Inglis & Anor v. Federal Commissioner of Taxation.Members:
RK Todd DP
Administrative Appeals Tribunal
R.K. Todd (Deputy President)
The first applicant, who at the hearing of these matters represented herself and the second applicant, her son, sought review by this Tribunal of objection decisions by the respondent relating to her taxation returns for the years ended 30 June 1976 to 1986 and to her son's returns for the years ended 30 June 1983 to 1986. By consent of each applicant all of these references were heard together and in public.
2. In the lists of issues filed prior to the hearing by both applicants and by the respondent the issues were clarified as being:
- (i) Who were the legal and equitable owners of the property "Lammermuir" throughout the period in question?
- (ii) Whether a business of primary production was being carried on at "Lammermuir" and, if so, by whom and in what capacity.
- (iii) The relationship of Lammermuir Pty. Ltd. to the applicants, and the effect of the contract between that company and the applicants.
- (iv) Whether, assuming that a business of primary production was being carried on at
ATC 2039Lammermuir, various deductions were allowable and, if so, to whom.
- (v) Whether various deductions claimed in respect of a rental property in Hobart ("the Nelson Road property") were apportionable to allow for private use of part of the property.
- (vi) Whether legal expenses incurred by the first applicant with "respect to protection of (her) work conditions" are allowable deductions under sec. 51(1).
- (vii) Whether interest on a loan, the security for which was a rental property at Tuross on the south coast of New South Wales, was allowable as a deduction to the second applicant.
- (viii) Whether expenses relating to the property at Tuross should be allowed as deductions only in proportion to the fraction of the year in respect of which the house was let.
- (ix) Whether the Commissioner was estopped from imposing late lodgment penalties.
3. Prior to the hearing, the Commissioner served on the first applicant an extensive list of items for which proof was required both of quantum and of connection to the gaining or producing of assessable income. At the hearing Mr Gibb, who appeared for the Commissioner and who presented his case with conspicuous fairness, advised the Tribunal that the Commissioner conceded the connection, assuming a business was being carried on, between the majority of the individual items claimed and the operation at Lammermuir. The Commissioner was also willing to accept the quantum of all claims and, in relation to the costs of the legal proceedings, did not require proof of the connection which individual expenses had to the proceedings. It was left to the first applicant to prove the connection that various expenses had either to Lammermuir or to Nelson Road, and then to persuade the Tribunal that her submissions were correct in respect of questions of law.
Ownership of Lammermuir
4. The property known as Lammermuir, a Tasmanian grazing property which is old law land, was purchased by the first applicant and her husband, Mr William Carmichael Inglis, in April 1951. The Memorial of Conveyance did not specify whether the property was to be held as joint tenants or as tenants-in-common. When Mr W.C. Inglis died in September 1975 he left a will which stated in part:
"3. I GIVE DEVISE AND BEQUEATH all my right title and interest in my property known as `Lammermuir', Derwent Valley in the State of Tasmania and the contents therein to my Trustee upon the following trusts namely: -
- (a) TO HOLD my said right title and interest in the said property and the said contents for my son WILLIAM STUART INGLIS [the second applicant] to have the use and occupation thereof during his lifetime and after his death to hold the same for such of the children of the said WILLIAM STUART INGLIS as shall attain the age of twenty-one years..."
If the second applicant predeceased the first applicant without leaving children who attained the age of 21 years the property was to be held absolutely for the first applicant.
5. The problem that faces the Tribunal is what, if any, interest in the property Mr W.C. Inglis was able to dispose in favour of the trust since, if he and the first applicant were joint tenants, she would take his interest by survivorship upon his death.
6. At the hearing the first applicant strongly disputed any assertions that she was anything other than a tenant-in-common, and relied on a partnership agreement between her and her husband that was executed on the same day as the conveyance to support her contention. Mr Gibb, for the Commissioner, argued that at common law there was a presumption of joint tenancy and that the presumption had not been reversed in Tasmania (unlike in N.S.W. or in England) and consequently the property was held on joint tenancy.
7. My view that Mr Gibb's submission is correct and that Mrs Inglis became the sole owner of Lammermuir by survivorship upon the death of Mr W.J. Inglis is reinforced by the following provision appearing in the partnership agreement:
"5. The capital of the partnership shall consist of the following items namely the property known as `Trap Valley' [renamed Lammermuir] and the stock plant and
ATC 2040equipment and money and other assets used or to be hereafter used in connection with the business of the partnership as carried on by them which shall as from the Fourteenth day of April 1951 belong to the partners in equal shares also such further assets and sums of money which either partner shall with the consent of the other from time to time contribute for capital purposes AND it is hereby declared that these presents shall prevail in so far as the lands now owned or hereafter to be acquired by the partners which shall form part of the capital of the partnership notwithstanding that the title deeds of [the property] or any other land are and may be vested in the partners as joint tenants such title(d) deeds are so prepared to facilitate the transmission of title in the event of the death of either partner and for no other purpose."
8. I find that, for the purposes of this hearing, Mr W.C. Inglis and the first applicant held the property Lammermuir as joint tenants from the time of its purchase in 1951 until the death of Mr W.C. Inglis on 27 September 1975. From that date the property has been owned solely by the first applicant in her own right.
9. In the case of
Inglis v. F.C. of T., 80 ATC 4001 the Full Court of the Federal Court found that there was no business of primary production being carried on by Mr W.C. Inglis and the first applicant in the years ended 30 June 1974 and 1975 respectively. It was found that although a business had been conducted previously, it had ceased by that time.
10. While not actually submitting that the Federal Court had been wrong in this finding, the first applicant argued that a business of primary production had been conducted from 1 July 1975 until the present day. The Commissioner, on the other hand, argued that there was no business of primary production being carried on at any relevant time or, alternatively, that it did not recommence until 1977 or 1982.
11. Briefly, the facts are as follows. In the financial year 1975-1976, as had been the case in 1973-1974 and 1974-1975, there was no stock on the property. Between 1977 and 1981 stock was purchased and in 1978 and from 1980 onwards, stock was sold. The number of stock on the property at the close of each year was as follows:
1976 - Nil 1977 - 19 1978 - 31 1979 - 43 1980 - 55 1981 - 75 1982 - 93 1983 - 86 1984 - 78 1985 - 73 1986 - 60
12. During this period, various contractors carried out fencing and other work on the property and each year both applicants would travel from their home in Canberra to the property about six times per year. The journey was accomplished partly by car and partly by air. Evidence was given that the first applicant had entered into a management contract with the second applicant on 1 July 1982 under which he received $1,000 in return for performing managerial and other functions in relation to the property.
13. Considering the activities carried out, especially the numbers of stock held on the property, I am unable to find that a business of primary production was carried out on Lammermuir in the financial years 1975/76 to 1978/79 inclusive. Activities carried out in those years should in my opinion be characterised as preliminary activities prior to recommencement of a business that had ceased. By some point in 1980, however, it appears that a business was being carried on and therefore I find that from the beginning of the year ended 30 June 1980 to the present, a business of primary production has been carried on on Lammermuir.
14. Having regard to the ownership of the land, to the contract with the second applicant, and to the evidence given by the first applicant, it is clear to me that the business was being carried on by the first applicant alone, with the assistance of various contractors, including the second applicant. In her evidence, the first applicant said that she was carrying on the business, although she believed that she was doing so half on her own account and half as trustee for her son. It is clear from all of the evidence that, prior to the contract with the
ATC 2041second applicant, his role in the business was that of volunteer and not of partner.
15. One effect of this finding is that the Tribunal is in the position of being unable properly to review the complete taxation position of the first applicant. In all of her returns she has halved the income and the deductions from Lammermuir and included half in her own return and half in a trust return. The decision above has the effect that all of those items should have been included in the first applicant's personal return. Consequently the Tribunal is without power to implement this part of the decision. It is therefore recommended that the Commissioner adjust the first applicant's return in accordance with the findings of the Tribunal on the questions of deductibility of individual items to reflect this situation.
16. The second major effect of this decision is that the first applicant is eligible to take advantage of the income averaging provisions of sec. 157 of the Income Tax Assessment Act 1936 ("the ITAA") from the 1980 year onwards. As the precise effect of this will depend on the Commissioner's decision in respect of the matter in the previous paragraph, the Commissioner is requested to calculate and give effect to the decision that the first applicant can obtain the benefits of the averaging provisions.
Lammermuir Pty. Ltd.
17. On 29 October 1983, the first and second applicants entered into an agreement with Lammermuir Pty. Ltd. under which they agreed that "the income of [Lammermuir] and [the Nelson Road property] shall belong to" the company. In return for this the company agreed to meet all of the expenses of both properties, to meet all of the expenses relating to a dog named "Scot", and to keep the second applicant on as manager. The only matter arising in relation to the company was whether the contract was effective, as the company's returns are not in issue and the contract has now been terminated. The company never returned a profit.
18. The first applicant clearly stated that the contract with Lammermuir Pty. Ltd. was not intended to be an assignment of the income from the properties in question. As the Commissioner did not argue that it was ineffective against him under sec. 260 or any other section of the ITAA, I find that the contract was effective, but that the first applicant should have shown in her returns the income from the properties with an equivalent deduction being claimed in respect of the expenses paid to Lammermuir Pty. Ltd. As the net effect of this omission on the first applicant's income is nil, the matter will be taken no further.
19. As the company continually lost money, the taxation effect of the contract was to prevent the first applicant from obtaining deductions to which she otherwise would have been entitled. The fee paid to the second applicant by Lammermuir Pty. Ltd. is clearly income and assessable in his hands.
Primary production expenses
20. As I have found that the business of primary production only recommenced in 1979/80, all expenses of primary production for 1975/76, 1976/77, 1977/78 and 1978/79 must be disallowed in full.
21. In her evidence the first applicant was able to elaborate on the descriptions of various items given in her taxation returns and to explain their connection with her business at Lammermuir. At the completion of her evidence it was clear that the following expenses, which had been disallowed on objection, were allowable deductions:
$ 1979/80 Chains 47 Superphosphate spreading 990 Postage 32 Rates and land taxes 212 Depreciation 72 Repairs 4,067 ------ Total $5,420
------ $ 1980/81 Postage 6 Payments to stock and station agents 2,676 Cattle cartage 210 Travel to vet. 88 Rates and land taxes 254 Depreciation 68 Repairs 2,524 ------ * Total $5,826 ------ $ 1981/82 Payments to stock and station agents 2,068 Cattle cartage 155 Chainsaw hire 10 Purchase of locks 50 Rates and land taxes 254 Depreciation 66 Postage 5 ------ * Total $2,608 ------ $ 1982/83 Rates and land taxes 478 Depreciation 60 Postage (etc.) 62 Stock agents 418 Cattle cartage 235 Water containers 20 Superphosphate spreader 10 ------ * Total $1,283 ------ $ 1983/84 Rates and land taxes 350 Depreciation 56 Repairs 16 Postage 3 Payments to stock and station agents 75 Field day expenses 30 Fencing material 20 Penknife 22 Hay 9 Bath (for use as trough) 15 ---- *# Total $596 ---- 1984/85 Depreciation 55 ---- *# Total 55 ---- 1986/ Depreciation 51 ---- *# Total 51 ----
* From 1981 onwards, the first applicant only claimed half of each of the above amounts in her own return and claimed half in the trust return.
* From 29 October 1983 all expenses in operating the property were met by Lammermuir Pty. Ltd. and therefore only depreciation has been claimed by the first applicant since that date.
22. Of the expenses claimed in respect of the management agreement with the second applicant, those amounts in the years before the contract was executed are disallowed on the basis that there was no evidence of an agreement, implied or express, before 1 July 1982. Amounts of $1,000 in each of the financial years 1981 and 1982 are therefore disallowed.
23. Motor vehicle expenses totalling $1,626 in 1982/83 and $237 in 1983/84 paid under the contract with the second applicant are disallowed on the basis that there was insufficient evidence of precise terms in the contract and, additionally, they are clearly of a private and domestic nature as they cover all expenses of running the vehicle in those years. The proportion of the total usage of the vehicle that was for "business" was not given at the hearing.
24. In respect of the contract with the second applicant, amounts of $1,000 (fee for management) and $300 (purchase of shotgun) are allowable as deductions in 1982/83. These amounts would have been assessable in the hands of the second applicant. As with deductions allowed above in para. 21, the first applicant has claimed half in her personal return and half in relation to the trust. As Lammermuir Pty. Ltd. paid the service fee from 1984 onwards, no deduction is allowable to the first applicant after the 1982/83 year.
25. Deductions were also claimed in respect of the dog previously referred to, a Rhodesian Ridgeback dog "Mpani Jama" who is known as "Scot". Scot was purchased in the 1979/80 year and all expenses for that year and for 1980/81, 1981/82, 1982/83 and part of 1983/84 were claimed as being incurred in the production of income at Lammermuir. Lammermuir Pty. Ltd. paid for all of Scot's expenses after 29 October 1983.
26. Scot was bought from a breeder in Cooma (near Canberra) and lives inside the applicants' house at Canberra. When either of the applicants go to Tasmania, Scot travels with them and assists with work on the farm.
27. Considering that, at a maximum, Scot would only spend 10 weeks per year at Lammermuir, I find that only a fifth of his expenses are allowable, the remainder being of a private and domestic nature. It was argued that while in Canberra and at the Nelson Road property (a suburban property consisting of units that are let save for one retained by the applicants), he performed duties as a guard dog. I find however that these facts are not sufficient to outweigh the overwhelming private and domestic nature of Scot's functions when he is not at Lammermuir. Any minor business function which Scot may perform while away from Lammermuir would be accounted for in the somewhat generous allowance that I have made of a fifth of his total expenses being attributable to Lammermuir.
28. The amounts allowable to the first applicant in respect of Scot are therefore as follows:
$ 1980 - 128 1981 - 156 1982 - 118 1983 - 147 1984 - 47
29. As these amounts are all less than the half originally claimed, half having been claimed in respect of the Trust, full effect can be given by the Tribunal to the claims to deduct these amounts.
30. The major deductions claimed each year were for interest on a mortgage and a personal loan, and for the cost of travelling from Canberra to Tasmania where the Lammermuir and Nelson Road properties are situated.
31. The evidence given by the first applicant made it clear that the interest on the mortgage from the Commonwealth Trading Bank is an allowable deduction. However, considering the onus imposed on her by sec. 190(b) of the ITAA, insufficient evidence was adduced in relation to the loans from the ANZ Bank to show that money borrowed from that institution was used in the production of assessable income at Lammermuir. Without this being shown the amounts are non-deductible. The amounts allowable are therefore:
$ 1980 - 4,905 1981 - 5,163 1982 - 5,465 1983 - 9,010 1984 - 30
32. As with other amounts claimed for Lammermuir, Mrs Inglis has only claimed half of each of the above amounts in her personal
ATC 2044return with the remainder being claimed in the trust return.
33. The travel costs were made up of the fares and other expenses incurred by the first and second applicants when travelling to Tasmania. These costs were then equally divided between the Lammermuir and the Nelson Road properties. The half assigned to Lammermuir was further divided between the first applicant and the Trust.
34. It is clear that the expenses incurred by the first applicant (or the Trust) in respect of the second applicant's travel are non-deductible. Before the contract for services the amounts can be described as private expenditure, incurred by a person running a business, in taking members of her family with her. After the contract, which did not seem to have a clause requiring the first applicant to pay the fares, the fares were an expense that if deductible by anyone would have been deductible if expended by the second applicant. As they were paid by the first applicant, any possible claim to a deduction which the second applicant could have made has been lost.
35. The position of the first applicant is comparable to that of the taxpayer in
F.C. of T. v. Green (1950) 81 C.L.R. 313, in which a Full Bench of the High Court found that expenses in travelling from Brisbane to North Queensland to inspect properties which the taxpayer owned was deductible. Considering the similarity of those facts to those before the Tribunal in this case, I find that these expenses are an allowable deduction pursuant to sec. 51(1). The amounts allowable for travel with respect to Lammermuir, calculated as half of those claimed for the first and second applicants, are as follows:
$ 1980 - 967 1981 - 1,019 * 1982 - 920 * 1983 - 2,390 * 1984 - 474
*These amounts also include amounts incurred travelling to Sydney to meet with the Commonwealth Trading Bank in relation to Lammermuir.
36. As nearly equivalent amounts to those above have been claimed by the first applicant in her personal return, the Tribunal can give effect in full to the allowance of the deductions for travel claimed as allowed.
37. In 1983 and 1984 a claim was made by the first applicant for clothing for the second applicant. This expenditure is clearly of a private and domestic nature and is therefore rejected, as are claims both for gun club fees for the second applicant and various books about dogs and guns. Photographs said to be taken for the purpose of showing the mortgagee the condition of the property are found not to have sufficient connection with the production of income and are consequently not allowable.
38. A claim was made in 1984, divided between Lammermuir and the Nelson Road property, for membership of University House at the Australian National University, Diners Club, American Express, Australian Federation of University Women, the National Press Club and the Canberra and District Historical Society. These claims are disallowed in respect of the half claimed in respect of Lammermuir on the basis that these expenses have insufficient connection with the production of assessable income at Lammermuir. In fact they have no such connection at all. The part of the claim that relates to the Nelson Road property will be dealt with later.
39. The final matter raised by the acceptance of the fact that a business of primary production was being conducted from 1979/80 onwards is the inclusion of the profits or losses from the livestock account in calculations of Mrs Inglis' income. The amounts for each year, with losses shown in brackets, are:
$ 1980 - 2,373 1981 - 1,074 1982 - 419 1983 - 4,117 1984 - (649) 1985 - (427) 1986 - (65)
40. The net effect on the first applicant's income of this part of the decision is that the following amounts should be allowed as deductions from her assessable income:
Column 1 Column 2 Column 3 Year of If deductions claimed by the Trust If deductions claimed by the Trust Income are not allowed to the first applicant are allowed to the first applicant $ $ 1980 9,047 9,047 1981 5,596 11,090 1982 4,556 8,692 1983 4,217 10,013 1984 2,492 2,805 1985 91 116 1986 454 482
41. The first applicant believed that the trust was effective, and consequently all of her returns were set out to reflect this fact. Until the directions hearing in this matter in June 1987 it appeared that it was the view of the Commissioner that there was a trust, but that the trust owned the whole of the property Lammermuir. It is not surprising that, faced with the clearly erroneous view of the Commissioner, the first applicant continued to complete taxation returns based on the existence of the trust. The difficulty that arises from this is that as the Tribunal is only able to review objection decisions, and as the first applicant only claimed and objected to the disallowance of half of all of the deductions in question, the Tribunal can therefore only give effect to the net results shown in Column 2 of the above table. It is however recommended that the Commissioner investigate whether it is possible to give effect to the net results shown in Column 3 as these would give a true reflection of the factual situation found by the Tribunal, and would in justice reflect the fact that the applicant's conduct in relation to the preparation of trust returns was significantly influenced by the Commissioner's own conduct.
The Nelson Road property
42. This property is a block of four flats in a suburb of Hobart. Three of the flats are let. The first applicant gave evidence that the fourth flat is used primarily as an office although she and the second applicant stay there when in Hobart.
43. Under the terms of the contract with Lammermuir Pty. Ltd. discussed above, that company received the income from the Nelson Road property and in return met all of the expenses relating to that property. This agreement took effect on 29 October 1983.
44. The matters in dispute for 1982/83 and 1983/84 in relation to the Nelson Road property are deductions claimed for the cost of University House membership, National Press Club membership and clothing for the second applicant. All of these are found not to have been incurred in the production of income at Nelson Road and are therefore disallowed.
45. In 1984/85 and 1985/86, probably due to the company being shown in the returns as receiving the income, the Commissioner disallowed all deductions related to Nelson Road on the basis that no business was being carried on.
46. All of the deductions claimed as "subscriptions to trade, business or professional associations" are found not to have been incurred in producing assessable income. These include those disallowed above in respect of 1982/83 and 1983/84 which were also claimed in 1984/85 and 1985/86 and, in addition, membership of the Australian Federation of University Women, Diners Club and American Express. Also disallowed are subscriptions to various newspapers (Financial Review and National Times), Rydges, Time and Life International, Business Letter and a CCH service. The exact CCH service was not specified and the use of these publications and membership of associations was basically said by the first applicant in her evidence to "assist me in forming the opinions that I have to form and on which I rely to carry on business". A more specific connection needs to be established before such expenses become deductible and I therefore disallow those expenses.
47. The final deduction claimed that specifically related to Nelson Road is depreciation. It was argued by the
ATC 2046Commissioner that only three quarters of the claimed amounts should be allowed, reflecting the fact that the first applicant had the use of one flat. She submitted that as she uses the flat primarily as an office when she is in Tasmania all of the depreciation should be allowed.
48. Despite the business use of the fourth flat, and considering that a large portion of the depreciation is for items such as washing machines, electric stoves and refrigerators, I find that there is a predominantly private purpose in the use of the fourth flat and that therefore depreciation is not allowable in respect of the items contained in it. Consequently, a deduction should be allowed of three quarters of the depreciation claimed in respect of items at Nelson Road, that is an amount of $78 in 1984/85 and $70 in 1985/86. For some reason the first applicant claimed half of the 1986 amount as a deduction against Lammermuir. This is clearly wrong and the amount should be deducted against the Nelson Road property.
Home office expenses
49. In 1983/84, 1984/85 and 1985/86 the first applicant claimed various expenses that may be described as "home office" expenses.
50. The first applicant gave evidence of the use which she made of a home office at her Canberra residence. She said that the office comprised approximately one fifth of the floor area of the house. The facts clearly do not distinguish this case from those in
Handley v. F.C. of T. 81 ATC 4165 and
F.C. of T. v. Forsyth 81 ATC 4157 and consequently deductions claimed for a proportion of the rates, household insurance and interest on mortgages are disallowed.
51. A claim to a deduction for the purchase of a Xerox machine in 1979 is also disallowed as capital expenditure, although depreciation is allowed for in respect of it from 1984 when depreciation was first claimed for home office items.
52. Also disallowed is both the cost, and a claim for depreciation of, security doors for the house. These doors are found to have a predominantly private purpose and any connection with the home office is legally too remote.
53. Those claims that were disallowed by the Commissioner but are now allowed in respect of the home office are:
1984 1985 1986 ---- ---- ---- $ $ $ Electricity (1/5 of total) 50 66 52 Telecom (1/5 of total) 70 133 84 Depreciation 180 201 171 Xerox servicing 249 83 53 Other Nil Nil 179 ---- ---- ---- Total: $549 $483 $529 ---- ---- ----
54. The first applicant claimed to be entitled to deduct certain legal expenses which she had incurred in and about the institution and prosecution of civil actions brought by her against the Commonwealth and certain individuals. The actions had been commenced in the Supreme Court of the Australian Capital Territory and in the High Court of Australia.
55. The first applicant was, at the time when the legal expenses were incurred, employed as a permanent officer of the Commonwealth Public Service, as the director of the Law and Government group in the legislative research service of the library of the Commonwealth Parliament. The first applicant claimed that new procedures were invoked which in her view placed unwarranted and special restrictions upon her. She objected to a procedure which, she claimed, amounted to her having to report to a particular person in the library who was superior to her, immediately before she tendered advice to any member of Parliament who had sought that advice. She claimed that extra copies of her advice to a member had to be given to this person, and that there had been comment that such copies might be sent elsewhere. The actions brought by the first applicant expressed her claims in convoluted and inappropriate form. They were ultimately disposed of by deeds of mutual release. It
ATC 2047would be easy enough to say that the bringing of the actions was unwise and ill-judged. But the applicant said that she had commenced litigation because she faced a loss of status, and that she was facing a lot of indignities in her employment. She said that she was also facing the chance of any promotion being blocked. In fact the applicant suffered no loss of income. She had been transferred sideways to another position. Her position, as she saw it, was effectively that she had been "eased out" of a responsible position into a backwater, a classic method of disposing of "troublemakers".
56. It is clear enough to me that the applicant's incurring of the legal expenses involved was probably, as I have already suggested, unwise and ill-judged. But the fact is that they were incurred. It is no more open to the Commissioner or this Tribunal to reject the deductibility of an item of expenditure on the footing that the taxpayer was unwise or even foolish in making the expenditure in question than it is open to reject deductibility on the footing that a business should have been run in a different way: See J.T.
Tweddle v. F.C. of T. (1942) 2 A.I.T.R. 360. The fact is that the first applicant spent the money on the legal expenses. The critical issue is their characterisation.
57. To characterise the expenses here in question, the first question arising under sec. 51 is whether the expenditure was incurred in gaining or producing assessable income. I consider that it was. The gravamen of the dispute that was reflected, however awkwardly, in the legal proceedings in question was the day to day situation of the first applicant in her work in the Parliamentary library. The expenditure was incidental and relevant to the work which produced the first applicant's assessable income. It is really the converse of the principle in
Lunney v. F.C. of T. (1957-1958) 100 C.L.R. 478 as stated at pp. 498-499 in the joint judgment of Williams, Kitto and Taylor JJ., for just as the essentiality of the taxpayer in that case expending the fares which had to be expended in order to get to work so that he could produce assessable income therefrom did not confer deductibility, neither does the supposed inessentiality of the payments in this case reject deductibility. The expenditure here incurred was incurred in the course of gaining or producing assessable income and in the course of nothing else.
58. The critical question then becomes whether deductibility is barred by the requirement of sec. 51(1) that the expenditure not have been of a capital, private or domestic nature. As was said by Dixon J. (as he then was) in
Hallstroms Pty. Ltd. v. F.C. of T. (1946) 72 C.L.R. 634 at p. 647:
"The claim is to deduct legal expenses, and legal expenses, we may assume, take the quality of an outgoing of a capital nature or of an outgoing on account of revenue from the cause or purpose of incurring the expenditure. We are, therefore, remitted to a consideration of the object in view when the legal proceedings were undertaken, or of the situation which impelled the taxpayer to undertake them."
Here the expenditure was clearly not private or domestic expenditure. Thus the question is the one commonly raised in cases involving deductibility of legal expenses, and in which equally commonly the fatal finding has been that the expenditure was of a capital nature. The cases are cited in CCH Australian Federal Tax Reporter at ¶24-572. The occasions however upon which courts have denied deductibility on the grounds that the expenditure was of a capital nature were principally cases involving expenditure incurred in carrying on a business. In the present case the most relevant authority in my opinion is that of
Dobbs v. Commr of I.R. 74 ATC 6001, a decision of Cooke J. in the Supreme Court of New Zealand. There the legal expenses were incurred by a public servant in respect of a successful appeal which resulted in a promotion which resulted in an increase in income. No such increase was of course produced in the present case, nor in my opinion need it have been. The question is whether the expenditure was of a capital nature. The important aspect of Dobbs' case is that Cooke J. relied upon
F.C. of T. v. Finn (1961) 106 C.L.R. 60 and upon
F.C. of T. v. Hatchett 71 ATC 4184 to reject an argument that an expenditure in relation to a person's body, mind or capacity can be described as an outlay of capital. It is true that Cooke J. pointed out, at p. 6007 of the report, that sec. 51(1) of the ITAA includes the expression "or of a capital nature", and queried whether the situation might be otherwise in Australia. In my opinion that consequence should not follow, and I refer to Hatchett's case upon which Cooke J.
ATC 2048expressly relied. It follows that I prefer to follow the decision of the Supreme Court of New Zealand to that of Board of Review No. 3 in Case N24
(1962) 13 T.B.R.D.
59. To sum up then, the expenditure in question had a "perceived connection" (the phrase used in Hatchett's case) with the first applicant's gaining or producing of her assessable income, and was not of a capital, private or domestic nature. The amounts shown in Schedule B of Exhibit M are therefore deductible under sec. 51(1). In the circumstances it is unnecessary to discuss the first applicant's claims under sec. 64A, a provision which in any event the first applicant in her submissions clearly misconstrued.
60. The amounts previously disallowed which are now allowed as deductions are as follows:
Year Amount ---- ------ $ 1976 3,244 1977 963 1978 1,542 1979 2,127 1980 524 1983 1,000
The Tuross property
61. The Tuross property is a house located at a beach resort on the New South Wales south coast. It has been owned solely by the second applicant since 5 June 1980, at which time he held the title clear of any registered mortgage. A mortgage over the property was registered by Mercantile Credits Limited on 9 May 1983 as security for a loan of $20,000 to the second applicant.
62. The second applicant gave evidence, and provided copies of contracts with tenants, which showed that the property was mainly leased during school holidays and at Easter. The contracts showed that the house had been let for approximately 12 weeks in 1982/83, 5 weeks in 1983/84, 11 weeks in 1984/85 and six weeks in 1985/86. A list of the dates upon which advertisements for the property appeared in the Canberra Times, and copies of some of those advertisements, were also put into evidence by the second applicant. The list showed that the number of advertisements were 16 in 1982/83, 18 in 1983/84, 20 in 1984/85 and 17 in 1985/86. Apart from word of mouth, no other activities were undertaken to obtain further tenants for the property.
63. The Commissioner in respect of 1983/84, 1984/85 and 1985/86 disallowed in full deductions claimed for the interest paid to Mercantile Credits Limited on the basis that the money was used for a private purpose. In his evidence to the Tribunal the second applicant explained that he had spent something under $2,000 on work on the property, but was unable clearly to explain for what the remainder was used. He indicated that the money had been used to assist his mother, with some suggestion being made that she had lent him money at some previous time.
64. As Brennan J. stated in
Ure v. F.C. of T. 81 ATC 4100 at p. 4104:
"Section 51 requires that a deductible expenditure be incurred `in' gaining assessable income, that is to say, it must be incidental and relevant to the gaining of that income (
Ronpibon Tin N.L. & Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56). An outgoing of interest may be incidental and relevant to the gaining of assessable income where the borrowed money is laid out for the purpose of gaining that income (
F.C. of T. v. Munro (1926) 38 C.L.R. 153 at pp. 170, 171, 197;
Texas Co. (Australasia) Ltd. v. F.C. of T. (1940) 63 C.L.R. 382 at p. 468). The laying out of the borrowed money for the purpose of gaining assessable income furnishes the required connection between the interest paid upon it by the taxpayer and the income derived by him from its use.
The purposes for which money is laid out is an issue of fact, turning upon the objective circumstances which human experience would judge to be relevant to the issue."
65. It is clear from the evidence that the objective purpose of these borrowings was not the production of income at the Tuross property. I find that the borrowings were for a private purpose and that the interest charges are therefore not deductible.
66. Expenses disallowed in full by the Commissioner on the basis that they were of a capital nature were the cost of a survey in 1983/84, the capital cost of furnishings and a motor vehicle in 1984/85 and the cost of
ATC 2049plumbing and electrical "repairs" in 1985/86. The evidence produced by the applicants to show that the expenses were not capital was extremely scant and, as they all appear prima facie to be capital, I affirm the Commissioner's decision on this point.
67. Also disallowed were part of the cost of membership of Diners Club and part of the cost of a driver's licence in 1984/85, vehicle expenses and membership of the Canberra and District Association of Eurobodalla Shire Ratepayers Associations in 1985/86. All of these are found to be private expenses and are consequently not allowable.
68. Most of the other expenses claimed by the second applicant in 1983/84, 1984/85 and 1985/86 in relation to the Tuross property have only been allowed by the Commissioner to the extent of 20% of the amount claimed, on the basis that the house had only been let for approximately 10 weeks per year.
69. It was argued on behalf of the second applicant that the house was available at all times and that therefore the expenses should be allowed in full.
70. Both applicants gave evidence as to the method of letting the property which was to the effect that, except in extraordinary circumstances, the house was made available only to people from Canberra, that the property was not placed with an agent and that the only newspaper advertisements were 20 or less each year in the Canberra Times.
71. While it is true that the property was vacant and theoretically available at all times, it cannot be said to have been truly available for letting unless some perceptible effort was being made to obtain tenants in respect of those times, or at least some step taken to draw its availability to the attention of the public, the classic method of so doing being the placing of it with an agent. The sufficiency of the steps taken is a question of fact to be decided in each case, but in this case, considering the irregular advertising and the restriction of the opportunity of renting to Canberrans, there has in my view been insufficient done for it to be able to be said that the property was available for letting for periods adequate to support the claims made. I find that the Commissioner's allowance of 20 per cent of expenses is reasonable and his decision should be affirmed.
72. The objection decisions of the Commissioner are therefore affirmed in full in respect of the Tuross property.
Income of the second applicant
73. No submissions were made at the hearing about the disallowance by the Commissioner of the claim by the second applicant for a deduction for contributions to the Commonwealth superannuation scheme. In Taxation Decision No. 3644, 20 July 1987, however, I found that such payments were not deductible and I refer to and repeat the reasons which I there gave.
74. As stated in para. 24, the income arising from the service contract is assessable in the hands of the second applicant.
75. Under sec. 26(e) of the ITAA, the second applicant is assessable in respect of the value of a shotgun received in 1982/83. In 1983/84 the second applicant did not receive any payment pursuant to the contract, although the reason for this was not explained at the hearing.
76. In 1984/85 the Commissioner excluded income of $100 from Lammermuir Pty. Ltd. from the income of the second applicant on the basis that it was "Management fees paid to self". The amount in 1985/86 was $1,000.
77. As I find, in the absence of argument by the Commissioner, that the arrangement with Lammermuir Pty. Ltd. was effective, all of the above amounts must be included in the second applicant's income. His assessable income is therefore increased by the following amounts:
$ 1983 - 1,300 (including value of shotgun) 1984 - Nil 1985 - 100 1986 - 1,000
Estoppel against the Commissioner
78. Mrs Inglis argued at the hearing of this matter that the Commissioner was estopped from imposing penalty tax on her for the late lodgement of her returns. The estoppel was said to be based, first, on alleged representations by the Commissioner that she need not lodge the returns until after a previous appeal was completed and, secondly, on what was claimed to be inadequate administration by the Commissioner.
79. The first of these contentions was never proved. In relation to the second, while errors were clearly made by the Commissioner during the processing of these returns, there is obvious fault on both sides. I find it surprising, considering that her returns for 1975/76, 1976/77, 1977/78, 1978/79 and 1979/80 were lodged on 6 February 1983 and that her returns for 1981 and 1982 were lodged on 14 February 1983, that Mrs Inglis complains that they were processed as a group and consequently that she received the assessment notices for all of the above years on the same day. While the time taken to process these forms, over two years, is fairly extended, having had the opportunity to study the returns in depth I am able to understand this. Without having had the structure of the purported trust and the relationship of the company clearly ascertained and explained, it is not surprising that some erroneous decisions were made by the Commissioner's office.
80. It is however academic whether or not the Commissioner's administration has in fact been unacceptable in a relevant respect. There is clear authority in the decision of the High Court in
F.C. of T. v. Wade (1951) 84 C.L.R. 105 that "no conduct on the part of the Commissioner can operate as an estoppel against the operation of the Act". If this was not the case, the Commissioner would be able to defeat the legislation by making representations that were in conflict with the Act.
81. Without making further comment on the merits of the factual situation, I find that the principles set out in Wade's case clearly apply, with which I respectfully agree, and that there can be no estoppel against the Commissioner to prevent the imposition of late lodgement penalty tax.
82. The effect of the conclusions to which I have come on the income of the first applicant (Mrs Inglis) and the second applicant (Mr W.S. Inglis) is shown in the following table. Column 1 shows the year of income, Column 2 the decrease in the first applicant's income that the Tribunal can give effect to, Column 3 the recommended decrease in the first applicant's income (see para. 41) and Column 4 the decrease in the second applicant's income. The figures in brackets indicate an increase in the taxable income for that year.
Column 1 Column 2 Column 3 Column 4 $ $ $ 1976 3,244 3,244 Nil 1977 963 963 Nil 1978 1,542 1,542 Nil 1979 2,127 2,127 Nil 1980 9,571 9,571 Nil 1981 5,596 11,090 Nil 1982 4,556 8,692 Nil 1983 5,217 11,013 (1,300) 1984 3,041 3,354 Nil 1985 652 677 (100) 1986 1,053 1,081 (1,000)
83. While the Tribunal would not normally make a decision that places an applicant in a worse position than before the appeal (as has happened with the second applicant), in this case the increases in the second applicant's income are as a result of the interlocking nature of the business, financial and family affairs of the two applicants. To give effect to the totality of the facts as found by the Tribunal I must, to a small extent, disadvantage the second applicant.