CASE 7/93

DJ Trowse M

Administrative Appeals Tribunal

Decision date: 15 March 1993

DJ Trowse (Member)

The applicant has requested the Tribunal to review a decision of the respondent, dated 27 February 1992, to disallow a series of items claimed as outgoings incurred in the production of his 1989 assessable income. The items in question are not only numerous but some are apparently based on the roughest of estimates. It appears reasonable to conclude that a ``scatter-gun'' approach had been applied in the preparation of the return and yet it is surprising to observe that all of the respondent's offers to settle this dispute, which appear more than generous, have been rejected. The task of the Tribunal is to decide whether the expenses in question are allowable deductions pursuant to either sub-s. 51(1) or s. 54 of the Income Tax Assessment Act 1936 (``the Act'') and, if so, whether the requirements of subdivision F of Division 3 of Part III of the Act, commonly referred to as the substantiation provisions, have been satisfied.

2. At the hearing the respondent was represented by Mr S. Cole of counsel. The applicant was represented by his tax agent and

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gave evidence under oath. The Tribunal found the applicant to be an unsatisfactory witness in- as-much that he either told falsehoods or presented his evidence with reckless abandon. More damning was the fact that he tendered as evidence receipts and invoices which related to vehicles other than the one being used for business and that several of these had been altered to reveal incorrect amounts and year dates. The Tribunal approached the applicant's evidence with the greatest caution.

3. During the period 1 July 1988 to 23 February 1989, the applicant was employed by a firm which was sub-contracted to assist exploration companies in their search for oil and gas in the far north of South Australia. The applicant described himself as a site foreman and in that capacity was involved in ``building pads and putting roads in for oil exploration''. The employer had located a base depot five kilometres from the settlement of Moomba and it was there that the applicant resided in his caravan. It is accepted that the applicant was required to travel extensively in the performance of his duties and that, in this regard, he used his Nissan four-wheel drive motor vehicle. It is the extent of that use and the proof of the outgoings allegedly incurred that are in dispute.

4. It seems common practice for employees engaged in this kind of work to be supplied with a camp when traversing these remote areas and this is particularly so when they are required to be away from the employer's depot for a period of time. The camp takes the form of a caravan, generator set and water tank, all of which is mounted on a semi-trailer. The Tribunal accepts the applicant's evidence that there were occasions when he supplied his own camp, i.e. caravan and generator set, and that those contributions resulted in an increased rate of remuneration from his employer. However, it is notable that no such use occurred in the year in question, although there were two occasions when the employer did hire the generator set owned by the applicant and it was accepted that hire income of $450 had been received from that source in the 1989 year of income. It is also accepted that the applicant owned a set of tools which was used by him in the performance of the duties attaching to his position.

5. The above employment ceased in February 1989 and the applicant moved to rental accommodation in a suburb of Adelaide. It appears that that tenancy had existed for some time and that the premises had been occupied by the applicant's girlfriend (who was later to become his wife). Also there were times when she visited Moomba and stayed with the applicant in his caravan which was at all times during the period July to February located at the employer's depot. Likewise, there were several occasions during this same period when the applicant journeyed to Adelaide and stayed at the rented premises.

6. On 6 March 1989 the applicant commenced employment as a grader driver with an earthmoving company located in Adelaide. There were instances when he would use the Nissan to travel from site to site and on those occasions he was paid a set allowance. The vehicle was also used to carry the applicant to and from his place of employment. He left that position on 23 May 1989 and commenced one similar on 1 June 1989. The new position did involve some mechanical repair work and on those occasions he was located at his employer's depot. Irrespective of his movements, the applicant received a daily allowance to reimburse him for the costs associated with home to work travel plus any that may relate to moving between work sites.

7. The following details represent the claims disallowed by the Commissioner and the matters objected to on behalf of the applicant-

    Nissan expenses
        Insurance                                   211
        Interest -- Esanda                         1804
        Petrol, diesel, oil, repairs
          and tyres                                4392
        Depreciation                               1967
    Less amount allowed                            2100


    Caravan expenses
        Insurance (including unknown
        portion for generator)                      193
    Interest -- ANZ Bank                            649
    Repairs                                          65

    Less depreciation recouped                      563            344
    Generator expenses
        Interest -- Esanda                          541
        Depreciation -- period
           23 February onward                       310            851
    Sundry expenses
        Soap and washing powder                     250
        Replacement boots                           150
        Replacement of jeans, shoes & shirts        416
        Replacement of hand tools                   156
        Travel expenses -- meals on long
           distance travel -- 52 weeks
           x $5 week -- travel to Moomba
           Gas Fields                               260
        Postage, stationery, pens, maps,
           technical journals, newspapers,
           directories, diary                       208
        Advertising re sale of plant                 59
        Telephone expenses -- on call and
           red phones                               104
        Home office electricity -- to read
           technical journals                       104
        Bank fees and charges -- to clear
           deposits and make cheque payments        160
        Security expenses -- cost of
           maintaining Rottweiler dog to
           prevent theft of plant, tools
           and fuel                                1310
        Cost of obtaining truck driver's
           licence                                  553
        Depreciation -- period 23 February
              Tool Chest                    90
              Freezer                       14
              Water Pressure Pump           15
              Generator, Fuel Tank          19      138
        AMP -- sick and accident premium            156
        MLC -- premium on girlfriend's policy        79           4103
                                                    ---        -------
        Total expenditure in dispute                           $11,572

8. A further adjustment relating to the hire income of $450 was made by the Commissioner. Notwithstanding the applicant's submission that this amount had been included in the gross income as shown in the group certificate, it soon became apparent that this was not the case. It was on that basis that the applicant conceded the correctness of the Commissioner's action in the bringing to account of the $450 in the determination of his taxable income.

9. The attitude of the Commissioner regarding the deductibility of the above outgoings is straightforward. He contends that some of the items of expenditure do not qualify for deduction in terms of sub-s. 51 and that those that do, or some portion thereof, do not

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meet the requirements of the substantiation provisions. On the issue of depreciation, it is his submission that some of the items of plant were not used at all in the production of assessable income, whereas the remainder ceased to be so used upon the applicant's return to Adelaide in February 1989. For those reasons he has denied in total the depreciation claim for the caravan and allowed others only for the period 1 July 1988 to 23 February 1989.

10. The approach of the applicant's representative is more simplistic. He submits firstly, that all the outgoings relate to the activities productive of the assessable income, and secondly, that the presentation of his client's evidence, together with the production of cheque butts, bank statements and a collection of cash dockets, is sufficient to discharge the requirements of sub-division F of Division 3 of Part III of the Act. Such a view misconstrues the momentum of the substantiation provisions, and is not helpful to the resolution of this reference. Further, it is a view that passed into antiquity on 1 July 1986, i.e. the date upon which the substantiation rules came into effect.

11. In order to expedite these reasons, the Tribunal will first address those items which fall at the sub-sections 51(1) and 54(1) hurdles.

Caravan expenses

It was here that the applicant resided during his term in Moomba. During the eight-month period it remained in the employer's depot and was occupied by either the applicant alone or by the applicant and his girlfriend. It was not subject to any leasing arrangement nor was it productive of assessable income during the period under review. The caravan represented the applicant's living quarters during the period July to February and on that basis the Tribunal concludes that the essential character of the net outgoings of $344 is private/domestic. Whilst it is true that a portion of the caravan may have been used as a home office and for the storage of equipment - and the Tribunal suspects that the number and extent of those occasions have been exaggerated - such uses do not detract from the private, domestic nature of the outgoings (see judgment of Mason J, as he then was, in
FC of T v Faichney 72 ATC 4245, particularly at pages 4248 and 4249).

Replacement of jeans, shoes and shirts - $416

Replacement of boots - $150

Soap and washing powder - $250

In relation to a claim under s. 51(1) for clothing replacement expenditure, it is not sufficient to show that the circumstances of employment require such clothing to be worn; the essential character of the expenditure must not be of a private nature. Where the clothing worn is of a character worn by men or women generally in our social system, the expenditure in replacing that clothing will be of a private nature. All of the clothing involved in these claims is worn by men generally in our social system and accordingly is of a private nature. Likewise, the essential character of the cost of laundering that clothing is private and thus no deduction is permitted.


The Tribunal is unable to perceive any connection between the cost of newspapers, and the activities productive of the applicant's assessable income and for that reason no deduction is allowed.

Advertising re sale of plant - $59

A disposal of plant is a capital transaction and in the opinion of the Tribunal any expenses attending such a sale take on that same character. The cost of advertising is capital by nature and thus caught by the exclusory provisions contained in sub-s. 51(1).

Cost of obtaining truck driving licence - $553

This expenditure concerns a course undertaken by the applicant to secure future employability in the event that his ``career in grader operating in Adelaide did not work out'' (see page 35 of transcript). The Tribunal considers that the applicant's endeavours to secure employment came at a point ``too soon'' (
FC of T v Maddalena 71 ATC 4161) to satisfy the requirements stipulated by the High Court of Australia as essential to qualify for deductibility under s. 51(1) of the Act. The cost of obtaining new employment does not form an outgoing incurred in the course of the production of assessable income. However, it should be observed that the Commissioner has conceded a deduction of $30 under this heading - a receipt for that amount having been produced - and on that basis the Tribunal will give effect to that concession.

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Depreciation - period 23 February onwards - $138

Sub-section 54(1) of the Act sets out the conditions for the allowance of a deduction for depreciation. One of those conditions is that the plant or articles must be used by the taxpayer for the purpose of producing assessable income or, alternatively, they must have been installed ready for use for that purpose and held in reserve by him. It is accepted that the items of plant in question ceased to be used in the production of income on 23 February 1989 and that on or about that date they were stored away in a shed located at the residential property then occupied by the applicant. The Tribunal is of the view that the entitlement to claim depreciation ceased when the income earning activities at Moomba came to an end. The Tribunal is not persuaded that use at some time in the unforeseeable future is sufficient to bring the items within the category of plant held in reserve for the purpose of producing assessable income. The expression does not include plant held in reserve for income-producing operations yet to be entered upon by the taxpayer (see decision of Tribunal in Case X46,
90 ATC 378).

MLC - premium on girlfriend's policy - $79

The Tribunal is at a loss to understand how an outgoing of this kind could possibly qualify for deduction in terms of sub-s. 51(1). Quite simply, it was not an outgoing incurred in the gaining of assessable income.

12. It is appropriate that the Tribunal now turns to a consideration of the provisions of sub-division F of Division 3 of Part III of the Act, the broad effect of which is to restrict the deductibility of certain outgoings which may otherwise qualify in terms of some other sections of the Act. The requirements of the subdivision are superimposed on those other provisions so that unless those requirements are met no deduction is permitted. The kinds of outgoings caught are ``employment-related expense'', costs associated with the running of a car, either by an employee or a self-employed person, and the expenses of travel, both local and overseas. Employment-related expense is defined in sub-s. 82KT(1) to mean outgoings incurred by a taxpayer in producing salary or wages. Car and travel expenses are specifically excluded from that definition and, as will be seen later, are the subject of separate substantiation requirements. Other terms contained in this definition section and which are relevant to the current reference are ``car'', ``log book car'', ``log book records'' and ``motor vehicle''.

13. One of the requirements of substantiation is the production of ``documentary evidence''. That term is defined in sub-s. 82KU(1) as follows-


82KU(1) A reference in this Subdivision to documentary evidence of an expense incurred by a taxpayer is, except in the case of depreciation, a reference to a document, being a receipt, invoice or similar document, that-

  • (a) sets out-
    • (i) in any case - in the English language; or
    • (ii) in a case where the expense was incurred outside Australia - in a language of the country where the expense was incurred,

    particulars of-

    • (iii) the date on which the expense was incurred;
    • (iv) unless sub-paragraph (v) applies - the name of the person who supplied the goods or services to which the expense relates;
    • (v) if the goods or services to which the expense relates were supplied in the course of a business carried on by a person - the name of the person or the business name under which the person carries on the business;
    • (vi) the amount of the expense expressed in the currency in which the expense was incurred;
    • (vii) the nature of those goods or services; and
    • (viii) the date on which the document was made out;
  • (b) is supplied by or on behalf of the person referred to in sub-paragraph (a)(iv) or (v), as the case may be; and
  • (c) is obtained by or on behalf of the taxpayer at, or as soon as reasonably practicable after, the time when the expense is incurred.''

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Sub-section (2) enumerates the information needed in respect of a claim for depreciation. Documentary evidence in this regard is a receipt, invoice or similar document that reveals-

  • • date upon which equipment was acquired;
  • • name of the person from whom asset was acquired;
  • • cost of property; and
  • • date upon which the document was made out.

Sub-sections (6) to (8) recognise the impracticability of obtaining documentary evidence for every transaction. In circumstances where the individual outgoing does not exceed $10 and the aggregate of such a claim does not exceed $200, a signed entry in a diary maintained by the taxpayer will suffice. A similar approach is adopted where the Commissioner is satisfied, having regard to the nature of the outgoing, that it would be unreasonable to expect the taxpayer to have obtained documentary evidence.

14. Sections 82KUA to 82KY are the provisions governing the deductibility of car expenses. The first of those sections commands that no deduction is allowable unless documentary evidence of the expense is obtained. There are exemptions but these are not relevant in this issue. In like vein, s. 82KUB states that a deduction is not allowable for car expenses incurred in a log book year of income unless, first, log book records and odometer records are maintained and, secondly, the taxpayer, in his car records for the current year, specifies a percentage of business use. Section 82KV sets out certain exemptions from the need for log book substantiation but once again these are of no moment.

15. Finally, for the purpose of these reasons, s. 82KZAA sets out the circumstances in which relief from the requirements of substantiation is available. It is expressed in the following terms:


82KZAA(1) Where:

  • (a) a taxpayer claims to have incurred an expense during a year of income; and
  • (b) having regard to:
    • (i) the nature and quality of evidence that the taxpayer has available to substantiate the claim; and
    • (ii) special circumstances affecting the taxpayer, including, but not limited to, the following:
      • (A) the extent to which the taxpayer attempted to comply with the substantiation sections;
      • (B) whether the taxpayer's failure to comply with the substantiation sections was inadvertent or deliberate;

      the Commissioner, in the course of reviewing the claim after the making of the assessment of the taxpayer's taxable income of the year of income, is satisfied that:

    • (iii) the expense was incurred by the taxpayer during the year of income; and
    • (iv) it would be unreasonable for the substantiation sections to apply in relation to the taxpayer in relation to the expense; and
  • (c) the Commissioner's review is undertaken:
    • (i) of the Commissioner's own motion; or
    • (ii) in considering an objection against the assessment of the taxpayer's taxable income of the year of income; or
    • (iii) in considering whether to make an amendment of the assessment of the taxpayer's taxable income of the year of income in response to a request made by the taxpayer before the commencement of this section;

    the substantiation sections do not apply in relation to the taxpayer in relation to the expense.''

16. The Tribunal now reverts to a consideration of the items still in contention.

17. Nissan expenses

It is clear that the Nissan motor vehicle was used by the applicant in the performance of the duties required of his employer whilst in the Moomba region. It is also obvious that the applicant perceived no need to maintain a log

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book record or odometer record nor to keep documentary evidence for all car expenses incurred during the 1989 year of income. Were it not for these shortcomings, there is no doubt that some portion of the car expenses would have qualified for deduction.

18. On the question of car expenses and use thereof, it is proposed to consider the applicant's evidence in greater detail. He contended that the amount expended during the year on diesel, oil, repairs and tyres was a figure of $4,392 and yet an examination of the material before the Tribunal reveals that such a claim is excessive for the reasons stated in paragraph 2. He estimated that the Nissan travelled a total distance of 40,000 kilometres during the year under review and argued that not one of those related to private use, and this was so notwithstanding his own evidence that it was used to convey him to and from his places of employment once he had moved to Adelaide. The Tribunal is also troubled by the assertion that the Nissan was not used for private purposes during the applicant's visits to Adelaide in the period July to February. In all of the circumstances the Tribunal rejects the applicant's submission that there was no private use attaching to the Nissan. His evidence on this subject lacked credibility. Putting the substantiation provision aside, any apportionment called for in terms of sub-s. 51(1) is not possible and for that reason alone the applicant's claim must fail. The onus of proof imposed in terms of s. 190(b) has not been discharged.

19. More significantly, the applicant has failed to meet the substantiation requirements. The Tribunal is satisfied that the Nissan four- wheel drive vehicle does come within the definition of ``car'' and that the expenses relating thereto require substantiation. No evidence was tendered regarding the vehicle's carrying capacity and thus the belated comment from the bar table that it was capable of carrying a load of one tonne or more is of no consequence. The Tribunal also finds that the Nissan was a ``log book car'' and that the 1989 financial year was a ``log book year of income'' and, in this regard, see particularly sub-s. 82KTG(g). It is also obvious that the applicant did not maintain during the year either log book records or odometer records. The application of s. 82KUB to those findings prohibits any deduction in respect of expenditure incurred for the Nissan.

20. The Tribunal takes the opportunity to comment on the Commissioner's action in allowing the deduction of $2,100 (i.e. 5,000 kilometres × 42 cents per kilometre) which coincides with the method outlined in s. 82KX. It is recalled that the use of the Nissan far exceeded that statutory limit and thus the choice exercised by the Commissioner in this regard appears incorrect. However, it should be observed that the function of sub-ss. 82KY(2) and (3) is to ensure that a taxpayer is not to be disadvantaged by not previously electing to have applied the statutory formulae contained in ss. 82KW or 82KX. Where, as a result of adjustment, expenditure claimed in terms of the log book method falls below levels authorised by the other two methods, the taxpayer is deemed to have elected that one of those alternatives apply. The provisions of s. 82KW are more relevant to the circumstances of this taxpayer and specifically the formula which permits a deduction equal to 12% of the original cost of the car. The amount calculated in accordance with that method is less than that already allowed by the Commissioner and for that reason the Tribunal takes the matter no further.

20. Generator expenses

The generator was acquired to produce power for the caravan and on that basis the Tribunal is of the view that the expenditure claimed is of a private nature. An exception is those occasions when the generator was hired out and assessable income produced. It appears that the daily rate of hire was $25 and that such hire occurred at various intervals during the period July to February. The rental received was $450 and thus it is calculated that the number of hire days totalled 18. Documentary evidence detailing cost and interest charged on the acquisition of the generator was tendered to the Tribunal and it was accepted that the interest charge for the full year amounted to $541. On a pro rata basis the Tribunal is prepared to allow an interest deduction of $27. A claim for full depreciation to 23 February 1989 has already been allowed to the applicant and this in the opinion of the Tribunal exceeds the correct entitlement. Certainly there is no warrant to allow a further claim beyond that date.

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22. Replacement of hand tools - $156

Travel expenses - $260

Postage, stationery, etc - $208

Telephone expenses - $104

Home office expenses - $104

Sick and accident premiums - $156

It is conceivable that outgoings of the type described above may qualify for deduction in terms of sub-s. 51(1) of the Act. However, the Tribunal is not satisfied that all of the outgoings were incurred. More to the point, the Tribunal regards all of the above as coming within the definition of ``employment related expense'' and as such require substantiation. There is no documentary evidence, or diary entry, to support any of the foregoing. In this situation s. 82KZ instructs that a deduction is not allowable.

23. Security expenses - $1,310

The Tribunal accepts that the Rottweiler dog was used to protect plant, caravan and applicant's girlfriend during the July to February period and on that basis accepts that some unknown portion could relate to the derivation of income. The onus of demonstrating that part has not been discharged nor has any documentary evidence or diary entry been produced. Once more the outgoing is employment related and thus the absence of proof of the type required results in no deduction.

24. Bank fees and charges - $160

Bank statements of the applicant's account were tendered at the hearing and the Tribunal is satisfied that these represent documentary evidence of the fees charged during the year under review. To the extent that those fees relate to either deposits that represent assessable income or withdrawals that are allowable deductions, they are deductible. According to the Tribunal's reckoning total deposits for the year amounted to $39,152, upon which financial institutions duty of $16 had been imposed. Assessable income paid into the bank account represented about two-thirds of the total deposits and on that basis a deduction of $10 is allowed. The withdrawals from the account are numerous and in any event the amounts qualifying for deduction are minuscule. In those circumstances the Tribunal is not prepared to take the matter any further.

25. The Tribunal perceives no reason to call to the assistance of the applicant the relief from substantiation requirement contained in s. 82KZAA. The Tribunal does not view with favour the nature and quality of evidence, nor did the applicant make any attempt to comply with the substantiation requirements. Whether that non-compliance was inadvertent or deliberate was not made known to the Tribunal. In all the circumstances the Tribunal decides that the discretion available in terms of this section not be exercised in the applicant's favour.

26. The Tribunal feels compelled to comment upon certain of the final submissions made on behalf of the applicant. It seems that the tax agent representing the applicant is of the view that the requirements of substantiation should be administered in a practical and common sense way. He maintained that the getting of receipts and the making of diary entries were not practical and that the ``only fair approach is to make an annual estimate''. It seems that the purpose and design of this relatively new sub- division was to outlaw that very practice and the problems that flowed from it and there is no doubt that both the Commissioner and this Tribunal must interpret and apply the law as it appears in the legislation. It may well be that the keeping of documents and maintenance of records may cause inconvenience and that otherwise productive time is spent on recording but that is not to the point. If the deduction is sought, the substantiation requirement must be met. It seems probable that the introduction of these requirements was aimed at those taxpayers then abusing the system. Unfortunately all self-employed and employee taxpayers are caught in the substantiation net and must bear the consequences if they are to succeed with their claims.

27. For the reasons enunciated above the Tribunal varies the objection decision to allow-

  • (a) cost of obtaining truck driving licence as conceded by the Commissioner $30;
  • (b) interest paid on generator $27; and
  • (c) bank fees $10.

In all other respects, the Tribunal affirms the Commissioner's decision on the objection.

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