Case Q84

Members: HP Stevens Ch
BR Pape M

TJ McCarthy M

Tribunal:
No. 1 Board of Review

Decision date: 6 September 1983.

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T.J. McCarthy (Member)

These references are concerned with deductions claimed by the taxpayer for home office expenses in the years ended 30 June 1980 and 1981. His returns in respect of those years show the amounts claimed to be made up as follows:

                          1980       1981

                            $          $

      Interest            4,813      4,789

      Electricity           221        238

      Insurance              50         57

      Rates                 732        682

                          -----      -----

                          5,816      5,766

                          -----      -----

      12.7% thereof         739        732

                          -----      -----
        

The percentage of 12.7% was based on an office area of 11.29 sq. metres compared with total house area of 88.99 sq. metres. In the original 1980 assessment the Commissioner allowed a deduction of $30 presumably for electricity expenses and he also allowed the same amount in the following year in an amended assessment; the remaining expenses claimed were disallowed. Following the disallowance of objections lodged on behalf of the taxpayer against the original 1980 and 1981 assessments, the Commissioner's decisions on the objections were referred to this Board for review.

2. On 9 September 1977 the taxpayer obtained registration of a business name which was apt to describe his operations. Suffice it to say that his area of interest was a particular period of Australian history and he lectured and entertained for reward in schools and clubs as a self-promoted lecturer/entertainer. In 1977 promotional material and letterheads were printed which featured the address and telephone number of his parents' home where he was living. When he married in December 1978 and moved house in May 1979, most of this printed material had not been used up, so he crossed out the old address and wrote his new address thereon. In May 1979 the taxpayer and his wife purchased as joint tenants the property in which they resided during the whole of the 1980 and 1981 years of income. The purchase price was $43,000, of which $40,000 was jointly borrowed from St. George Building Society and $3,000 came from a personal loan.

3. During the year ended 30 June 1980 the taxpayer performed casual security work from time to time (about 10 hours per week) and in the school holidays was employed by a couple of local councils; otherwise he

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ATC 427

devoted himself entirely to his history lecturing and research. Cash receipts and payments books were kept and the cash receipts book records fees of $8,927 from 148 lectures given in the year ended 30 June 1980. The business tax return lodged for that year disclosed a profit of $4,499 after expenses of $4,428 (including home office expenses of $739).

4. From 1 July 1980 to 30 June 1981 the taxpayer was employed by his father's firm. The hours of work were 8 am-4 pm, Monday to Friday, but with time off whenever he needed it. During the year the taxpayer was absent from this employment for a total of about nine weeks in order to carry out lecturing and research. The 1981 tax return shows lecturing fees received amounted to $5,432 (about 90 lectures, of which about 70 were arranged through one organisation) and a profit of $1,062 after expenses (including home office expenses of $732).

5. In neither year did the taxpayer or his wife maintain a personal cheque account. The only account used was the business bank account on which the taxpayer was the only signatory. Whilst the wife did contribute $875 and $324 to the account in the years ended 30 June 1980 and 1981, cheques written on her behalf in those years amounted to $2,436 and $1,702 respectively. Accordingly, all of the expenditure on interest, etc., which is the subject of these references was paid solely by the taxpayer.

6. When the taxpayer and his wife purchased the house early in 1979, their family responsibilities were limited to one child from the wife's previous marriage. I accept the taxpayer's evidence that a three-bedroom house was specifically selected so that one of the ``bedrooms'' could be used as an office. Out of a total area of 88.99 sq. metres the office occupied 11.29 sq. metres. During the relevant years, there was a desk, a chair for the taxpayer, two visitors' chairs, a typewriter, 1 six-shelf and 2 four-shelf bookcases, a cupboard storing more books (the taxpayer said he had 700 history books in his office) and boxes containing promotional literature, stage props and costumes. In the year ended 30 June 1980 the taxpayer spent at least 30 hours per week in his office and a somewhat lesser time in the following year when he was employed in his father's firm.

7. During the relevant years of income the taxpayer used the office for the following purposes:

• (a) to research and prepare lectures;
• (b) to canvass business by mail and telephone;
• (c) as accommodation for a large reference library, equipment, stage props and costumes;
• (d) to interview representatives from schools and other organisations interested in procuring his services as a lecturer;
• (e) to maintain records of appointments, income and expenditure;
• (f) to prepare promotional literature;
• (g) to research and write material for publication (no income therefrom in years of income, but future income expected);
• (h) to maintain a filing system covering persons of historical interest;
• (i) to answer in writing requests for further information as a result of lectures given;
• (j) for private telephone calls (the only telephone was located in the office and was also used by the wife).

8. In cross-examination the taxpayer admitted the office did not have separate access, nor was there a sign outside the house indicating his activities. In the period 1977-1981 the main number listed for reference on the promotional material was the telephone number of his father's firm. The taxpayer said he wanted the telephone to be answered if he was away lecturing or giving shows and he used that number as a telephone answering service. However he also wrote his office address and telephone number on the promotional material and also listed his office number on the back of business cards which he handed out. He acknowledged that when he worked for his father's firm during the year ended 30 June 1981 telephone messages were taken in relation to his operations, but denied he transacted any substantial business there, preferring to ring back from his own office where all his records and diaries were held. As there were eight people in the room where he worked at his father's firm, he did not consider it appropriate to be seen to be conducting his

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ATC 428

own business there. His mother, who was called as a witness by the Commissioner's representative, confirmed his account. I do not think this evidence is inherently unreliable when due regard is given to the time off which he was given. Moreover, a large block of lectures was arranged through one organisation. I would therefore accept that the taxpayer's home office was the base for his lecturing operations during the year ended 30 June 1981, as well as for the year ended 30 June 1980.

9. The primary submission put forward by the Commissioner's representative was that the home office was not a place of business because the taxpayer was not carrying on a business. It is no doubt true that casual lectures given for reward do not necessarily establish the existence of a business, although fees therefrom would nevertheless be income as being for services rendered. But in this case the evidence of system, organisation and continuity admits of only one conclusion, namely, that the taxpayer was carrying on business as a lecturer/entertainer during the relevant years of income. Furthermore, I also find that his home office was the base for these business operations during the years ended 30 June 1980 and 1981.

10. The taxpayer's representative placed heavy reliance upon the judgment of Murphy J. in
Handley v. F.C. of T. 81 ATC 4165 , especially at p. 4173 where his Honour said:

``If the part of a home used in gaining assessable income were in a real sense a place of business, this would in general mean that the outgoing (even if some apportionment were called for) would be allowable. Thus, the case is quite different from that of a doctor, a marriage celebrant, a caterer, an author or a solicitor who uses part of his or her home as a place of business. This reference to place of business is not intended to be exhaustive; it may be sufficient but not necessary that the outgoing is referable to a place of business, for it to be an allowable deduction.''

11. In my opinion, these observations of Murphy J. are apposite here. The home office of the taxpayer was unquestionably his place of business, it was the base for his business operations in the relevant years. It is important to notice what follows from this conclusion. Not only do the decisions of the Full High Court in Handley and
F.C. of T. v. Forsyth 81 ATC 4157 not stand in the taxpayer's way, the judgments therein now support his claims inasmuch as a majority of the Justices constituting the High Court in those cases would have allowed this taxpayer's home office deductions in principle. Indeed, in my opinion, there is no reason to think that Mason J. or Wilson J. would reject the taxpayer's claims. Insofar as Mason J. referred at p. 4172 to Commr. of
I.R. (N.Z.) v. Banks 78 ATC 6001 and observed that ``no attention at all was given to the purpose for which the moneys secured by mortgage were borrowed'', the evidence in this case was that the house in question was initially acquired mainly as a home for the taxpayer, his wife and her child, but also partly as a place of business, and the house was selected accordingly. The moneys borrowed to finance the acquisition of the house were therefore borrowed for those purposes. In my view, it could not be said here with any justification that the interest would be the same amount whether or not he had decided to use one room as the base for his business operations. So also the application of the essential character test, which was considered to be relevant and helpful by Wilson J. (at p. 4163), would lead to the same conclusion on these facts. The significance of separate access and signs outside the house will obviously depend on the particular circumstances and the kind of business being carried on. In the relevant sense, as explained by the authorities, the office used by the taxpayer was not part of the home. Clearly, the use of a place of business for personal telephone calls does not, by itself, change its nature or character.

12. I now turn to the question of apportionment. The taxpayer paid all of the outgoings in question from his business bank account on which he was the sole signatory. On the evidence these liabilities were accepted by the taxpayer and the wife made no contribution thereto. The outgoings comprised interest paid to the St. George Building Society (but not interest on the personal loan of $3,000) and amounts paid for electricity, municipal and water rates and home insurance. Should these outgoings be first reduced by one-half because the house

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ATC 429

was jointly owned? In Case D8,
72 ATC 41 , which involved a claim for home office expenses, this Board as then constituted unanimously rejected a submission to that effect by the Commissioner. Mr. R.E. O'Neill said at p. 43:

``The only other point of principle in this reference stems from a submission for the Commissioner that if the Board should conclude that the taxpayer is entitled to any deduction in respect of the various items claimed then it should halve such amounts as it would otherwise allow, because the home was jointly owned by the taxpayer and his wife. A similar submission was rejected in
Castle's case (1971) 2 A.T.R. 481 at p. 495 where his Honour cited authorities. Here the taxpayer's wife had no separate income so there is no difficulty in inferring that in fact she made no financial contribution towards meeting the relevant outgoings. Accordingly, I reject the submission.''

13. As was said by Toohey J. ( Northrop and Sheppard JJ. agreeing) in
F.C. of T. v. Ilbery 81 ATC 4661 at p. 4666 : ``expenditure actually made is an outgoing incurred''. No doubt if a payment is made pursuant to a definitive commitment which arose in a prior year and a deduction was allowable and was allowed for the amount under sec. 51(1) in the prior year, the terms of sec. 51(1) would not, as a matter of construction, be satisfied in the year the payment was made. But this result flows from the context of the Act, rather than from the literal terms of sec. 51(1). Whatever else the word ``incurred'' may include, it certainly includes an actual disbursement. Thus if no deduction is claimed when the definitive commitment arose, a deduction can be claimed in a subsequent year when the obligation is discharged (see the dicta of Barwick C.J. in
A.G.C. (Advances) Ltd. v. F.C. of T. 75 ATC 4057 at p. 4064 ). Of course, if the definitive commitment arose and was discharged in the same year, there would be no basis for saying an outgoing was incurred in some other year. Even if it could be said, in the case of a joint obligation, that one of the joint debtors was not completely subjected to the whole of the obligation at the time when it arose, the subsequent discharge by that person of the whole of the joint obligation to the creditor would result in the whole of the outgoing being incurred by him, the assessability of any contribution subsequently recovered being a separate, though related, question. For example, in a case where moneys are borrowed jointly by A and B to finance shares acquired in joint names, for the purpose of producing assessable dividends in subsequent years, the payment by A in the initial year of the whole of the interest (before a partnership arises for tax purposes) will mean that the total amount was incurred by him for the purposes of sec. 51(1), although, apportionment being required, only one-half thereof will be an allowable deduction under sec. 51(1), see Case J54
(1958) 9 T.B.R.D. 281 .

14. As the outgoings in question were incurred by the taxpayer partly for domestic purposes - to provide a home for himself, his wife and her child - and partly to provide himself with a place of business, an apportionment is required. In Handley, Aickin J. at p. 4175 expressed his agreement with the method suggested by Yeldham J. in the Supreme Court, which was to take the proportion of floor area occupied by the office and then to make an adjustment reflecting a comparison between the time during which the room was used for income-producing purposes and the time during which it was actually used for other purposes. Applying that method here, the only other use of the office was for personal telephone calls by the taxpayer and his wife. In view of the considerable business use of the office, I would assess the business use to be at least 90% of the total use in each year.

15. Accordingly, in my opinion, pursuant to sec. 51(1) the taxpayer is entitled to deductions amounting to 90% of 12.7% (the proportion of total area occupied by the office) of the outgoings incurred. The deductions allowable on this basis are as follows:

                              1980       1981

                                $          $

      Interest                 550        547

      Electricity               25         27

      Insurance                  6          7

      Rates                     84         78

                               ---        ---

                               665        646

                               ---        ---
          

As the taxpayer has already been allowed a deduction of $30 in each year in respect of

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ATC 430

these expenses, the additional amounts which should be allowed in the years ended 30 June 1980 and 1981 are $635 and $616 respectively.

16. For these reasons I would reverse the Commissioner's decisions upon the objections and would reduce the assessments for the years ended 30 June 1980 and 1981 as indicated in para. 15 above.

Claims allowed in part