Federal Commissioner of Taxation v. Groser.Judges:
Supreme Court of Victoria
Appeal by the Commissioner of Taxation pursuant to sec. 196(1) of the Income Tax Assessment Act 1936.
The respondent Adrian Charles Noel Groser included in his income tax return in respect of the year ended 30 June 1977 an amount of $104 as assessable income by way of rent paid to him by his brother for the brother's occupation of a suburban house owned by the respondent; and he claimed to be allowable deductions certain outgoings, as having been incurred in gaining or producing that income of $104. The Commissioner in his assessment in respect of that year of income declined to accept either that any part of the sum of $104 was assessable income or that any part of any of the outgoings was an allowable deduction.
Mr. Groser is an Australian resident who served in the armed forces during the Second World War. In 1947 he purchased the dwelling house in Glen Iris in which he had lived with his parents before and after his war service and of which his parents were the tenants. For that purchase he obtained a loan from War Service Homes Division which he is still repaying and which was, and is still, secured by a mortgage to the Division. He was then 27 years old and unmarried. He bought the house as a residence for himself, his parents and an older brother, then aged 29 years. This brother is mentally retarded and was in 1947 dependent for his care on the respondent's parents. The respondent had also in mind that his purchase of the house provided him with ``an investment'' which would yield him rental when it was no longer required as a residence for his parents or brother or for himself.
The respondent lived in the house with his parents and brother until 1956, when he married and moved to a house which he bought in a neighbouring suburb. But he continued to pay, without contribution by his parents, the rates and taxes on the Glen Iris house.
In or about 1964 the respondent was finding onerous the financial burdens he had imposed on himself. He enquired by letter to the Taxation Department whether he could claim any income tax deduction in respect of his contributions to the support of his parents, who were then receiving Age Pensions, and of his brother, who was then receiving an Invalid Pension. The answering letter from the Department notified the respondent that he could not claim any deduction. He then interviewed, by appointment, an officer of the Department whom he understood to be a senior tax assessor, with a view to arguing his claim that he should be entitled to treat his parents and brother as dependants for the purpose of the income tax laws. During that conversation the departmental officer maintained the contention which had been expressed in the letter, but the officer was understood by the respondent to say also that, if the respondent were to charge his parents a nominal rent for their occupation of the Glen Iris house, he would be entitled to claim ``costs'' against that rental income as allowable deductions for income tax purposes. The officer did not indicate what amount might answer the description ``nominal rent''.
The respondent then reported the substance of his discussion with the departmental officer to his parents and asked them if they were willing to pay him rent. When they said that they were, he asked them how much they could afford to pay by way of rent, and agreement was made for \cp1 per week. That weekly sum was thereafter paid until the respondent's mother died, aged 83, in February 1968. His father died in March 1967, aged 85.
In his income tax returns for the year ended 30 June 1965 and for succeeding years the respondent included as assessable income an amount of $104 in respect of the weekly payments of $2. He also claimed as allowable deductions amounts expended by him on rates and taxes, repairs and, after some time, mortgage interest in respect of the Glen Iris house. None of the claims was questioned or disallowed by the Commissioner until the year before the assessment was made with which this appeal is concerned, nor was the returned assessable income of $104 excised until then. (Until 1973 rates and land taxes payable by the respondent in respect of the Glen Iris home were allowable deductions by force of sec. 72 of the Income Tax Assessment Act 1936-1968, even if they were not allowable deductions, by force of sec. 51(1) of that Act, as ``outgoings... incurred in gaining or producing the assessable income'' of the respondent.)
On the death of the respondent's mother the respondent considered that his mentally retarded brother's welfare would be best served by continuing his brother's residence in the Glen Iris home. Although the brother was able to go about alone, attending football matches and picture theatres and handling small sums of cash, he could neither read nor write nor provide his own meals, and he was, in the respondent's judgment, which there is no reason to question, incapable of controlling his own invalid pension income. The respondent therefore proposed to his brother that a suitable married couple be offered accommodation in the house, in which the brother should continue to reside, in return for provision by the woman of meals and cleaning and laundry services for the brother. The respondent also proposed to his brother that arrangements should be made for payment of the brother's invalid pension to the respondent, who would manage the brother's financial affairs and keep him supplied with small sums of cash from the brother's funds. The respondent also proposed that his brother contribute the same weekly sum of $2 as his parents had contributed, which sum the respondent called ``rent''.
To all these proposals the brother assented, and all the proposals were carried into effect. The invalid pension was paid into the respondent's bank account, but the respondent kept an account of the expenditure he made on his brother's behalf, and in those accounts he debited $2 per week in respect of ``rent''. He so regulated the expenditure that he was ordinarily holding a small credit balance in his brother's favour. The rack rent of the Glen Iris house was at no time since the respondent's purchase as low as $2 per week, and was during the year ended 30 June 1977 about $75 per week. The respondent had fixed upon the sum of £1 per week in the first place because his parents had suggested that sum as the amount they could afford, and he proposed that sum to his brother because he considered that the rest of the brother's income by way of invalid pension would be required to meet the expenses of the brother's maintenance. In the event the brother's income did approximately equal the aggregate of those expenses and the weekly ``rent''.
Upon the reference of the Commissioner's decision on the taxpayer's objections to the assessment, a Board of Review ordered amendment of the assessment by inclusion of the sum of $104 in the respondent's assessable income, and by allowance of the following deductions, pursuant to sec. 51(1) of the Income Tax Assessment Act 1936:
$ (1) Municipal and Board of Works rates and land tax 421 (2) Premium paid on insurance of the premises 43 (3) Interest paid on mortgage loan 23 (4) Carpet cleaning 35 ---- $522 ----
The Commissioner's contention that the weekly payments of $2 do not form part of the respondent's assessable income was based upon the circumstances that the house was, during the year of income, as it had been ever since the respondent purchased it, dedicated to use as a home for the respondent's brother, as it had been for his parents while they lived, and not at all as a source of income; and that the weekly sum of $2 was paid in pursuance of a family arrangement for a sharing of the expense occasioned by that use; and that the arrangement was designed and intended by the respondent to gain an income tax
ATC 4481advantage, not to gain income by way of a commercial return from the house, considered as an economic asset.
These are, in my opinion, circumstances pointing to the conclusion that the regular appropriation by the respondent to himself out of his brother's invalid pension income at the rate of $2 per week did not constitute a derivation of income in accordance with ordinary concepts and usages, but there are circumstances which I think tend to indicate the contrary. The respondent and those from whom he received the money made the arrangements for payment in the language of contract and tenancy. They spoke of ``rent'' in description of the payments, and there is no evidence that any of them said anything one to the other contradictory of an intention to enter into, and to maintain, a relationship of landlord and tenant. No doubt it would only have been in extraordinary circumstances, to which the respondent had probably not adverted, that he would exercise to his brother's disadvantage any of the legal rights which are vested in a landlord. But that circumstance is not necessarily inconsistent with the existence of an intention on his part that the legal relationship of landlord and tenant should subsist.
The words of Deane J. in
F.C. of T. v. Harris 80 ATC 4238 at p. 4245 are, I think, apposite to this case:
``In the present case, there are circumstances pointing in different directions and the decision whether the receipt was income according to ordinary concepts turns on questions of emphasis and degree.''
I need express no opinion as to whether the receipt of $2 per week from his parents was assessable income of the respondent. I have come to the conclusion that his derivation of $2 per week out of the brother's funds was not a derivation of assessable income. I do not regard the evidence of the brother's mental retardation as throwing doubt on his contractual capacity in relation to the transactions between him and the respondent - see
Gibbons v. Wright (1954) 91 C.L.R. 423. But I do regard that evidence and the respondent's evidence about his concern, and his sense of responsibility, for the protection and the welfare of his brother as throwing upon those transactions a light which emphasises strongly their familial character. My conclusion is that the arrangements which the respondent proposed and which his brother accepted ought to be regarded as the respondent's arrangements for his care of his brother, having nothing to do with transactions of the kind which result in the receipt of income as understood in ordinary usage. I think that the deduction of $2 per week from his brother's funds was proposed by the respondent in the verbiage of tenancy law because that was a tactful and convenient way of presenting his proposal to his brother's immature mind, and because he was accustomed so to speak of his parents' weekly payment, and because the word ``rent'' was associated in his mind with the practice he had long maintained of returning his parents' payments as assessable income, and the outgoings in respect of the house as allowable deductions. Notwithstanding the description of the payment as ``rent'', the payment is, in my opinion, to be characterised in all the circumstances as a contribution to the funds out of which the respondent proposed to defray the expenses of ensuring proper care of his brother.
If the conclusion be correct, that the appropriation to his own use by the respondent of $2 per week out of his brother's funds was not a derivation by him of assessable income, it follows, in my opinion, that no outgoing in respect of the house was an allowable deduction. Section 51 of the Act was the only provision suggested as justifying a deduction in respect of the outgoings and the outgoings in the year ended 30 June 1977 could not have been incurred in gaining or producing assessable income if the weekly sums appropriated during that year were not assessable income. It was not submitted that deductibility could flow from the circumstance that the respondent had an intention to gain income by renting the house when it should in the future be no longer occupied by his brother.
If my conclusion concerning the sum of $104 received by the respondent were incorrect and that which was received were assessable income, it would be necessary to determine whether to any extent the outgoings had been incurred in gaining or producing that assessable income, and were by force of sec. 51 deductible. In my opinion
ATC 4482the most favourable conclusion for the respondent which the circumstances might be regarded as justifying is that he had paid these outgoings to secure several objects, of which the derivation of income by way of rent at the rate of $2 per week was one, but a quite subordinate one. The outgoings were paid in discharge of obligations incurred so that the respondent might retain the house and, so far as the expense of cleaning a carpet was concerned, so that the house might be kept clean. His principal object in keeping the house and in having the carpet cleaned was to confer on his brother the benefits of a comfortable home and of housekeeping services in that home, all at a nominal cost to his brother. Those private and domestic considerations moved the respondent to incur the expenditure on outgoings. An apportionment of the outgoings between what could properly be regarded as incurred in gaining or producing the sum of $104 and what could not be so regarded might - I express no concluded opinion - result in the allowance of $104 as deductible pursuant to sec. 51, but such an apportionment could not in my opinion result in the allowance of any greater sum. (See
Ure v. F.C. of T. 81 ATC 4100.) Accordingly the assessment would not be shown to have been excessive even if the receipts at the rate of $2 per week were held, in contradiction of my opinion, to be assessable income of the respondent and the outgoings were held to have been, to some extent, incurred in gaining or producing that income and not to have been of a private or domestic nature.
For those reasons I am of opinion that the Commissioner's appeal should be allowed, the decision of the Board of Review set aside and the assessment number 261889/015, as amended by assessment number 235754/004, confirmed. (Discussion ensued.)
Decision of the Board of Review set aside.
Assessment number 261889/015, as amended by assessment number 235754/004, confirmed.