Case Q84

Judges: HP Stevens Ch

BR Pape M
TJ McCarthy M

Court:
No. 1 Board of Review

Judgment date: 6 September 1983.

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B.R. Pape (Member)

The question in issue in these references is whether the taxpayer is entitled to an allowable deduction under sec. 51(1) of the Act for home office expenses. His business is a novel one.

2. After resigning his position as a trainee accountant with a large industrial company the taxpayer then aged about 25 years commenced to carry on the business known as ``History Promotions''. This name was apparently registered as a business name on 9 September 1977. Until the taxpayer was married on 16 December 1978 he carried on this business from his parents' home where he had resided. In or about May 1979 he and his wife became the joint tenants of a property which was their matrimonial home. This property was purchased for $43,000 of which $40,000 was financed by a first mortgage loan from a building society. The taxpayer claims that the reason for the purchase of this house was that it was a three bedroom house and one of those bedrooms would be used for his office.

3. The assessments in dispute relate to the 1980 and 1981 years of income. In his returns

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of income the taxpayer has computed his claim for home office expenses as follows:

      Expenditure                     1980       1981

                                        $          $

      Interest                        4,813      4,789

      Electricity                       221        238

      Insurance                          50         57

      Rates                             732        682

                                      -----      -----

                                      5,816      5,766

                                      -----      -----

      Proportion claimed 12.7%          739        732

                                      -----      -----
          

It appears the basis of apportionment, which was not disputed by the Commissioner, was that 11.29 sq. metres of this 88.99 sq. metre home was set aside as an office for the taxpayer. Accordingly it can be seen that the amounts in dispute relate to the claim of $739 and $732. The Commissioner has allowed a deduction of $30 which I infer was for electricity expenses in respect of both years of income. I think the evidence establishes that the taxpayer and his wife were the joint borrowers of the mortgage loan yet the taxpayer in calculating the amount of the interest has included her share of the expenditure. Accordingly I am of the view that the taxpayer's claim for this reason alone should be reduced (leaving aside the question of electricity), by one half.

4. I do not think it will serve any purpose to recapitulate the evidence relating to the way in which the taxpayer carried on his business. I think it is sufficient to say that during the 1980 year of income he derived income from this business and as a casual employee of a security service and from casual employment with local municipal councils. In the 1981 year of income he was employed by a company of which his parents were the directors/shareholders. He was released from his duties with this company for about nine weeks of the year to enable him to carry on his business.

5. The evidence in these references establishes that the business carried on by the taxpayer was one which had high and low periods of activity. For example about 50% of the lectures or performances which the taxpayer gave in any one year were done under the auspices of an organization which gave him the opportunity of performing in country schools. This activity took up about five weeks in which he gave some 75 performances. The other performances were done with various schools and charitable organizations. The letterhead on his stationery disclosed the telephone number of his father's company as a contact point. It appears that his mother who worked with this company took messages on his behalf. On balance it seems to me that in respect of the 1981 year of income the business carried on by the taxpayer could be described as a part-time business and similarly for the 1980 year of income. Although in this year of income he was not in receipt of any income from paid employment other than casual employment it would appear the taxpayer had a great deal of time on his hands to devote to research.

6. I would accept the taxpayer's evidence that he did spend a substantial amount of his time in his so-called office at his residence researching and preparing material to be used in the course of carrying on his business. However I think there is a hurdle to the taxpayer's claim which I think is made insurmountable by the decisions of the High Court in
F.C. of T. v. Forsyth 81 ATC 4157 ;
Handley v. F.C. of T. 81 ATC 4165 . Because the taxpayer and his wife were the co-owners of the property as joint tenants they each had an undivided interest in the whole of the property. To this extent his wife had the right to use the office concurrently with the taxpayer. The telephone was installed in the office which I infer was used by both the taxpayer and his wife (30% of the telephone expenditure was for private purposes). There is no evidence that the taxpayer had the exclusive right to occupation of the office. Likewise I am of the view that the expenditure on rates and insurance also bears this attribute. Insofar as the claim for electricity expenses is concerned I am not satisfied that the claim based on an apportionment of area occupied is a suitable basis of apportionment. Accordingly I would not disturb the Commissioner's decision in allowing $30 for this expenditure.

7. Upon reviewing the evidence I am of the view that the expenditure claimed by the taxpayer has the essential character of being for domestic purposes. It was expenditure incurred independently of whether the taxpayer carried on a business from his home. What the taxpayer sought to do was to allocate part of the expenditure on interest, rates and insurance to his business activity,

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ATC 426

when in fact the expenditure incurred is properly seen to be independent of whether he used a bedroom as his office.

8. Alternatively it was alleged in the taxpayer's objection against the 1981 assessment that he was entitled to an allowable deduction under sec. 72 of the Act of $87 being for 12.7% of the amounts paid in respect of council rates ($445) and water rates ($237). Whilst the taxpayer and his wife were, at least jointly liable for these rates, the total amount of $682 was paid by the taxpayer. In my view the evidence prima facie satisfies the requirements of subsec. (1B)(a) and (1C) of sec. 72 because the relevant premises were used by the taxpayer partly for the purpose of gaining or producing assessable income during the year ended 30 June 1981. Nevertheless the taxpayer was during this year of income engaged in full-time employment with his parents' company. The difficulty I have is in finding a reasonable basis for apportionment as required by subsec. (1C) because the taxpayer was only engaged on a full-time basis in the business for about nine weeks of the year of which five weeks were spent away travelling. However a substantial amount of time appears to have been devoted to research and the preparation of material during the evenings. Bearing in mind that the residence was also his sole place of business I am of the view that a reasonable basis for apportionment is one half of 12.7% of $682, the product being $44. This calculation takes into account that the matrimonial home was owned by the taxpayer and his wife as joint tenants. In these circumstances I would allow a deduction of $44 under sec. 72.

9. Therefore I would:

• (a) uphold the Commissioner's decision on the objection against the assessment for the 1980 year of income and I would confirm the assessment.
• (b) reverse the Commissioner's decision on the objection against the amended assessment for the 1981 year of income and reduce the taxpayer's taxable income by $44.