Garrett v. Federal Commissioner of Taxation.

Lusher J

Supreme Court of New South Wales

Judgment date: Judgment handed down 15 March 1982.

Lusher J.

This is an appeal by the applicant taxpayer against the disallowance by the respondent Commissioner of Taxation of the greater portion of certain travelling expenses claimed to have been incurred by him in connection with his income during the year ended 30th June, 1979.

The appellant at all material times was a medical practitioner by profession and he also conducted pastoral activities as a farmer and grazier on a property at Greenthorpe in the State of New South Wales. The following matters relate to the year in question and are accepted by me and found as facts.

The applicant resided on the property at Greenthorpe. His wife and children live on the property and he spent most of the week-ends there and also during the periods when sowing and harvesting were required on the property. On the medical side, the applicant

ATC 4061

is a consulting physician in allergies and he practised and treated patients in Sydney and certain country towns. The detail of this is as follows:

During the year ended 30th June, 1979, he carried on his medical practice at the following places:

  • At his surgery at Caringbah on Tuesday, Wednesday and one half-day Thursday of each week.
  • District Hospital at Mudgee on demand - during the year ended 30th June, 1979, this was eight times.
  • District Hospital at Condobolin on demand - during the said year this was eight times.
  • District Hospital at Cowra on demand - during the said year about forty times.
  • Greenthorpe - conducted an emergency semi-general practice at Greenthorpe. On an average, he saw about two patients per week.

The patients who consulted him at Cowra came from Cowra, Parkes, Cobar, Dubbo, Orange, Bathurst, Young, Canowindra, Canberra and other country areas.

The practices which he conducted at Cowra, Mudgee and Condobolin accounted for approximately thirty-five per cent of his gross fees derived during the year ended 30th June, 1979.

The applicant made use of an aircraft for the purpose of travel and transport to and from and between the various centres during the year in question. The aircraft was also used to transport vaccines from Sydney to these centres. It is necessary for these vaccines to be kept refrigerated and he was able to transport them to the country areas under refrigerated conditions in the aircraft. It would not be possible for this to be conveniently done in other forms of transport, the commercial airline schedules from time to time and if it was necessary to rely upon them, it would be very difficult to arrange attendances at appropriate times at the country centres, the workload of which varies from time to time with different seasons of the year and sometimes involves week-end practice in some centres to cope with the demand for his services. The appellant believes and it was not challenged that he was the only specialist allergist who practised in the country areas and since 30th June, 1979, he has enlarged the number of his country practices and accepts work in any country centre where it is offered. His country practices have commenced in response to requests from the medical practitioners in the particular centres to commence practice there. His intention is to continue this expansion and he attributes the number and success of his country practices to his flexibility in being able to respond to the demands for his services and this flexibility would not be possible if it were necessary for him to rely on transport other than the aircraft.

During the year in question, the appellant also derived income from his farming and grazing business. According to the schedule to the return, e.g. the sum of $52,660 was received in relation to wheat. The business could not have been properly managed by him without the availability of his aircraft and he has also used it for flights from the property to inspect stock, farm machinery, he says, and I accept that he would not be able to comply with the demands of his medical practices and his farming and grazing business if it were necessary for him to use road transport, public rail or air services and it is only because of the facility afforded to him by his aircraft for transport, that he is able to carry on his practices at the above-mentioned centres and also to properly manage the property.

The appellant claimed as a deduction an item, ``aircraft expenses'', in the sum of $23,300, made up as follows:

      Fuel           4,039
      Leasing       15,808
      Repairs        3,235
      Training         218

This item was disallowed by the respondent Commissioner as appears from the adjustment sheet. An objection was made against the disallowance, which objection was subsequently disallowed. Thereafter on 22nd January, 1981, the appellant gave a notice of dissatisfaction with the decision on the objection and requested him to treat the objection as an appeal to the Supreme Court.

ATC 4062

On or about 15th June, 1981, the appellant received a notice of amended assessment with an adjustment sheet in respect of the relevant year wherein the Deputy Commissioner advised that he had allowed a deduction of $3,495, in respect of aircraft expenses, this being assessed, so I am advised by counsel for the defendant as fifteen per cent of the amount of $23,300 claimed. I am advised by counsel that this deduction represents an allowance for the cost of travel between the various centres and the farming flights but does not include the cost of proceeding to the country centre from the initial starting point.

The details of the flights claimed and taken from the plaintiff's log book and the correctness of which were not challenged by the defendant are as follows:

``AIRCRAFT USAGE 1st July, 1978 - 30th June, 1979

      Medical use:                                                       Hours
      7 trips   Greenthorpe-Condobolin-Greenthorpe ...................   11.30
      1 trip    Bankstown-Canberra and return to Greenthorpe .........   11.30

      7 trips   Greenthorpe-Mudgee-Greenthorpe
      1 trip    Bankstown-Mudgee-Greenthorpe .........................   13.25

      1 trip    Bankstown-Canberra-Greenthorpe
      1 trip    Greenthorpe-Canberra-Greenthorpe .....................   02.30

      1 trip    Greenthorpe-Dubbo-Greenthorpe ........................   01.50

      1 trip    Greenthorpe-Melbourne-Greenthorpe ....................   05.00

      1 trip    Greenthorpe-Melbourne-Greenthorpe ....................   05.00

                Bankstown-Greenthorpe-Bankstown ......................   85.40
                Training for IFR Licence .............................    9.10
                Licence Renewal ......................................   01.00

      Farm use:
      2 trips   Greenthorpe-Parkes-Greenthorpe .......................   02.00
      1 trip    Greenthorpe-Bowral-Greenthorpe .......................   01.45

      1 Detour trip to Bowral ........................................   00.25
                            Total Usage ..............................  132.45

The relevant section is sec. 51(1). The subsection provides:

``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.''

The question of travelling expenses or similar expenses incurred by a taxpayer in relation to aspects of his income earning activity has been frequently litigated in a variety of situations from which some principles emerge.

Moneys expended on travelling expenses incurred between a taxpayer's residence in the sense of his home and his place of

ATC 4063

employment usually are not properly deductible under the section, either because such expenditure is within the exception as being of a private or domestic nature or because it is not a business expense or an expenditure incurred in gaining or producing assessable income (see sec. 51(1)). This is particularly so when the employment and the income earning activity does not commence until arrival at the place of employment. It is not enough to show that expenditure was a necessary prerequisite to the earning of assessable income; merely because the expenditure was necessary in that sense does not mean that it was incidental and relevant to the earning of the income. (
Newsom v. Robertson (1953) 1 Ch. 7;
Lunney & Hayley v. F.C. of T. (1958) 100 C.L.R. 478;
Lodge v. F.C. of T. 72 ATC 4174; (1972) 128 C.L.R. 171.)

A qualification to the above general proposition is that where the taxpayer, for example, keeps necessary equipment or instruments reasonably at his home and which he needs for the purpose of performing his work at his various places of work and, by reason of their bulk or otherwise, these need to be transported by vehicle from the home to such places, and where the equipment was used at home for purposes of practice, the expenditure was deductible within the section, even though the taxpayer was also thereby transported. This is because the expenditure incurred was part of the operations of earning the income and was essential to the carriage of the instruments rather than to the taxpayer's own travel (
F.C. of T. v. Vogt 75 ATC 4073; (1975) 1 N.S.W.L.R. 195, per Waddell J.).

Again, where the nature of the employment or income earning activity can be construed as having commenced at the time of leaving the home, the expenditure on travel is a proper deduction. This can be illustrated by the commercial traveller whose engagement provides that his duties commence when he leaves his home with his samples which are kept there as part of his employment. Similarly, where equipment is transported from the home to place of work by the taxpayer but the taxpayer's activities by which he earned income under a contract could be regarded as having been embarked upon either before or when he left his home so that the home in that sense became his base of operation from which he carried on his income earning activities the expenses become deductible. Expressed in other terms the contractual activities and requirements, by reason of their nature, in this sense are construed as being moved back anteriorly from the place of substantial performance to the earlier point or to the point of commencement of the journey. (
F.C. of T. v. Ballesty 77 ATC 4181, per Waddell J.)

On the other hand, where the travelling expenditure is incurred on journeys between different places of business or employment, the expenditure can be regarded as being a deduction within the subsection and this can be so even though one of the places of business may also be the home of the taxpayer, or the home can be so construed. (In
re The Income Tax Acts (1903) 29 V.L.R. 299; Case B81,
70 ATC 374; Case No. B107
(1952) 2 T.B.R.D. 536;
F.C. of T. v. Green (1950) 81 C.L.R. 313;
F.C. of T. v. Collings 76 ATC 4254 (Rath J.);
Owen v. Pook (1970) A.C. 244;
Taylor v. Provan (1975) A.C. 194 at pp. 215 and 225.)

The defendant Commissioner does not dispute the first part of the above general proposition and claims to have made an amended deduction in relation to that percentage of flights between the country centres, these being accepted as places of business and also the flights in connection with the farming activity. Other than that the defendant submits the expenditure is not within the subsection.

There is obviously a range of cases between the case of the expenditure on the simple daily regular journey on the part of a taxpayer in getting to and from the place of work where, on arrival, he commences his work and in consequence begins and concludes the earning of his income and the variety of factual situations that may emerge in relation to expenditure on travel in the context of sec. 51(1).

The subsection in question is of wide application. It is not limited to deductions from income derived only from carrying on business but to income generally including that of employees (Green's case (supra) at p. 319) and to companies, although private or domestic expenditure on the part of a company is not easy to envisage.

ATC 4064

There is of course a distinction between the two limbs of the subsection, the first relating to losses and outgoings generally, the second in relation to carrying on a business, and the distinction has been canvassed in the
Ronpibon N.L. & Tongkah Compound N.L. v. F.C. of T. ((1949) 78 C.L.R. 47, at pp. 55-57) where it was said that in actual working the alternative can add but little to the operation of the leading words. The plaintiff puts his case on either limb.

There are some principles by way of guidance in determining whether the particular expenditure is deductible. In Ronpibon N.L. v. F.C. of T. (supra at pp. 57-58) in relation to the first limb of the subsection, it was said:

``For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable income it must be incidental and relevant to that end. The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income,''


``... it is both sufficient and necessary that the occasion of the... outgoing should be found in whatever is productive of the assessable income,''

and it was later put at p. 58

``The question is how far was it incurred in the course of, how far was it incidental and relevant to, gaining or producing the assessable income.''

In that case it was considered that it could be decided by reference to the first limb. More recently in Lunney's case it was said that:

  • ``Examination of these cases'' (i.e. Ronpibon (supra) and
    Charles Moore & Co. (W.A.) Pty. Ltd. v. Federal Commissioner of Taxation, (1956) 95 C.L.R. 6), ``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.''

In Lunney's case (supra, p. 501) the question put was whether the expenditure was ``incurred in or in the course of earning assessable income'' and -

``whether or not it should be so characterised depends upon considerations which are concerned more with the essential character of the expenditure itself than with the fact that unless it is incurred, an employee or a person pursuing a professional practice will not even begin to engage in these activities from which their respective incomes are derived.''

(p. 501)

This was in the context of appeals by an employee and a dentist respectively and concerned journeys from home to work. Later, on the same page, it is said the expenditure in that case was not within the quoted words of the subsection itself. In some cases, it is a question whether expenditure was incurred in travelling on the taxpayer's work as distinct from travelling to and from his work, although this is said usually in relation to employees or self-employed persons (
Taylor v. Provan (1975) A.C. 194, at pp. 215 and 225).

Applying these principles and looking at the facts disclosed in this case, the basic facts are that the taxpayer resided at Greenthorpe with his family, a place where he carried on two business, one that of medical practice, the other that of farming and grazing. At Caringbah, Sydney, he carried on the practice of a medical practitioner and had a small flat attached to the surgery which he used whilst in Sydney during the week, which was two, sometimes two and a half days a week. Varying other periods were spent at the other country practices. The genuine nature of his activities is shown by the fact that thirty-five per cent of his gross fees for the relevant year was derived from three country practices, viz. those at Cowra, Mudgee and Condobolin. I have already mentioned figures which gave an indication of the extent of his farming operations. The aircraft with one minimal exception (infra) was used only for business purposes and was also used to transport vaccines necessary for his practices under the necessary refrigerated conditions not otherwise available. I also accept that the taxpayer accepted work where it was offered and that the work load was

ATC 4065

seasonal and sometimes involved week-end work in some centres and that the aircraft as a means of transport was necessary in the circumstances to enable him to carry on the various businesses in the manner described and to earn the income derived.

I find as a fact that the expenditure was incurred in travel between the different places on business for the purpose of gaining and producing income, further that the expenditure was ``outgoings'' incurred in gaining and producing his assessable income. The essential character of the expenditure was that it was a part of the operations by which he earned his income, and was essential to the performance of them, there being no other practical or reasonable way of transporting himself and his vaccines. I find the expenditures concerned were allowable deductions within sec. 51(1).

There has been reference to the fact that $9 fuel included in the expenditure was attributable to a private matter. I regard this as so trifling as to be within the maximum de minimis or as was expressed in Green's case (supra, at p. 319):

``... as so small really as to be a negligible amount and for this reason we think no attention need be paid to it.''

I accordingly disregard it as a reduction in the amount.

Another matter involves some items of repairs. The sum of $3,235 is given for repairs which comprised service and maintenance and in addition some items of repair. An actual dissection of the items of repair was not made. The respondent Commissioner formally takes the point that the matter of repairs comes under sec. 53 and is distinct from the other expenditure and no notice of objection was given in relation to them. This submission is made notwithstanding that the defendant allowed fifteen per cent of the total expenditure claimed which included repairs, so that as I understand it he allowed fifteen per cent of the repairs claimed. This was done under an amended assessment and adjustment sheet issued and dated 12th June, 1981, after the notice of objection in the form of a letter dated 11th September, 1980.

The notice of objection is an informal document in the form of a letter. It follows upon the initial disallowance of the deduction claimed. The claim specifically referred to, inter alia, an item ``Repairs, 3235'' as part thereof. The disallowance was of the whole including the repairs. The letter in question, dated 11th September, 1980, deals in general terms with the broad nature of the taxpayer's contention in response to the disallowance. It states:

``These expenses in respect of aircraft is an outgoing incurred in earning assessable income and as the aircraft is used for business purposes only, all expenses should be an allowable deduction.''

It is true that the provisions of sec. 190(a) which limit the taxpayer to the grounds taken are a direction to the Court and not a provision for the benefit of the defendant. Likewise, it is true that the letter in nominating ``these expenses'' (which included repairs) identified them as outgoings and thus within sec. 51(1) and this is supported by the further reference to ``business purposes''. Even so, in my opinion, these observations are to be viewed by way of argument or submission in the letter rather than as specifying the ground and read in this way, the ground is that the expenses in respect of aircraft, all expenses incurred is [sic] an allowable deduction.

In my opinion, the words quoted in the context of this correspondence and the reference to repairs in the deductions claimed is sufficient to include a reference not only to sec. 51 but also to sec. 53 and I accordingly reject this submission. On the findings I have made and the repairs being proper deductions otherwise, I find that the same come within the appropriate section and were proper deductions.

For the above reasons, I find that the amounts claimed by the taxpayer as deductions being the expenses relating to aircraft amounting to $23,300 are allowable in full. The appeal is upheld.


The appeal is upheld. Order the matter to be remitted to the Commissioner and that the objection against assessment for the year ended 30th June, 1979 be allowed. Order the respondent to pay the appellant's costs.

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