Foster J

Drummond J
Cooper J

Full Federal Court

Judgment date: Judgment handed down 29 April 1994

Foster, Drummond and Cooper JJ

This is an appeal from the decision of Gummow J given on 17 December 1993 [reported as
FC of T v Edwards 93 ATC 5162] in an appeal brought by the present appellant, the Commissioner of Taxation (the ``Commissioner''), from a decision of the Administrative Appeals Tribunal (the ``AAT'') given on 23 July 1993 by Mr DP Breen, Deputy President [reported as Case 31/93,
93 ATC 359]. The learned Deputy President had allowed the appeal of the present respondent, Frances Margaret Edwards (the ``taxpayer'') against the disallowance of an objection by her against her Assessment to Income Tax for the year ending 30 June 1991. He had set aside the Commissioner's decision on the objection and upheld the objection in part by allowing a deduction under s 51(1) of the Income Tax Assessment Act 1936 (Cth) (the ``Act'') in the amount of $3,656.73. Before Gummow J it was agreed that there was a calculation error in this figure and that it should have been $3,565.73.

The appeal to Gummow J was brought under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) (the ``AAT Act'') and was accordingly ``on a question of law''. Similarly, this appeal from his Honour's decision is restricted to questions of law.

The factual background may be stated as follows: the taxpayer was, in the year of income, employed as the Personal Secretary to Lady Campbell, wife of his Excellency the Honourable Sir Walter Campbell, then Governor of the State of Queensland. His Excellency was, also in the relevant year, Administrator of the Commonwealth for a period of three weeks.

Prior to receiving this appointment, the taxpayer had held the position of Executive Secretary in a company operating a large international hotel chain. In that employment she had required a wardrobe of high quality clothing for her daily use. In her new position she had need of clothing of the same quality but her wardrobe was necessarily more extensive. For instance, she now had need of hats, gloves and full evening dresses suitable for wearing on formal occasions. She was also required to change her clothing, on occasions, two or three times during the day in order to properly attend on Lady Campbell at official functions and engagements. In order to meet these needs of her new employment, she made clothing purchases mainly in the months from August to November 1990. Fifty-one particular items were purchased and were used for these purposes. Some of the additional clothing was necessitated by the fact that her duties took her to Vice-Regal engagements outside Brisbane and to Canberra in circumstances where laundry facilities were not promptly available. Consequently, a supply of immediately wearable fresh clothing was required.

In his judgment [at 5164], Gummow J elaborated upon the clothing requirements of her position as follows:-

``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

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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.''

Gummow J made particular reference [at 5165] to the following factual findings of the AAT:-

``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.]''

In considering whether a relevant error of law had been demonstrated in the judgment of the AAT, Gummow J pointed to the fact that the learned Deputy President had cited and purported to apply the established exposition of s 51(1) of the Act to be found in many decided cases, of which
FC of T v Cooper 91 ATC 4396; (1991) 29 FCR 177 is a recent example. In that case Lockhart J (at ATC 4399-4400; FCR 181-2) discussed the relevant principles as follows:-

``The phrase `incurred in gaining or producing assessable income' in the first limb of s. 51(1) has been construed to mean incurred in the course of gaining or producing assessable income:
Amalgamated Zinc (De Bavay's) Limited v FC of T (1935) 3 ATD 288; (1935) 54 CLR 295 per Latham C.J. at ATD 293; CLR 303 and Dixon J. at ATD 297; CLR 309;
W Nevill & Co. Limited v FC of T (1937) 4 ATD 187; (1936-1937) 56 CLR 290 per Dixon J. at ATD 196; CLR 305;
Ronpibon Tin NL v FC of T (1949) 8 ATD 431; (1949) 78 CLR 47 per Latham C.J., Rich, Dixon, McTiernan and Webb JJ. at ATD 435; CLR 56-57.

For expenditure to be an allowable deduction as an outgoing incurred in gaining or producing the assessable income, it must be incidental and relevant to that end: Ronpibon at ATD 435; CLR 56. This test of deductibility has been explained in subsequent judgments of the High Court, so 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. This formulation of the test has its origins in the joint judgment of Dixon C.J., Williams, Webb, Fullagar and Kitto JJ. in
Charles Moore & Co. (W.A.) Pty. Limited v FC of T (1956) 11 ATD 147 at 149; (1956) 95 CLR 344 at 351. It has been applied subsequently in cases which include
Lunney v FC of T (1958) 11 ATD 404 at 412; (1957-1958) 100 CLR 478 at 497;
Handley v FC of T 81 ATC 4165 at 4171; (1980-1981) 148 CLR 182 at 194;
FC of T v Forsyth 81 ATC 4157 at 4161; (1980-1981) 148 CLR 203 at 210;
John v FC of T 89 ATC 4101; (1988-1989) 166 CLR 417.The essential character test is also applied to determine if the expenditure is of a capital, private or domestic nature as these cases illustrate.''

His Honour stated the further accepted view of the meaning and operation of s 51(1) as follows (at ATC 4401-4402; FCR 184):-

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``The question whether the additional expenditure of the taxpayer is deductible under s. 51(1) cannot be answered simply by a process of reasoning that, because expenditure of this kind is a prerequisite to the earning of the taxpayer's assessable income (in the sense that it is necessary if assessable income is to be derived), it must be incidental and relevant to the derivation of income. It does not follow that such expenditure is incurred in or in the course of gaining or producing the income. The deductibility of the expenditure depends upon determining the essential character of the expenditure itself and not upon the fact that, unless it is incurred, the taxpayer will not be able to engage in the activity from which his income is derived.''

It is clear, as Gummow J points out, that the learned Deputy President had these principles well in mind when approaching the facts of this case. His Honour cited [at 93 ATC p 5165] the following passage from the judgment of the AAT:-

``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.]''

His Honour also summarised [at 5167] the findings of the AAT as follows:-

``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.''

Mr Jackson QC, on behalf of the Commissioner, presented a very comprehensive argument, including a reference to many decided cases, in support of a submission that the AAT and Gummow J had committed a relevant error of law. He argued that to establish such an error, it was necessary to demonstrate that, on the facts as found, it was impossible to hold that the expenditure claimed as an allowable deduction was incidental and relevant to the gaining of the taxpayer's assessable income in having the essential character of expenditure incurred for that purpose.

He sought to establish this proposition by submitting that expenditure on conventional clothing worn conventionally when performing the tasks of employment can never be an outgoing incurred in gaining or producing assessable income. Alternatively it would necessarily be an outgoing for private or domestic nature. In either case deductibility under s 51(1) of the Act would not be available. In this submission the term ``conventional clothing'' was used as a description of ordinary clothing not being a uniform or specific to a particular occupation, such as Court robes or industrial protective clothing. The term ``worn conventionally'' was intended to make allowance for circumstances where a deduction might be available for conventional clothes worn in an unconventional way, such as clothing specifically purchased by an actor for use in a particular play.

Counsel relied upon what he described as ``the trend of decisions'' in this country. He made particular reference to the following expenditures which have been held to be non- deductible:-

``(a) fares paid by taxpayers for the purposes of travelling from their homes to places of employment or business and back:
Lunney v FC of T (1958) 11 ATD 404; (1957-1958) 100 CLR 478;
FC of T v Genys 87 ATC 4875; (1987) 17 FCR 495 and
FC of T v Toms 89 ATC 4373 are to the same effect;

(b) expenditure incurred by a taxpayer in providing child minding in order to enable the taxpayer to perform her income earning activities:
Lodge v FC of T 72 ATC 4174; (1972) 128 CLR 171;
Martin v FC of T 84 ATC 4513; (1984) 2 FCR 260;
Hyde v FC of T 88 ATC 4748; (1988) 19 ATR 1645;
Jayatilake v FC of T 91 ATC 4516; (1991) 101 ALR 11;

(c) additional food and drink to maintain a footballer's optimum playing weight: FC of T v Cooper 91 ATC 4396; (1991) 29 FCR 177;

(d) expenditures in relation to a study in the taxpayer's home: FC of T v Forsyth 81 ATC 4157; (1980-1981) 148 CLR 203;
Handley v FC of T 81 ATC 4165; (1980-1981) 148 CLR 182;
Thomas v FC of T 72 ATC 4094;

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(1972) 46 ALJR 397;
FC of T v Faichney 72 ATC 4245; (1972) 129 CLR 38;
FC of T v McCloy 75 ATC 4079; [1975] 1 NSWLR 202;

(e) costs of dry cleaning suits worn by a magistrate:
Frankcom v FC of T 82 ATC 4599; (1982) 65 FLR 25.''

He submitted that the dual bases of the decisions were that either the expenditure in question was found not to have been incurred in gaining or producing assessable income, or that it was of a private or domestic nature. Sometimes disallowance occurred on both bases. He contended that the present case was no different from that of a university student who, after graduation, was required to purchase additional suitable clothing in order to join the workforce in areas where appropriately formal garb was required. He submitted that the taxpayer's present claim should necessarily have failed because her need for additional clothing arose merely because she did not have sufficient clothing of the necessary kind when she took up her position. It could be no more than a necessary prerequisite to her obtaining the employment.

In our opinion these arguments fail to establish the proposition necessary to the success of this appeal, namely that the taxpayer's expenditure on additional clothing of a conventional kind to be worn in a conventional way could, ipso facto, never attract deductibility under the Act. We are satisfied that the proper construction of s 51(1) does not result in any such universal proposition. Each case must be approached by the application of the section, properly construed, to its particular facts.

In this case, the learned Deputy President made findings of fact upon which, in our opinion, it was open to him to find that a proportion of the clothing expenditure was deductible. This approach was, as the learned trial judge accepted, entirely consistent with authorities such as
Ronpibon Tin NL v FC of T (1949) 8 ATD 431; (1949) 78 CLR 47 and
Fletcher & Ors v FC of T 91 ATC 4950; (1991) 173 CLR 1. The apportionment that was made, which is not the subject of challenge in this appeal, was of a kind contemplated by s 51(1) of the Act and was made on a commonsense or practical basis: reflecting the fact that the entirety of the additional expenditure could not be said to have been incurred in the production of the assessable income but that a proportion of it was so incurred.

We are satisfied that no error of principle has been involved in the determination of this case before the AAT or the learned trial judge. The decision turns on its own special facts. It involves no new principle, nor does it depart from established tests as to deductibility under s 51(1). It should be noted that the decision does not establish that the cost of all clothing acquired and worn at work will, because of that circumstance alone, become deductible as an outgoing incurred in deriving assessable income.

In our view it was open to the AAT to find that the respondent was entitled, on the facts as found to the deduction allowed. Accordingly, this appeal must be dismissed with costs.

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