Case R63

Judges: HP Stevens Ch
TJ McCarthy M

PM Roach M

Court:
No. 1 Board of Review

Judgment date: 12 July 1984.

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P.M. Roach (Member)

In this reference I adopt the findings of fact made by my colleague, Mr. McCarthy.

2. As the law stood prior to the enactment of sec. 51AB the taxpayer would have been entitled to a deduction from assessable income of its expenses in maintaining and operating the vessel. The circumstance that the officers of the company and its guests might have enjoyed and taken pleasure from the outings on the vessel would not have denied the taxpayer a deduction. The question for the Board upon this reference is whether the taxpayer is still eligible for a deduction notwithstanding the introduction of sec. 51AB to the Act in 1974.

3. Perusal of sec. 51AB makes it clear that the general purpose of the section was to deny eligibility as a deduction to expenses incurred in the provision of services commonly, but not necessarily, pleasurable, if they were incurred in respect of the membership of social or recreational clubs or in the use of boats.

4. To that end sec. 51AB(4) provides that -

``... a loss or outgoing to which this section applies is not an allowable deduction.''

Section 51AB(3) provides -

``This section applies to a loss or outgoing to the extent to which it is incurred by a taxpayer -

• (a)...
• (b) for or connexion with -
  • (i) the acquisition of ownership of, or of rights to use, a leisure facility;
  • (ii) the retention of ownership of, or of rights to use, a leisure facility;
  • (iii) any obligation associated with ownership of, or with rights to use, a leisure facility; or
  • (iv) the use, operation, maintenance or repair of a leisure facility.''

Section 51AB(1) (inter alia) defines ``leisure facility'' as meaning -

``a boat, other than a boat that is an excepted facility in relation to the year of income...''

``Excepted facility'' is defined in the same subsection as meaning (inter alia) -

``(a) a boat that, at all times during the year of income, is held for sale by the taxpayer as trading stock in the ordinary course of a business carried on by the taxpayer;

(b) a boat that, at all times during the year of income, is used, or held for use, by the taxpayer principally for any one or more of the following purposes: -

• (i) for the purpose of being let on hire in the ordinary course of a business of letting boats on hire carried on by the taxpayer;
• (ii) for the purpose of transporting for reward members of the public, goods (including live stock) or substances in the ordinary course of a business carried on by the taxpayer;
• (iii) for any other purpose in the ordinary course of a business carried on by the taxpayer if the taxpayer satisfies the Commissioner that the use of such a boat for that purpose is essential to the efficient conduct of that business;''

5. Upon the evidence it is clear that the taxpayer did not carry on any business of letting boats on hire nor did the taxpayer carry on any business of transporting persons, goods or substances for reward. Upon the evidence I am satisfied that the vessel was used by the taxpayer for a purpose other than a purpose of letting the boat on hire or for the transport of persons, goods or substances for reward. Accordingly I am satisfied that, within the meaning of subpara. (iii) quoted above, the boat was used by the taxpayer ``for any other purpose''; and further that it was used ``in the ordinary course of a business carried on by the taxpayer''.

6. Therefore, the ultimate question for the Board is whether ``the use of such a boat for that purpose is essential to the efficient conduct of that business'', that is to say, essential to the efficient conduct of the business actually carried on by the taxpayer.

7. To answer that question one must first ask what was ``that business'' as carried on by the

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ATC 464

taxpayer. It was the business of an advertising agency procuring advertising business for a radio station. One must then ask whether the use of the boat to transport the managing director of the taxpayer in company with representatives of the radio station and advertising agencies and actual or prospective advertisers, together with members of their families on many occasions, was ``essential to the efficient conduct of that business''.

8. Those words stand in sharp contrast to the phrase ``necessarily incurred'' in sec. 51 of the Act, which has long been construed as meaning no more than ``clearly appropriate and adapted for'' (
Ronpibon v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56 ). In that case the Full Court of the High Court of Australia also laid down a further principle of construction in relation to sec. 51 namely that:

``It is not for the Court or the Commissioner to say how much a taxpayer ought to spend in obtaining his income, but only how much he has spent''

( supra p. 60).

I am of opinion that in essence that principle also applies in the construction of sec. 51AB. The Board is not empowered to consider whether the expenditure by the taxpayer on the boat was reasonable or prudent. Nor is the question for the Board whether the expenditure actually incurred was ``essential to the efficient conduct'' of the business. Rather the question is whether ``the use of such a boat for that purpose (was) essential to the efficient conduct of that business''.

9. The evidence before the Board established the belief of the managing director of the company that expenditure in respect of the use of the boat increased the revenues of the taxpayer, and further that those expenditures increased the net income of the taxpayer. Assuming that belief to be soundly held the question still remains whether ``the use of such a boat for that purpose (was) essential to the efficient conduct of that business'' of the taxpayer.

10. Accordingly I ask, what does ``efficient'' mean in this context? It is the ``conduct of that business'', that is, its operations and performance as distinct from the results of the business, which must be efficient. A person may produce manufactured goods with great efficiency, yet fail to profit because the goods are unsaleable.

11. I then turn to the further question whether the use of such a boat was ``essential'' to the efficient conduct of the business? If the business could be conducted efficiently without the use of such a boat, I would conclude that the use of the boat was not essential to the efficient conduct of the business because in terms of the Shorter Oxford Dictionary it would not be ``of the essence'' or be ``indispensably requisite'' to the efficient conduct of the business of an advertising agency. The use of a boat is essential to the business of a professional fisherman; of a water-ski instructor; of a deep-sea diving instructor; and of a repairer of underwater structures, in most instances. In those cases the business cannot be conducted at all without a boat.

12. But the taxpayer need not go so far. It need only establish that its business, the business of an advertising agency, cannot be efficiently conducted without using such a boat. Here the taxpayer faces three problems. The first is that, on the evidence of the managing director, other advertising agencies do not use boats in the same way as the taxpayer. The second problem is that for periods during the year of income when the boat was not available for use or was not used, the business continued.

13. The third problem is that on the evidence if the objection is not allowed the boat will be sold and, accordingly, cease to be used in the business, although the business will continue. I discount the last problem as having little significance because every business is conducted with a view to profit and every expense incurred is directed to increased profitability after tax. In consequence it is proper that in determining whether or not a particular outlay should be incurred or whether it is warranted, to have regard to the taxation consequences attending the expenditure.

14. However, having regard to the first two problems mentioned, I conclude that not only was the use of such a boat not essential to the conduct of the business of the advertising agency, but it was not ``essential to the efficient conduct of that business''.

15. Accordingly, I would disallow the objection and uphold the Commissioner's assessment.

Claims disallowed