PM Roach SM
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
The issue which is central to the determination of this reference calls for determinations as to apportionment pursuant to sec. 51(1) of the Income Tax Assessment Act 1936 (``the Act'') in relation to several heads of expenditure. The applicant, who represented himself at the hearing, is a professor of economics. He argued for an application of economic principles applied in the assessment of ``joint costs''. The Commissioner, represented by one of his officers, argued for the application of a mathematical basis of apportionment in accordance with views held by the Commissioner and commonly applied by Taxation Boards of Review: views reflected in the apportionment effected by the Commissioner in relation to the assessment in dispute.
2. The applicant with the support of his university, travelled overseas to study. He was granted leave of absence from his research, teaching and administrative duties for 12 months to enable him to participate in what is now called a ``study development program'' - a term which currently seems to be preferred in the industrial politics of academic life to such terms as ``study leave'' or ``sabbatical leave''. The professor planned to spend 10 months studying at a university in the United States of America and for nearly two months at a prominent school of economics in the United Kingdom, with a number of visits in transit to other places. He was accompanied overseas by his wife. It is not suggested that she had any income-related purpose in travelling.
3. In preparation for their departure, the professor arranged through a friend to secure accommodation in the university town (``Campusville''). The choices were limited. There were few one-bedroom apartments available. The friend arranged a 12-month lease - the minimum available under ordinary circumstances - in relation to a modest, two-bedroom apartment. While occupying the apartment, the professor used the second bedroom to store some of his working materials and, for three or four nights, that bedroom was occupied by a guest. Apart from working in the study provided for him at the university, the professor also did some work at the apartment but for that purpose used the living area.
4. Knowing that they would be away for 12 months, the professor and his wife arranged to let their Sydney residence for that period. There being no distinction in their interests in the home, they jointly let the property and jointly accounted for the net income arising.
5. When the time came to proceed overseas, they needed to be at the international airport sufficiently early to join an early-morning flight. To ensure that the home would be left in a neat, clean and hygienic condition and also in a condition suitable for the entry of tenants, they arranged to stay in a city hotel overnight and also to dine in the city and have an early breakfast there. Having arrived at Campusville, they there occupied the two-bedroom apartment for the next 10 months. Before the year of income had passed, the professor had paid the rent for the entire 12 months; for heating; for power; and for cleaning. Following his departure from the United States, the landlord was able to arrange a subtenancy for some of the balance of the remaining term and, in due course, accounted to the professor for the moneys so received.
6. While residing in Campusville, the applicant planned to travel to New York in December to attend a major conference of economists. Initially his wife did not propose to attend with him. In November he arranged his train travel and also accommodation for himself alone for three nights at a New York hotel. Shortly prior to his scheduled departure his wife changed her mind. She decided to travel with him. After some difficulty, arrangements were made for her to travel with him by train and, on arrival in New York, arrangements were made with the hotel for her to also occupy the accommodation which had been provided for him. It was suggested that that arrangement would have necessitated the provision of double accommodation in lieu of the single accommodation which had been arranged for the professor. I reject that. I doubt that many hotel or motel rooms capable of accommodating only one person have been constructed in the cities of the world in the past 50 years.
7. When the professor and his wife left Campusville with a view to travelling to the United Kingdom, their planned itinerary took them to Boston and Montreal. In both cities
ATC 179they stayed in hotels. In Boston they stayed three nights. As the professor took the view that that visit was not wholly for income-related purposes, the only claim made related to the cost of accommodation on one night.
8. When the professor came to prepare his income tax return for the year ended 30 June 1983 he addressed his mind to a consideration of possible claims. The net result was that the professor presented himself in his return of income as having derived a taxable income of $32,618. Assessable income sourced in employment was said to have been - salary $29,121 (hardly a professorial salary for 12 months); ``living-away-from-home'' allowances and travelling allowance ($19,228) which, together with another unspecified allowance of $448, amounted to $19,676. The sum of $19,676 was also specified in the return as ``provisional estimate (see attached letter)'' and the return detailed deductions claimed as relating to ``living-away-from-home'' allowance and other allowances.
9. The sums claimed as deductions included claims in relation to such items as
- (a) personal medical expenses, occasioned by an accidental shoulder injury sustained in Campusville, on the basis that:
- ``(i) medical costs are higher in the U.S. than in Australia;
- (ii) presumably the accidental injury would not have been sustained had I remained in Sydney''
- (b) motor vehicle expenses - while in Campusville he purchased and operated a motor vehicle which was sold upon his departure. As his wife did not drive the car, he claimed the entirety of the U.S. $1,416 incurred;
- (c) telephone - of a total expense detailed at $630, $35 was identified as ``calls made by my wife'' and the balance ($595) was claimed as a deduction; and
- (d) ``work-related expenses'' said to range from matters such as subscription to Faculty Club; haircuts; and purchase of an American Dictionary - U.S. $533.
In particular he considered in relation to some expenses now in issue questions of apportionment with the following results:
- (a) Sydney - he claimed 100% of the cost of only his own dinner and breakfast - $17, and the entirety of the taxi fare for his wife and himself to the airport - $6. As to accommodation, he claimed the entire cost, less the additional charge levied by the hotel for accommodating a second person in the room - the net claim was $50.
- (b) Air travel - he claimed and was allowed the cost of his own air fare (including departure tax).
- (c) Accommodation in Campusville - he claimed the entire rent (less the income from subletting received after departure) - a total of $2,338. As to electricity, he claimed the entirety of the space heating component (U.S. $227) and 50% of the ``other use'' component (U.S. $295). He also claimed a deduction for ``initial cleaning, fairly regular major cleaning and final cleaning'' (of the apartment) by a cleaning contractor - U.S. $210. Further claims were for one-half of expenses of household washing ($68) and household equipment and supplies ($25). As to the cost of groceries he claimed, ``because I eat appreciably more than my wife does'', 55% of the total - $1,188; for meals eaten out, he claimed the entirety of the cost where he ate alone and one-half of the cost of meals taken with his wife - $722.
It can at least be said that the claims presented were based upon a thorough consideration of possible entitlements. By the standards normally to be found in these matters, considerable detail was presented in support of the claims.
10. When the Commissioner assessed the taxable income of the applicant, he did so in the sum of $42,959 and by an adjustment sheet indicated that he had increased taxable income by the following factors:
Increase Adjustments to income and in taxable deduction items income $ Adjustment as per your advice 6,482 Travel 193 *Accommodation/living expenses 2,569 Telephone 313 Medical 210 Work related expenses 310 New York conference 164
Adjustments to claims for rebate and concessional expenditure.
*Note: Accommodation/living expenses disallowed refers to those expenses incurred during holiday period.
At the hearing there was no attempt to justify the assertion that the accommodation/living expenses at Campusville were incurred during a ``holiday period''. The applicant objected to the assessment and a number of adjustments were made in favour of the applicant. As to the remaining items, the applicant requested an independent review.
11. By that point the position was somewhat confused, as was acknowledged by the Commissioner's representative who later came to be responsible for the presentation of the Commissioner's case upon the reference. In preparing the Commissioner's case, he was able to identify the amounts in issue as follows:
$ $ Travel costs Sydney accommodation 50 Dinner and breakfast 8 Taxi to airport 3 Boston accommodation 23 Montreal accommodation 18 102 ----- Accommodation costs Rent payments 2,338 Electricity payments 120 Cleaning of apartment 111 2,569 ----- Work-related expenses Faculty Club 68 Newspapers 42 Haircuts 13 Clothing 16 Routine expenses 108 247 ----- New York conference expenses Hotel costs 80 80 ----- ------ $2,998 ------
In a letter to the applicant he advised that "the amount of $2,338 for rent has been calculated as follows:
Amount expended U.S.$4,440 Less 50% attributable to your wife U.S.$2,220 ---------- U.S.$2,220 Less Amount received from sub-letting U.S. $550 ---------- Allowable as a deduction U.S.$1,670 Amount Claimed U.S.$3,890 ---------- Amount in Dispute U.S.$2,220 (A$2,338)"
When the matter came on for hearing, the applicant abandoned the five claims under the heading of ``work-related expenses'' and also ``cleaning of apartment''. The claims relating to accommodation in Sydney, New York, Boston and Montreal have a common element. On the basis of dual-occupancy the Commissioner has used - it is said - a ``mathematical'' approach and, more often than not, divided by two - allowing only one-half. The professor argued for an economist's approach claiming single-occupancy rate.
12. As a result the issues to be determined are as follows:
- (a) Sydney accommodation, meals and taxi fare: the Commissioner claims that nothing at all was allowable and, alternatively that, in relation to the cab fare, one-half has already been allowed and no more should be allowed.
- (b) Campusville apartment costs: the primary argument for the Commissioner is that the Campusville apartment became the place of residence for the applicant and his wife and that no amount is deductible pursuant to sec. 51 of the Act.
ATC 181Alternatively, the Commissioner says that $1,758 has already been allowed for rent; $275 for electricity; and $111 for cleaning, and no more should be allowed.
- (c) New York, Boston and Montreal: the Commissioner contends in relation to New York that, of the amount claimed ($194), $114 has already been allowed and no more should be allowed; and in relation to Boston and Montreal accommodation that, of the amounts claimed of $55 and $50 respectively, $32 has in each instance been allowed and that no more should be allowed.
13. On the question of the Sydney expenses, I think the answer is to be found in the adage: ``Each journey begins with a single step''. I find that for this applicant his journey commenced, as it did for his wife, when he left his home. He was already ``en route'' when he stayed overnight in Sydney just as surely as he would have been ``en route'' had he travelled from interstate to join his international flight. Accordingly, the costs of his two meals are to be wholly allowed. As to apportionment of the costs of accommodation and cab fare, I shall defer those items until I address the question of apportionment generally.
14. The costs of providing for one's domestic shelter, like the costs of providing for one's sustenance, are ordinarily ``private'' in character as that term is used in sec. 51(1) of the Act. However, it has always been recognised that sometimes it is appropriate to hold that the costs of shelter are allowable as deductions because the costs incurred in the provision of that shelter are more appropriately characterised as having the same character as the income-earning circumstances which caused the expense to be incurred. When a pop star travels from city to city to entertain, or a professor of economics travels from city to city in order to inform, and both thereby derive their assessable income and each resides in different hotels from night to night, the expenses of shelter take on the character of their income-earning travelling. In this instance the applicant travelled from Sydney as a result of his employment. He was to be absent from his Australian home for 12 months during which time he was obliged to be about the duties of his employment. He might have travelled alone. He might have moved from place to place never remaining in one place for so long as a month or even a week. He might have resided in expensive hotels or in a modest apartment. But in this instance the applicant, instead of travelling alone, travelled with his wife; instead of being nearly constantly on the move, spent 10 months based in one university in one continent, and two months based at another academic institution in the United Kingdom; and instead of residing in hotel or motel accommodation, resided in an apartment which was leased for the duration of his 10-month stay. The Commissioner's representative contends that in those circumstances, having closed his Australian home, having established a new place of residence with his wife; and having occupied that apartment as was intended for no less than 10 months; that those factors are such that it is appropriate to regard the Campusville apartment as the applicant's new place of ``residence'', just as the Sydney home had been, and was to become again, the place of residence of the applicant. The argument is not to be easily dismissed. Clearly, continued ownership of a former home is not alone enough to qualify as tax deductible expenses incurred in maintaining other accommodation taken up in order to perform the duties of employment. Clearly, too, the need to secure alternative accommodation in order to enable a taxpayer to carry out the duties of a new or continuing employment for a fixed term is not enough.
15. However, on balance, I am of opinion that where, as here, duty takes a person to distant places for a limited term; where that travel is but part of a larger journey; and where the nature of the accommodation is as it was here, it is not appropriate to say that the applicant, or that the applicant and his wife, had established a new residence. I think it more appropriate to consider the apartment in Campusville as a place temporarily occupied by the couple in order that the applicant might perform the duties of his employment.
16. Accordingly, I reject the first submission for the Commissioner. The second contention of the Commissioner can now be considered along with the remaining questions as to the apportionment of accommodation expenses in Sydney, New York, Boston and Montreal.
17. In Case R89 (
84 ATC 597 at p. 603) I first considered the question of ``apportionment'' at length and I now repeat in these reasons for decision some of what I then said:
``The leading authority as to dissection and apportionment in the application of sec. 51(1) of the Income Tax Assessment Act (`the Act') is the joint decision of the Full Bench of the High Court of Australia in
Ronpibon Tin N.L. v. F.C. of T. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47.
Having said that charges which could not be dissected should be apportioned, the Court went on to say (at p. 59):
- `The question, what expenditure is incurred in gaining or producing assessable income, is reduced to a question of fact when once the legal standard or criterion is ascertained and understood. This is particularly true when the problem is to apportion outgoings which have a double aspect, outgoings that are in part attributable to the gaining of assessable income and in part to some other end or activity.'
- And at p. 59:
- `[T]here are at least two kinds of items of expenditure that require apportionment. One kind consists in undivided items of expenditure in respect of things or services of which distinct and severable parts are devoted to gaining or producing assessable income and distinct and severable parts to some other cause. In such cases it may be possible to divide the expenditure in accordance with the applications which have been made of the things or services. The other kind of apportionable items consists in those involving a single outlay or charge which serves both objects indifferently... With the latter kind there must be some fair and reasonable assessment of the extent of the relation of the outlay to assessable income. It is an indiscriminate sum apportionable, but hardly capable of arithmetical or rateable division because it is common to both objects.'
- Continuing on p. 59:
- `In such a case the result must depend in an even greater degree upon a finding by the tribunal of fact.'
- At p. 60:
- `The Court must make an apportionment which the facts of the particular case may seem to make just... The question of fact is therefore to make a fair appointment [sic] to each object of the company's actual expenditure where items are not in themselves referable to one object or the other. But this must be done as a matter of fact and therefore not by this Full Court.'
In consequence in each case the formal order of the Full Court (so far as material) was that -
- `The learned Judge should decide as a matter of fact what part or proportion (of the amounts to be apportioned) is fairly and properly attributable to gaining the assessable income.'
No further reference to the cases appears in the Commonwealth Law Reports although the report (1949) 8 A.T.D. 431 records that the cases were disposed of by his Honour the Chief Justice at Melbourne on 8 June 1949.
The Minute Book of the High Court for that day records that Mr Ashkanasy K.C. with Spicer K.C. appeared for the taxpayers and Mr McInerney appeared for the Commissioner and records -
- `11.05 a.m. Mr Ashkanasy K.C. informs the Court that the parties have agreed on the figures in each case. He hands his Honour typewritten statements. He asks for a deduction of £600 in Ronpibon and £800 in Tongkah.
- 11.25 a.m. Mr McInerney replies. He suggests £60 in Ronpibon and £70 in Tongkah.
- 11.48 a.m. Mr McInerney concludes.
- 11.48 a.m. Mr Ashkanasy K.C. replies.
- 11.58 a.m. Mr Ashkanasy K.C. concludes.
- 11.58 a.m. His Honour delivers oral reasons for judgment.
- 12.05 p.m. Order: Remit assessments to Commissioner with a direction that they
ATC 183be amended by allowing £400 as a deduction in the case of Ronpibon and £500 in the case of Tongkah Compounds. Commissioner to pay costs of appeal including costs of case stated. Liberty to apply.
- 12.10 p.m. Court adjourned sine die.'
Although no transcript or other detailed record of proceedings that day is available it is nonetheless clear that the matter was determined by his Honour the Chief Justice, as a matter of fact, being an exercise of judgment, no doubt founded in his Honour's long professional and judicial experience, and being a judgment promptly made after having the benefit of brief argument rather than evidence.
So it appears that in the case of Ronpibon, of the £650 expended in management and director's fees the taxpayer argued for a finding of £600 to be allowed as a deduction; the Commissioner argued for an allowance of £60 only, and his Honour determined upon a figure of £400.
In the case of Tongkah the figures were £890; £800; £70; and £500 respectively.
I conclude that consistently with the principles enunciated by the Courts in relation to assessments of damages incapable of calculation or measurement by any precise criteria, so too the learned Chief Justice resolved the questions of apportionment before him by an exercise of judgment.
Walsh J. took a similar course in
Smith v. F.C. of T. 72 ATC 4111. In that case his Honour had to apportion amounts expended on fares overseas and in travelling while overseas. His Honour said (at p. 4121):
- `The evidence does not make it possible to determine by any precise calculation what was the extent to which the outgoings were so incurred. But I think the evidence enables me to make an estimate of the amount which may be reasonably allowed. I estimate the amount of the allowable deduction at $829 made up of $404 being half the overseas fares and $425 being about one-third of the $1,274 said to have been expended in the African countries after the sporting event had been held.''
18. It is clear from that decision that the Court was not adopting either a mathematical model (the description given by the professor to the Commissioner's approach) or the economic model contended for by the applicant.
19. Subsequently, in Case R2 (
84 ATC 106) Taxation Board of Review No. 3 (as it then was) applied a view that, what I shall describe as the ``marginal cost'' approach was appropriate in determining to what extent hotel expenses are deductible where there was dual-occupancy by a married couple only one of whom was about income-producing purposes.
20. I had occasion to consider whether I should follow that approach in Case S80 (
85 ATC 589): the case of an academic who studied in Europe and who there resided in a three-bedroom residence with his wife and three children. He claimed a deduction for two-thirds of accommodation expenses and the Commissioner had allowed one-third only; presumably on the basis that three children are equal to one adult. I then said at p. 598:
``In proceeding to make the determination of fact so called for, I note the `marginal cost' argument, but do not consider it compelling. I note also that but for the income-earning activities of the taxpayer, there would have been no visit overseas and no expenditure to apportion. I accept that the quantum of expenditure was probably greater than would have been the case if the taxpayer had lived alone, but that it was not greater by reason of the fact that accompanying members of his family were adults, children or infants or because there were four members of the family rather than three, two or one. I also accept that the fact that expenditure was incurred at all in relation to the accommodation of the taxpayer's family was incidental to his activities, rather than the other way around. The expense incurred in relation to the accommodation of his family was incidental to the costs of maintaining his own accommodation but, unlike the cost of his own accommodation, was not an expense incurred in the earning of his own income. Further, I suggest that the finding as to apportionment to be made in a case such as this should be consistent with the finding which would be made by the same tribunal upon the same evidence if a `fair and
ATC 184reasonable' apportionment had to be made to determine the costs relating to the accommodation of the taxpayer's wife and children. Having regard to those circumstances and considerations and to the nature of the issue to be determined I am satisfied that the apportionment allowed by the Commissioner was `fair and reasonable'. I would disallow the objection.''
21. The issue of apportionment came forward again in Case T40 (
86 ATC 334). In that case the taxpayer was an officer in the Army Reserve. In earlier years his income from that source was wholly exempt and, accordingly, the expenses incurred in deriving that income were not allowable. Then when, as a result of legislative change, 50% of the hitherto exempt income came to constitute assessable income, he proceeded to claim 100% of expenses incurred as deductions. The Commissioner allowed only half of the expenses. In that instance I also confirmed the Commissioner's apportionment, saying:
``An arithmetical or ratable division is not necessary and, in the case of an item such as director's fees, may be quite inappropriate. However, in the circumstances of this case where the expenditure serves neither purpose to the exclusion of the other and where the related income is assessable and exempt in equal parts I am satisfied that no apportionment is more appropriate than the apportionment adopted by the Commissioner.''
22. In this case I have reviewed all of those matters. Having done so, I am satisfied that, when it comes to making such a finding of fact as was directed by the High Court it is not appropriate to simply adopt any particular model, be it described as a mathematical or economic model. What is called for is that the Tribunal ``should decide as a matter of fact what part or proportion (of the amounts to be apportioned) is fairly and properly attributable to gaining the assessable income''. That decision has to be made in light of all the relevant circumstances.
23. Duty took the applicant overseas. He and his wife determined that they should travel together and, when established overseas, should reside there together. Some of the costs which they incurred - e.g. air and train fares - were to be incurred on an identical cost-per-person basis. Some other costs - the cost of meals - would vary according to the taste and needs of the persons dining. With costs of hotel accommodation they experienced a common situation that a relatively small additional charge would be made in the event of dual occupancy of the facilities. On the other hand, with some other costs - cab fares and apartment rental - they found that, in accordance with common experience, the cost was fixed whether the facility was used by one person or two or, within the limits of capacity of the facility, by more than two. In the case, for example, of hotel accommodation, one practical answer is to say that the only cost of accommodating the wife was the additional amount charged for dual occupancy: the ``marginal cost'' approach. By an extension of the same logic the costs of accommodating the wife in the apartment would be held to be nil because no cost increase was occasioned by her presence. But, as I understand the principles laid down by the High Court of Australia for determining such issues, the matter is no more to be resolved by such logical processes than by the ``mathematical'' approach criticised by the applicant.
24. In my view it is appropriate to recognise a distinction between hotel costs experienced while en route to any given destination and while on short-term absences from any place where, for the time being, the couple ordinarily lived: even though that place too might have been occupied only on a relatively short-term basis.
25. The findings of fact I make are that the claims of the applicant in relation to hotel accommodation, meals in Sydney and cab fare are to be wholly allowed but that the Commissioner's determination in relation to occupation of the apartment (including charges for power) is to be upheld.
26. As a result the determination of the Commissioner upon the objection under review should be varied by reducing the taxable income of the applicant for the year of income ended 30 June 1983 by $182.
* * *
After the foregoing reasons for decision had been finalised and arrangements made for the handing-down of the decision in this matter, there came to hand a supplementary written
ATC 185submission from the applicant. As presented, it contained no indication that a copy of it had been made available to the Commissioner's representative. Having read the submission and formed the view that nothing in it influenced my conclusions in this matter I determined to proceed with the previously organised program. A copy of that written submission will be supplied to the Commissioner, together with these reasons for decision.