Gummow J

Federal Court

Judgment date: Judgment handed down 17 December 1993

Gummow J

This is an appeal from a decision of the Administrative Appeals Tribunal (the ``AAT'') [reported as Case
31/93, 93 ATC 359] in a proceeding in which the taxpayer sought to review the decision of the respondent (``the Commissioner'') disallowing an objection by the taxpayer against the assessment to income tax for the year ended 30 June 1991.

The taxpayer unsuccessfully claimed a deduction under the first limb of sub-s. 51(1) of the Income Tax Assessment Act 1936 (``the Act'') in respect of certain clothing purchased by her. In addition, small amounts were claimed for dry cleaning and hairdressing. The AAT determined that the decision of the Commissioner upon the objection be set aside and that the objection be upheld by allowing a deduction in the sum of $3,656.73. It was agreed that this was an error and that the correct figure was $3,565.73.

The ``appeal'' to this Court under s. 44 of the Administrative Appeals Tribunal Act (``the AAT Act'') must be ``on a question of law'', the expression used in sub-s. 44(1). One of the arguments of the taxpayer is that the appeal is not competent because, in truth, it does not raise any question of law as to the construction or operation of sub-s. 51(1) of the Act.

It is appropriate first to turn to the facts as found by the AAT. They are not in dispute. But they are somewhat unusual.

On 20 August 1990 the taxpayer took up a position as Personal Secretary to Lady Campbell, wife to His Excellency The Honourable Sir Walter Campbell, then the Governor of the State of Queensland. During the relevant year of income, for three weeks in May 1991, the Governor was Administrator of the Commonwealth.

Before taking up her present position, the taxpayer had been employed as an Executive Secretary by a large international chain of hotels. In that position she had need of a wardrobe of the same quality as that required

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for use in her position in the vice-regal household but there had been no requirement for hats, gloves and formal full length evening dresses. The taxpayer's evidence was that the change in employment in 1990 had also required her to expand the quantity of her wardrobe. The new clothing was acquired by the taxpayer in the course of the year in which she took up her position. She did so in August and the great majority of her expenditure was in the month of August-November. In all, there were 51 particular items of expenditure on clothing for which the deduction was sought.

The evidence shows that the taxpayer attended Lady Campbell on all her engagements, including those undertaken with the Governor. In the period 16 August 1990-27 June 1991, there were 163 such engagements. In the three weeks in May whilst Sir Walter Campbell was Administrator of the Commonwealth there were 27 engagements. On various days there were several daytime engagements followed by an evening engagement. Such circumstances required several changes of clothes by the taxpayer in the course of any one day. A number of vice- regal engagements were in towns and cities outside Brisbane and on occasion this involved the use of additional quantities of clothing because laundering was not possible whilst the vice-regal party was travelling throughout the State.

The AAT found (ATC p. 361; para. 7):

``The taxpayer's duties required that she attend the employer on all public engagements. The taxpayer stated that on any day there could be a number of engagements requiring different attire, for example, a day dress and hat followed by black tie evening wear. The taxpayer described two changes of clothes in one day as being `very normal' and... three changes of clothes in one day as being `not abnormal'.''

In her evidence, the taxpayer, by way of example, outlined her duties on 8 May 1991. This was whilst Sir Walter Campbell was Administrator. She said:

``One day, a ceremonial [welcome] at Fairbairn Air Force Base in Canberra... very heavy woollen, fully lined dress, hat and gloves to welcome the President of Turkey. Then back to Government House, Yarralumla, where actually I was residing for three weeks with Sir Walter Campbell, whilst he was Administrator of the Commonwealth. Back at Yarralumla where an investiture of the President of Turkey [with] the Order of Australia he had been given. That of course was in Yarralumla Government House, is centrally heated, so of course we wore lighter clothing. That evening was a formal State dinner for 56 people at Government House Yarralumla, where I sat at dinner beside the President's ADC, and was asked to wear just not cocktail or evening, but that it was formal full length. So that was three changes in one day.''

In a case such as the present, it is relevant to have regard to the requirements of the employment of the taxpayer:
FC of T v Cooper 91 ATC 4396 at 4400; (1991) 29 F.C.R. 177 at 182. The taxpayer was expected to dress on each engagement in a manner compatible with that of Lady Campbell, upon whom she attended. Thus if Lady Campbell wore hat and gloves, then the taxpayer was expected to do likewise. Particularly before travelling away from Brisbane, the taxpayer would discuss with Lady Campbell what attire might be required in order again to ensure that they dressed compatibly. There was no express condition of the taxpayer's employment that she had to wear or purchase a particular outfit. However, she well understood that she was expected to dress in accordance with an appropriate standard for each occasion. The taxpayer appreciated that when attending Lady Campbell she was exposed to the public eye and scrutiny in a way quite different from that in her past life in private industry.

The taxpayer lived in at Government House in Brisbane. That is significant in understanding her evidence. The AAT described her employment as a ``seven days a week occupation on a live-in basis of tenure'' (93 ATC p. 361; para. 10). The taxpayer said that her standard of clothing for personal use when ``off-duty'' was casual in nature, being T-shirt, jeans, shorts or tracksuit. She said it was very seldom that she had an opportunity to wear for private use any of her official wardrobe, and she did not have a lot of ``private time''. The taxpayer's claim for deduction made allowance of one third for a ``private use component'' of her expenditures on her wardrobe.

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In its reasons for decision, the AAT said that there was no general rule of law against the claiming of expenditure on clothes as a deduction under sub-s. 51(1) of the Act. The AAT continued (ATC p. 361; para. 14):

``The taxpayer contended that the peculiar and unavoidable conditions of her employ which required frequent changing of clothes, frequent travel, the availability at all times of pressed and clean clothes, were directly attributable to the activities which produced the assessable income. The taxpayer's evidence that if she did not conform with these requirements she would not have secured or later retained the job was unchallenged. I was impressed by the taxpayer who presented as a very credible witness and I accept that her intention was to spend as little money as possible on clothing and accessories. She has not been wasteful or frivolous in respect of her clothing expenditure.''

and (ATC p. 362; para. 17):

``Excluding the expenditure on the more non-conventional items (hats, gloves and the black tie formal evening wear), the taxpayer's claim in the present case relates to an increase in quantity of clothing required rather than an increased quality.''

In paragraph 19 of its reasons, the AAT said:

``There is nothing about the additional changes of clothes in a work day for this taxpayer which serve a private purpose. Her personal requirements of modesty, decency and warmth are met by her first set of clothes for the day. Her additional changes of clothing throughout the day solely serve work-related purposes which enable the taxpayer to attend the wife her employer in the performance of her duties at many different types of functions as Personal Secretary. The expenditure on the additional clothing is incurred in the course of gaining the income. Although not determinative of the issue, it is a relevant consideration that she makes the additional changes of clothes because the employer requires her to wear them.''

[Emphasis supplied.">

The AAT then referred to a passage in the judgment of Lockhart J. in FC of T v Cooper supra at ATC 4400; F.C.R. 181. There, his Honour discussed various High Court authorities and said that ``to be deductible the expenditure must be incidental and relevant in the sense of having the essential character of expenditure incurred in the course of gaining or producing assessable income''.

The AAT continued (in 93 ATC p. 362; para. 21):

``I am satisfied on the evidence that the occasion of the outgoing operates to give it the essential character of a working expense. I am satisfied on the evidence that the expenditure on the additional clothing (including hats, gloves and black tie formal evening wear) is both incidental and relevant to the derivation of the taxpayer's income.''

[Emphasis supplied.]

In the course of discussing, and contrasting, Cooper's case supra, the AAT said (at ATC p. 363; para. 25):

``By contrast, the nexus between the expenditure and the income-producing activity is not tenuous in this case. The taxpayer was paid money to attend upon the employer at all public engagements the employer undertook. Her income-producing activities included her being suitably attired to meet the formality of the occasion of each engagement in any one day. The nexus is direct. Additional eating and drinking could not ensure that the footballer [in Cooper's case] would play well, let alone that his team would win, whereas if the Personal Secretary changed outfits during the day to meet the standard of attire required for each engagement then she did so as an exigency of the proper performance of her job. The consumption of food and drink is intrinsically of a private nature. There is, however, no question that expenditure on clothing can, in certain circumstances, be allowable as a deduction.''

[Emphasis supplied.]

The AAT continued (para. 27):

``27. Having determined which items in relation to which the expenditure is deductible, it is necessary to determine how the deduction is to be calculated. The applicant's evidence was that her expenditure on clothing as an Executive Secretary for the years ended 30 June 1989 and 30 June 1990 were $2,220.21 and $2,948.06 respectively. Her total clothing expenditure for the year ended 30 June 1991 was $6,149.86.

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28. The taxpayer claimed as a deduction two-thirds of her total clothing expenditure as representing the additional expenditure over and above that incurred in the preceding two years. The [Commissioner] submitted that the appropriate test for calculating the deduction is whether or not the taxpayer spent more than would normally be expended by a Personal Secretary to the wife of the occupant of the public office. As the [Commissioner] submitted, there was no evidence that the taxpayer expended any more than would normally be required to be spent by an employee in that type of employment.


30.... The taxpayer in this case must have an extensive wardrobe irrespective of whether she personally needs to wear more clothes or not. It is the job, not the personal requirements or preferences of the taxpayer, which dictates that she have an extensive wardrobe. By virtue of these distinguishing features, the logic of comparing expenditure with other employees is inapplicable in this case.


32. The essential character of the expenditure of the taxpayer is the point. On the particular facts of this case, including that the taxpayer had an executive wardrobe of similar quality for at least two years previous to the subject year, I am satisfied that the amount of deduction allowable should be based on the amount by which the expenditure for the year ended 30 June 1991 ($6,149.86) exceeds the average of the level of expenditure over the two years ended 30 June 1989 ($2,200.21, as I have recorded in paragraph 27) and 1990 ($2,948.06). The total expenditure for those two years amounts to $5,168.27, producing an annual average for each of $2,584.13. This in turn, when deducted from the amount expended in 1991, produces an allowable deduction quantified at $3,565.73.''

[Emphasis supplied.">

The notion of ``essential character'' thus loomed large in the reasoning of the AAT, and, on the authorities, necessarily so.

Propositions which depend for their application upon notions of Platonic essences are found in various areas of the law. Examples from such diverse areas as decisions construing s. 92 of the Constitution and the law of charitable trusts are given in
Netcomm (Australia) Pty Ltd v Dataplex Pty Ltd (1988) 81 A.L.R. 101 at 106. A more recent instance is the construction given the phrase ``in trade or commerce'', as it appears in s. 52 of the Trade Practices Act 1974, by the High Court in
Concrete Constructions (N.S.W.) Pty Limited v Nelson (1990) 169 C.L.R. 594 at 602-605. The case law upon s. 51(1) of the Act presents a further, and striking, example.

Section 51(1) states (with emphasis supplied):

``51(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions, except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.''

It is plain enough that (i) the circumstance that s. 51 was intended to deal with a great variety of items of expenditure made it inevitable that it should be couched in general terms (
Kenneth Edmund Lunney v FC of T (1958) 11 ATD 404 at 411; (1957-1958) 100 C.L.R. 478 at 495), (ii) the questions whether an outgoing was wholly or partly ``incurred in gaining or producing the assessable income'' or ``necessarily incurred in carrying on'' a business of the character described in the section, present issues of characterisation; the relationship between the outgoing and the assessable income must be such as to impart to the outgoing ``the character of an outgoing of the relevant kind'':
Fletcher & Ors v FC of T 91 ATC 4950 at 4957; (1991) 173 C.L.R. 1 at 17, (iii) by reason of the foregoing, there is a number of decisions concerned with fixing the point where the connection with a process of income derivation is sufficient to make an outgoing ``relevant'' in this sense, and (iv) nevertheless, whatever the complexities to which (i), (ii) and (iii) and the appendant case law give rise, a primary concern is that the provision be applied in a ``practical'' and ``commonsense'' fashion; Fletcher at ATC 4958; C.L.R. 18-19,
FC of T v Foxwood (Tolga) Pty Limited 81 ATC 4261 at 4264, 4268-4269; (1980-1981) 147 C.L.R. 278 at 285, 293.

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In the present case, the AAT held (paras. 19, 25) that with the use of her wardrobe after personal requirements of modesty, decency and warmth were met by her first set of clothes of the day, there was a direct nexus between the expenditure of the taxpayer on her wardrobe and her income producing activities.

However, as Lockhart J. and Hill J. pointed out in their judgments in FC of T v Cooper supra at ATC 4401-4402, 4413; F.C.R. 184, 198-199, the result of decisions such as Lunney supra and
Lodge v FC of T 72 ATC 4174; (1972) 128 C.L.R. 171, is that it is not sufficient to fix particular expenditure with the necessary character that it is a prerequisite to the earning of the taxpayer's assessable income, in the sense that it is necessary if the assessable income is to be derived. The expenditure must also be ``incidental and relevant'' to the derivation of income; in particular, it is necessary to determine the ``essential character'' of the expenditure itself and it is not sufficient that unless the expenditure is incurred the taxpayer will be unable to engage in the activity from which the income is derived.

This concentration upon the characterisation of the expenditure incurred was said by Mason J. in Lodge (at ATC 4176; C.L.R. 175) to be founded ``largely on the presence of the word `in' in the principal parts of the subsections''.

Accordingly, in Lunney (at ATD 414; C.L.R. 501) the expenditure on fares was said to be a necessary consequence of living in one place and working in another, and in Lodge (at ATC 4176; C.L.R. 175-176) the essential character of the expenditure was as nursery fees for the taxpayer's infant daughter. Counsel for the taxpayer contrasted these cases with the situation in the present case. He said that the earlier cases had concerned expenditure preparatory to engagement in the income producing activity, not the day to day performance of the duties of the taxpayer.

After discussing certain of the High Court decisions, including Lodge and Lunney, Professor Parsons, in his work ``Income Taxation in Australia'' 1985, para. 8.62, reached a conclusion of significance for much legal reasoning which turns upon a process of characterisation of essential and inessential attributes. He wrote:

``It appears that the determination of `essential character' makes possible a conclusion on relevance. The determination of essential character involves the adoption of a description of the expense which affords an answer to the question of relevance. The description in effect asserts the relevance or want of relevance of the expense. The analysis tends rather to cloak than to reveal the process of decision. No analysis can deny the evaluation that must be made in concluding that an expense is relevant or irrelevant.''

Perhaps lacking in the cases is the specification of further criteria by which that process of evaluation is to be conducted, beyond those which may be divined from the general terms in which s. 51 is expressed, in particular from the preposition ``in''. Wilcox J. pointed out in his judgment in Cooper (dissenting as to the result) (at ATC 4404; FCR 187):

``The problem about the `essential character' test, of course, is that it tends to beg the critical question. Everything depends upon the ambit of the facts selected for inclusion in the description of essential character; so that the making of that selection predetermines the outcome of the case.''

What, however, does not appear to have been submitted by the Commissioner in Cooper was that the taxpayer must fail because he had not isolated and characterized each item of expenditure on food. There was no challenge as to the global sums said to represent the additional expenditure on food. The primary Judge had said (
FC of T v Cooper 90 ATC 4580 at 4583):

``The taxpayer was unable to relate specific amounts to so much steak, so many potatoes and so much Sustagen purchased in addition to that or those which would otherwise have been purchased.''

There are several consequences of the state of affairs discussed above which are of significance for the present proceeding.

The first goes to the objection as to competency. The facts of the present case are not in dispute. The issue is whether, and to what extent, the outgoings fall within the first limb of sub-s. 51(1). There is a further question as to whether the exclusory provision dealing with outgoings of a ``private or domestic nature'' applies. It is not simply a matter of applying the plain words of the statute to the undisputed

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facts. As indicated above, the case law upon the interpretation of the words of the statute means that there is much more to sub-s. 51(1) than ordinarily would meet the eye. Hence the proposition that a question of law is involved in a s. 51(1) case where, the facts not being in dispute, the issue is whether the case necessarily falls within or outside the statute; see
FC of T v JD Roberts; FC of T v Smith 92 ATC 4380 at 4384-4385. Jurisdiction under s. 44 of the AAT Act thus is attracted in this case. The point is emphasised by the taking by the Commissioner of a number of specific objections to the reasoning of the AAT. These were said to illustrate, in his submission, particular errors in applying the case law which construes s. 51. The objection to competency fails.

Secondly, from time to time efforts are made to erect sub-categories of legal propositions to deal with particular factual situations said to fall within s. 51(1). Thus in the present case, in its reasons the AAT referred to the application in the past by it of two ``tests'' as a guide for determining whether expenditure on clothing is allowable under sub-s. 51(1). The first was the ``necessary and peculiar'' test (e.g. uniforms required by the employer) and the second the ``abnormal expenditure on conventional clothing'' test (e.g. the wardrobe of a mannequin). However, as the AAT went on to point out, these ``tests'' have fallen into disfavour before it and the position which now applies is that such ``secondary'' criteria tend only to obscure the application of s. 51. That, of course, throws one back to the search, among other things, for the ``essential character'' of the outgoing.

In his submissions, counsel for the Commissioner submitted that the approach by the AAT had been to determine the essential character of what it had identified in paras. 19 and 21 as ``the additional clothing''; but beyond the indication in para. 19 that the ``additional clothing'' was that which was worn by the taxpayer in addition to ``her first set of clothes for the day'', the AAT had not determined which of the 51 items of expenditure fell into which class and, in any event, the evidence would not have permitted the AAT to do so. The difficulty with this, in the submission for the Commissioner, was that the claim of the taxpayer in truth is in respect of a series of individual expenditures on discrete items of clothing, not an otherwise undefined portion of one sum representing an aggregation of all expenditure. This deficiency was said to infect the determination of the matter by the AAT.

It followed, so it was submitted, that the application by the AAT of the ``essential character'' test to ``additional clothing'' was flawed by reason of a failure first satisfactorily to isolate the particular items together constituting that class. In addition, and alternatively, it was submitted that, in any event, the outgoings were of a private or domestic nature.

Finally, the Commissioner submitted that even if the necessary factual basis had been laid for the AAT to determine the ``essential character'' of the expenditure of the ``additional clothing'', the taxpayer nevertheless should have failed. This was said to be because the items of clothing were conventional, all of them being suitable or appropriate for day or evening wear, whether the taxpayer was or was not on duty, so that they were not ``exclusively adapted'' to use in her occupation. It was also contended that the selection of the items of clothing had been a setter for the discretion of the taxpayer, and her remuneration did not vary with the quality of the clothing she wore or the range she maintained or the frequency with which she changed her apparel. As to the small sums claimed for dry cleaning and hairdressing, the AAT ought necessarily to have concluded that their essential character was not a working expense.

(In the Amended Notice of Appeal, ground 5(j) asserts that, in any event, the AAT erred in not concluding that the expenditure on ``additional clothing'' was not of a capital nature. No argument was addressed on the point and it may be dismissed from further consideration.)

Counsel for both parties referred to
Mallalieu v Drummond (Inspector of Taxes) [1983] 2 A.C. 861. It will be recalled that the House of Lords there held that expenditure by the taxpayer on the clothes she wore whilst she practised her profession as a barrister was not ``wholly and exclusively laid out or expended for the purposes of her profession'' within the sense of s. 130 of the Income and Corporation Taxes Act 1970 (U.K.) The Australian legislation is in different terms. In the result, I

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have gained no particular assistance from this decision.

Counsel for the taxpayer submitted that what the AAT had done, correctly, was to take the global expenditure of the taxpayer on her wardrobe in the year of income, and to characterize this as serving a mixed business and private purpose. The business purpose was the need for additional changes of clothes in the working day, over and above what was described as the first set of clothes to meet the personal requirements of the taxpayer to be clothed whilst performing her duties. It was, counsel submitted, ludicrous to require individual consideration and characterisation of each of the 51 particular items of expenditure. In a practical sense, and contrary to the submissions of the Commissioner, they might be treated together as an outgoing which itself was to be characterized in the manner required for the application of sub-s. 51(1).

Counsel submitted that on the facts found by the AAT, it was open in law for it to characterize the expenditure as serving a mixed business and private purpose, notwithstanding that the clothing was ``conventional'', and the taxpayer selected herself what she wore for each official engagement. No means of arithmetical or rateable division was immediately available. However, a method of apportionment was adopted which involved the taking of the average of the taxpayer's expenditure on her wardrobe for the 1989 and 1990 years of income ($2,584.13) and deducting this from her expenditure in 1991. The result was an allowable deduction quantified as $3,565.73. Counsel submitted that, on the authorities, it was open for the AAT to approach the matter in a commonsense way and adopt a method of apportionment and quantification of this kind; cf
Ronpibon Tin N.L. v FC of T; Tongkah Compound N.L. v FC of T (1949) 8 ATD 431 at 437; (1949) 78 C.L.R. 47 at 59,
Ure v FC of T 81 ATC 4100 at 4106; (1981) 50 F.L.R. 219 at 227.

Counsel further contended that the AAT had not erred in law in finding (93 ATC p. 363; para. 25) that there was a direct nexus between the allowable expenditure and the taxpayer's income producing activity. Further, the AAT did not err in law in holding that the ``essential character'' of the expenditure was not to clothe herself in any ordinary or usual sense as part of daily life, but to enable her to perform satisfactorily the duties of her position. It was implicit in the AAT's reasoning that the otherwise allowable expense was not of a private or domestic nature. Indeed, the AAT had found (ATC p. 362; para. 19) that there was nothing about the additional changes of clothes in a work day which served a private purpose.

I accept all these submissions. However, two elements of the deduction quantified by the AAT as $3,565.73 were $125.95 for hairdressing and $130.10 for dry cleaning. As to each of these, the AAT noted the taxpayer's contention that the expenses for the hairdressing (the beneficial effects of which on each of the two occasions in question lasted several months) and the dry cleaning would not have been incurred had it not been for her employment. The AAT did not consider the ``essential character'' of these outgoings. If it had done so, there must have been a strong likelihood that, at least as to the dry cleaning, the essential character of the outgoing was not sufficiently relevant to the revenue earning activity of the taxpayer. Both parties were reluctant for these somewhat de minimis matters to be sent back to the AAT. I should order that the decision of the AAT be varied by substituting ``$3,309.68'' for ``$3,565.73'', and otherwise dismiss the appeal with costs.

There will be orders accordingly.


(1) The decision of the Administrative Appeals Tribunal be varied by substituting $3,309.68 for $3,656.73 as the amount of the allowable deduction.

(2) Otherwise the appeal be dismissed.

(3) The appellant pay the costs of the respondent of the appeal.

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