and personal expenditure''. This section provides that persons, ``whether a taxpayer or not'' may be required to furnish any return required by the Commissioner. However to satisfy the provisions of sec. 69 the return must be in respect of income. In my view a statement of assets and liabilities is not a return with respect to income nor for that matter is a statement of cost of living and personal expenditure. To this extent the statement of assets and liabilities is a source document for the computation of the notional income set out on the handwritten schedule prepared by the taxpayer's agent. No income is disclosed either directly or indirectly by a statement of assets and liabilities.
18. In addition, even if it could be construed that the handwritten documents were returns with respect to income, no satisfactory evidence was adduced before the Board that the Commissioner required these schedules to be furnished. Mr. Patterson of counsel asked the Board to infer from the negotiations between the tax agents and the investigation officer that the handwritten schedules were supplied in response to a request. Alternatively the inference could be drawn that the schedules were prepared by the tax agents upon their own initiative so as to bring about a satisfactory conclusion to the investigation on behalf of the taxpayer. The note in respect of the 1968 year of income recorded the fact ``that the taxpayer has agreed to have the sum of $1,300 added to his income for that year'' in my view lends more weight to the drawing of the latter inference than the former. On the evidence placed before the Board I would not accede to the request to draw an inference that the two handwritten schedules described in para. 7(b) and 7(c) were requested by the Deputy Commissioner of Taxation.
19. The Deputy Commissioner of Taxation in making his decision to issue the notices of amended assessment of income tax in respect of 1968, 1969 and 1970 appears to have done so in reliance upon sec. 167 of the Act. This section is said to add to or amplify sec. 166 of the Act.
20. In my view these amended assessments arose from the information obtained by the Deputy Commissioner invoking the assistance of sec. 264 of the Act. Whilst I am of the view that the ``statement of assets and liabilities'' is a return (albeit one which is not prescribed by the regulations, although quaere the operation of reg. 18) it is not a return with respect to income.
21. Furthermore the handwritten schedules supplied on 17 December 1974 fail
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to comply with the provisions of sec. 165(1) of the Act. Section 165(1) of the Act provides as follows:``Any person who charges directly or indirectly any fee for preparing or assisting in the preparation of a return required by this Act or the Regulations or by the Commissioner shall sign a certificate (in this Act called an `agent's certificate') in the prescribed form to be endorsed on or annexed to the return setting out such information as to the sources available for the compilation of the return as is prescribed.''
22. The consequences of the failure to comply with sec. 165(1) appear to be that if the handwritten schedules were a return, the return is not deemed to have been duly furnished vide reg. 25.
23. Accordingly, for the foregoing reasons, I am of the opinion that the documents handed to the investigation officer on 17 December 1974 (Exhibit 2) do not constitute a return within the meaning of sec. 69 of the Act.
24. I turn now to the question of the deductibility of the telephone expenses incurred by the taxpayer during the 1975 and 1976 years of income. Of the amount claimed of $130 (1975) and $213 (1976), the Commissioner allowed $70 and $56 respectively as a deduction pursuant to sec. 51(1) of the Act.
25. On the day of the hearing, the taxpayer's claim was amended to $127 (1975) and $191 (1976). Accordingly, the amounts in issue were $57 (1975) and $135 (1976).
26. The taxpayer's claim on the day of the hearing was reformulated as follows:
1975 1976
$ $ $ $
Metered calls
6 months to October 38.50 83.85
6 months to April 75.66 114.16 125.55 209.40
----- ------
Rent in Advance
6 months to May 32.00 38.50
6 months to May (Adj.) 6.42
6 months to November 37.00 75.42 38.50 77.00
----- ------- ------ -------
Amount incurred $189.58 $286.40
------- -------
190 286
Proportion claimed pursuant to
sec. 51(1) -- 2/3 127 191
Amount allowed 70 56
---- ----
Amount in issue $57 $135
---- ----
27. The taxpayer at the hearing adduced evidence that in respect of the 1975 year of income 73% of the metered calls were incurred in earning his assessable income and in respect of the 1976 year of income 72% of the metered calls were so incurred. This evidence was not contradicted.
28. The taxpayer commenced employment with P Ltd. some time on or about 18 October 1971. He was employed as a car salesman by this company which had the ``X'' dealership. He remained in employment with P Ltd. until 1 November 1974. His evidence, which was uncontradicted, was to the effect that he gained a great many ``prospects'' and customers from his association with a local sporting and social club. He also became involved in selling ``X'' vehicles to the ``Y'' industry. To promote these sales the dealership advertised in a ``Y'' industry magazine, in which the taxpayer's name and telephone numbers both business and home
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were inserted. His business cards also recorded his home telephone number. Whilst he was employed with P Ltd. from 1 July 1974 - 1 November 1974 he was paid a retainer of $105 per week, the balance of his earnings being commission.29. It appears from the evidence that P Ltd. in either October or November 1974 changed the brand of its dealership. The taxpayer left P Ltd.'s employ and started work with N Ltd. on 6 November 1974 as a car salesman. He remained as an employee of this company until 23 January 1975. During this period he received a weekly retainer plus commission on sales made. He said that he did not carry a business card whilst he was with N Ltd.
30. On 4 February 1975, he commenced employment with the L Group, which also had an ``X'' dealership. He remained with this Group until 4 December 1975. There he was employed by one of the companies in the group as the Fleet and Leasing Manager. This position also required him to make and receive phone calls in his residence and which were related to his work.
31. Thus I find as a fact that whilst the taxpayer was employed in the vehicle industry it was an implied condition of his employment that a telephone be maintained in his place of residence.
32. The other members of the family who resided with the taxpayer during the relevant years were his wife, two sons and one daughter. In 1975 the sons were aged 19 years and 16 years respectively and his daughter was aged approximately 7 years.
33. It appears from the evidence, that with the exception of his daughter all of the members of the taxpayer's family made some use of the telephone. Furthermore it is not in issue that the taxpayer used the telephone to make and receive business calls. The only issue here is the quantum.
34. The principal issue before the Board in respect of the claim for telephone expenses is the deductibility of the payment for the rental of the telephone in respect of the 1975 and 1976 years of income.
35. The Board was referred to the recent decisions of the High Court in
Forsyth
v.
F.C. of T.
81 ATC 4157
,
Handley
v.
F.C. of T.
81 ATC 4165
. Both counsel for the taxpayer and the Commissioner's representative in reliance upon these decisions submitted that it was the ``essential character'' of the telephone rental which determined whether it was an allowable deduction or not. Counsel for the taxpayer submitted that the ``essential character'' of this expenditure was a business one, whereas the Commissioner's representative submitted that its essential character was a domestic expense.
36. The Commissioner's representative put an alternative submission that if the Board held that the essential character of the expenditure was not of a domestic nature then it was capable of apportionment between the use for domestic and income earning purposes.
37. Section 51(1) of the Act provides as follows:
``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature or are incurred in relation to the gaining or production of exempt income.''
I have deliberately stressed the words ``to the extent'' to emphasise the fact that the section specifically contemplates apportionment in appropriate cases.
38. In my view it is not helpful to attempt to seek the answer to the hypothetical question of whether the rental of the telephone would have been incurred irrespective of whether the taxpayer needed it to produce his assessable income. This in my opinion avoids the issue. The question which requires to be answered is for what purpose or purposes did the taxpayer have in mind when he incurred the outgoing in respect of the rental of the telephone?
39. Upon the evidence before the Board, I have formed the opinion that the incurrence of the telephone rental whilst he was employed in the vehicle industry was for a twofold purpose, one business and the other private or domestic. These purposes were co-extensive. Accordingly, I find that the rental
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of the telephone in this case is incapable of having the essential characteristic of either an outgoing incurred in gaining or producing the assessable income or of a private or domestic nature. It is a case for apportionment.40. In my view the rental of the telephone does not fall within the ambit of the comments of Wilson J. in Forsyth's case (supra) at p. 4165:
``I would make one further comment, dealing with the effect of the words `to the extent to which' first appearing in sec. 51(1) in the context where there is an outgoing which requires to be apportioned between the gaining of assessable income and otherwise. In a case where the whole of that outgoing bears some association with the home, it is in my view a misconception to think that the result of the process of apportionment is necessarily to deny a continuing domestic character to the portion of the outgoing so identified. So to read the sub-section is to misread it.''
41. It seems to me that the maintenance of a telephone in the taxpayer's home is not related to the home as such but to the purposes for which the taxpayer uses the telephone. In my view it is impossible to categorize the use of the telephone for business purposes as having a domestic character because it happens to be installed in the taxpayer's home. Its character is in my view more dependent upon the nature of its use than to where it is installed.
42. I accept the evidence of the taxpayer's agent that 73% of the cost of metered calls incurred during 1975 were made in earning his assessable income. However, the taxpayer was only employed for seven months in the car industry during 1976 comprising a period of five months with one employer and a period of two months with another. A period of two months unemployment separated these periods of employment. Accordingly, I would accept that only 72% of the metered calls made in the six months period to 24 October 1975 were for business purposes.
43. It was submitted by the Commissioner's representative that if the case was held to be one for apportionment, then the telephone rental must be apportioned according to the use made of the telephone and that an appropriate basis would be according to an estimate of incoming and outgoing private and business calls. On the facts of this case, this would seem to be the appropriate method to use to apportion the telephone rent. The evidence is that during the 1975 year of income 73% of the outward calls were incurred in gaining the taxpayer's assessable income. However, in so far as 1976 is concerned it is difficult to accept the taxpayer's evidence that 72% of the outward calls were for business purposes during the period November 1975 to May 1976 because of the lack of continuity of employment. Nevertheless at the time when the rent was paid in advance for ensuing six months in October 1975, the taxpayer was in employment. I am prepared to infer from the level of outward business calls that this also reflected the number of inwards calls which were related to gaining or producing the taxpayer's assessable income.
44. It is also arguable in my opinion that in certain circumstances where the purposes for which the telephone rent was incurred is for business and private purposes then the appropriate basis is to allow one half of the rent as an allowable deduction. This method of apportionment reflects the nature of the rental payment. It is a payment to be made whether any telephone calls are made or received. The cost of the telephone rent is a joint cost to be apportioned between business and private purposes.
45. As the taxpayer's objections limit me to two-thirds of the total expenditure claimed I therefore would allow:
1975 1976
$ $
Metered calls in arrears
2/3 of $114............ 77
2/3 of $84............. 56
Rent in advance
2/3 of $75............. 50
2/3 of $38............. 25
---- ----
$127 $81
---- ----
Amount claimed $127 $191
---- ----
46. Accordingly, a further deduction should be granted to the taxpayer as follows:
1975 1976
$ $
Total amount allowed...... 127 81
Amount previously allowed. 70 56
--- ---
$57 $25
--- ---
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47. Thus for the foregoing reasons I would reduce the taxable income in respect of the 1975 amended assessment by $57 and by $25 in respect of the 1976 assessment. In all other respects the 1975 and 1976 assessments are confirmed.
Claims allowed in part
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