Case V98

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 1 July 1988.

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P.M. Roach (Senior Member)

On 21 June 1984 the Commissioner issued an amended assessment against the applicant: a person whom I will refer to as ``Christopher''. His liability to the Commonwealth was increased by $110. That sum included a penalty of $43

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levied by way of additional tax for incorrect return. The amended assessment related to the year of income ended 30 June 1982. The issue of that amended assessment and what followed indicates how finely and slowly the wheels of tax administration turn and how surely they turn even for officers of the Commissioner. Christopher at all material times was an officer in the service of the Commissioner, and his wife (``Mary'') had been in the service of the Commissioner in years past. In the event, nearly four years were to pass before the dispute as to the claim of the Commonwealth to recover $120 from the taxpayer could be resolved. However, it should be noted that Christopher was fortunate in at least one respect. He was not required to place at risk a sum of $240 as a prerequisite to having an independent determination made as to whether or not the Commonwealth was entitled to the $110 it claimed.

2. At all material times Christopher and Mary were a married couple. By June 1982 they were the parents of six children, the youngest of whom had been born in October 1981. During the year of income ended 30 June 1982 Christopher had derived assessable income only from employment. The assessable income only from employment. The assessable income so derived amounted to $24,060 but in consequence of substantial donations made to charity his taxable income was reduced to $19,720. That was not in dispute. For several years Mary had worked on a part-time but regular basis with two employers in order to supplement the family income. In that capacity she had worked as a TIM (Ticket Issuing Machine) Operator, working with totalizator organizations at a variety of race tracks. I find that she was required to present for work at several race tracks: for thoroughbred racing at Randwick, Rosehill, Canterbury, Warwick Farm and Hawkesbury; for trotting meetings at Harold Park; and for dog racing at Harold Park and Wentworth Park. All of those tracks are in New South Wales. Sometimes she had to travel directly from one race meeting to the other and I find that on such occasions she partook of a snack meal. As a result of her endeavours, I find that household finances were augmented by the moneys she earned, less the expenses she incurred in the course of and in consequence of obtaining that income. Measured week by week the increased funds available to the household was only so much of her pay as she received after PAYE instalments were withheld. Measured year by year the latter factor would be displaced by the amount of any income tax that she might be obliged to pay in consequence of her earnings. At least in a non-tax context, ``net income'' is understood as being ``net'' of (inter alia) tax.

3. By reason of the birth of her youngest child in October 1981 she did not work throughout the year of income ended 30 June 1982. Her income-earning activities were probably confined to a period of little more than four months: July and part of August in 1981 and from some time in April to the end of June 1982. In all, she worked on some 60 occasions although sometimes she would have worked by day at one venue and in the evening at another.

4. On 21 July 1982 Mary prepared her return of income and in due course presented it to the Commissioner. As a former officer of the Commissioner she prepared it herself. She acknowledged having derived assessable income from one employer of $983 plus a travelling allowance of $25; and from the other employer $1,237: a total of $2,245. Christopher claimed that, recognising that a taxable income of that magnitude would attract no liability to income tax, she did not assert any claim to deductions such as might have resulted in her taxable income being determined at a lesser figure than the sum returned as assessable income.

5. A fortnight later Christopher prepared his income tax return for the year. In doing so he addressed (inter alia) the question of claiming a ``spouse rebate''. He was aware that the maximum rebate claimable was $930, and that the amount claimable was to be reduced by $1 for each $4 by which ``separate net income'' of Mary for the year exceeded $282. Recognising those matters and being aware of Mary's circumstances, he stated Mary's separate net income at $1,980: a figure he estimated by making allowance for the expenses he considered that she had incurred in gaining the $2,245 returned by her as assessable income. I accept that that estimate was honestly made - it would be surprising if persons so generous to the needy should be dishonest in their dealings with the Commissioner. As a result, he claimed a spouse rebate of $406. On 5 October 1982 an assessment of income tax against Christopher was made in accordance with the return of income lodged.

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6. In due course the returns of both husband and wife were subjected to a routine comparison, such as Christopher understood to be a common practice of the Commissioner. It was then that the difference between the wife's acknowledged taxable income of $2,245 and the husband's assertion that her ``separate net income'' had been only $1,980 was noted. Christopher was called upon for an explanation. He responded in writing. I accept that before doing so he endeavoured to measure his wife's ``separate net income'' more precisely than he had previously done. His advice to the Commissioner was as follows:

      ``Calculation of S.N.I. of spouse              - y/e 30
      June 1982.
      Gross:                                       - $2,245
      Expenses:
      The gross income resulted
      from 60 meetings at Harold
      Park and Wentworth Park
      ($37-$38/meet.)

      * M.V. expenses -
        2,400 km (40 X 60) at
        20c per km                         - $480
      Parking - 60 X 80c
      (average)                            -   48
      Meals on Course -
      20 (say) @ $1.50                     -   30       558
                                            -----    ------
                                                     $1,687
                                                     ------
            

^*At this time vehicle was 6 cyl. Holden Stat. Wagon. Very heavy on Petrol. Although old vehicle, 20c per km not considered excessive.

As you know, S.N.I. is not defined. It is calculated by reducing gross income (including exempt income) by all expenses directly related to the gaining of the income. The expenses are not governed by s. 51 but by general accounting and commercial principles. Thus the exclusions of s. 51 (private, domestic etc.) do not apply.

Refer CITCM 635.''

The reference to CITCM 635 was not explained.

7. The Commissioner was not persuaded by this submission and on 21 June 1984 issued the amended assessment first referred to. The assessments of taxable income and income tax remained as previously assessed but the rebate previously allowed was reduced from $1,131.88 to $1,064.88: a reduction of $67. In addition a penalty for incorrect return was imposed in the sum of $43.

8. The applicant objected to the amended assessment and, on 25 October 1984, the Commissioner advised Christopher that his objection had been disallowed. The applicant requested that his objection be made the subject of independent review and, on 15 October 1986, the Commissioner complied with the request. Before doing so, the Commissioner issued yet a further amended assessment whereby he remitted the penalty of additional tax. Why he did so was not explained.

9. In issuing the amended assessment, the Commissioner acted on the view that, in the particular circumstances, the ``separate net income'' of Mary was equal to her taxable income as assessed; and that that taxable income happened to be equal to the assessable income received by her. That is not to say that the Commissioner contends that in all cases ``separate net income'' is to be identified with ``taxable income'' correctly assessed. It was argued for the Commissioner that, for example, exempt income and the expenses of deriving exempt income need to be taken into account to determine ``separate net income''. Further, it was argued that, while in the absence of exempt income only allowable deductions may be brought to account, not allowable deductions are proper to be brought to account. It was contended that such allowable deductions as ``carry forward losses'', which are not incurred in the year in which they are allowable; and deductions such as ``investment allowance'', which do not relate to the measure of the profits of the year, are not proper to be brought to account in measuring ``separate net income''.

10. The applicant responds in two ways. First, he contends that, even by the standard proposed by the Commissioner, Mary's taxable income, and thereby in the circumstances of this case her ``separate net income'', was not taxable income as assessed but the amount remaining after deducting from assessable income all allowable deductions (cf. sec. 48 Income Tax Assessment Act 1936 (``the Act'')); and that all of the expenses of and incidental to travelling and nourishment as detailed in response to the enquiry of the Commissioner

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were allowable deductions pursuant to sec. 51(1) of the Act.

11. The applicant acknowledges that the question ``whether the fares paid by ordinary people to enable them to go day-by-day to their regular place of employment or business and back to their homes are deductible expenses allowable against the assessable income earned by the employment or business'' - the question as posed by Dixon C.J. (at p. 485) and addressed by a Full Bench of the High Court of Australia in
Lunney v. F.C. of T.; Hayley v. F.C. of T. (1958) 100 C.L.R. 478 - is to be answered in the negative. However, he sought to distinguish the circumstances of his wife on the basis that her employment was essentially itinerant and, therefore, that all of her travelling expenses between home and work should be allowed, and not only those incurred in travelling between two places of work (cf.
F.C. of T. v. Genys 87 ATC 4875).

12. I find that in many respects touching her two employments it was not so. She accepted employments which required that she should attend at different places on particular days. I am not persuaded that the fixing of venues was of so irregular a pattern or of such an uncertain nature as to be fairly described as itinerant (as in the case of the shearers (Case S29,
85 ATC 276)). Nor were her circumstances to be likened to those of the teacher who was required to attend several schools according to a regular order within each week carrying with her all her quite substantial teaching materials (
F.C. of T. v. Wiener 78 ATC 4006). On the other hand, there were occasions when, in the course of a day, she did travel from one place of employment to another and to that extent I find that such travelling was ``in the course of'' her employment.

13. As to that, despite Christopher's experience as an officer of the Commissioner, the evidence presented was quite imprecise and vague. None the less, I think it sufficient to found a finding that some 300 kilometres of the total distance claimed to have been travelled of 2,400 kilometres would have been so involved and that, in respect of those occasions, she incurred motor vehicle expenses amounting to $80, incidental parking expenses of $10 and meal expenses of $30. I am not persuaded that there was any further entitlement in Mary to sec. 51(1) deductions than $120.

14. However, the applicant's second argument was that all of expenses which were incurred and which related to the derivation of assessable income by Mary must be taken into account in determining her ``separate net income'': and not only those giving rise to allowable deductions - in her case pursuant to sec. 51(1) of the Act - in determining her taxable income.

15. Just as there is no definition of the term ``income'' in the Act, neither is there any definition of ``separate net income''. In sec. 90 of the Act ``net income'' is defined as meaning:

``in relation to a partnership,... the assessable income of the partnership... less all allowable deductions except the concessional deductions and deductions allowable under section 80, 80AA, or 82AAT.''

In sec. 95 ``net income'' in relation to a trust estate is defined in somewhat similar terms. But in sec. 159J - the section I am concerned to apply - there is no similar development in exposition of the concept of ``separate net income''. However, recognising that the key word in the phrase ``separate net income'' is ``income'' - the key word in the entirety of the Act - I hold that the term ``income'' in the phrase ``separate net income'' has the same meaning as in sec. 25 of the Act.

16. For myself, I find few indicators as to the meaning of the term ``income'' more meaningful or helpful than the words of Mr Justice Pitney of the Supreme Court of the United States in
Eisner v. Macomber (1919) 252 U.S. 189 at pp. 206-207. The learned Judge said:

``The fundamental relation of capital to income has been much discussed by economists. The former being likened to the tree or the land, the latter to the fruit or the crops; the former depicted as a reservoir supplied from springs, the latter is the outlet stream, to be measured by its flow during a period of time.''

17. The passage serves as a reminder that, in the first place, for the purposes of the Act, ``income'' is something to be measured periodically - commonly annually. Secondly, it is used to distinguish ``capital''. The next thing to note is that ``income'' is a term which embraces ``exempt income'' as much as

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``assessable income''; and income derived from outside Australia as much as that derived from sources in Australia. Again ``net income'' refers to something which remains after taking into account all of the expenses of obtaining the ``income''. Those expenses are not to be identified with, or confined to, the allowable deductions permitted to be taken into account for the purposes of sec. 51 of the Act in measuring taxable income or, so far as is appropriate, identified with expenses not allowable as deductions only by reason of having been incurred in the course of deriving exempt income.

18. I next observe that, having held that ``income'' in the phrase ``separate net income'' bears the same meaning as the term ``income'' in sec. 25 of the Act, it follows that the concept of ``separate net income'' does not extend to include those amounts which the Act requires to be brought to account as assessable income only by reason of specific provisions which have the effect of extending the concept of income expressed in sec. 25 of the Act. Then again, it is not appropriate to bring to account in calculating ``net income'' those deductions only allowable, not because of their relationship to the generation of income, but because of specific statutory warrant: for example, losses carried forward; investment allowance; concessional deductions; self-education expenses; and so on, which are not related to the derivation of the income of the year. However, although I find it unnecessary to determine the point, ``net income'' may well mean the amount of income remaining after deducting (inter alia) income tax on that income either as assessed or as withheld under the PAYE provisions of the Act.

19. Against that background it is necessary to determine whether, in circumstances such as these, the expenses to be brought to account should be limited to those deductions allowable under sec. 51 of the Act. The Commissioner's representative contends for an affirmative answer. He contends that the expenses of travel are not to be brought to account because they fail to satisfy the requirement of sec. 51 that, to be deductible, expenses be incurred ``in the course of'' the derivation of assessable income
(Amalgamated Zinc (De Bavay's) Limited v. F.C. of T. (1935) 54 C.L.R. 295; Hayley v. F.C. of T. (1958) and Lunney v. F.C. of T. (supra)).

20. On the other hand, the applicant makes the point that the concept of ``separate net income'' is not hedged around with words of elaboration or qualification (as in sec. 90 and 95); or expressed to be related to the concept of allowable deductions under sec. 51; or, to take a broader standard, to the fixing of taxable income under sec. 48. Further, he contends that the fact that negative tests exist in sec. 51(1) which may disqualify for deductibility expenses which have satisfied the positive tests in that subsection, indicates that even expenses incurred in derivation of assessable income by the standards of the positive tests are in some instances to be excluded from deductibility for the purposes of determining taxable income despite being incurred in the course of deriving assessable income. In addition, the applicant says that the interpretation of sec. 51 which has been adopted by the courts operates to exclude from deductibility some expenses which, by ordinary commercial principles and the standards of accountancy practice, should be brought to account in assessing the results of any given year of effort. He instances provisions reasonably made for such matters as contingent liabilities; long service leave; and bad debts.

21. On balance, I think the interpretation proposed by the applicant is to be preferred. What Mary gained by her efforts was no greater than what remained after bearing the costs she did of getting herself to and from work. I would also take into account the costs of sustaining herself while there, although I consider that expense to be less certainly allowable. Accordingly, the order of the Tribunal will be that the decision of the Commissioner upon the objection under review be varied and that the objection be wholly allowed.