RE CARLAW AND FC of TMembers:
BJ McMahon DP
Administrative Appeals Tribunal
BJ McMahon (Deputy President)
This is an application to review a decision of the respondent to disallow an objection against a notice of assessment, issued in respect of year ended 30 June 1993. The applicant has asked that the hearing be in public.
2. At all relevant times, Mr Carlaw was employed by Linfox Transport (Aust) Pty Ltd as a truck driver. In his 1993 return of income, he claimed as deductions a number of outgoings which he said were incurred in gaining his assessable income. These were motor vehicle expenses $908, uniform expenses $70, laundry expenses $910, purchase of journals and publications $48, driver's licence $48 and sun glasses $101. All of these claims have either been compromised or settled to the satisfaction of the applicant, or have been abandoned. In those cases where claims have been abandoned, additional tax by way of penalty has been calculated with reference to the shortfall brought about by the claims not pursued. I will return to the question of additional tax later in these reasons. It is sufficient to note at this stage, however, that additional tax on the items not pursued is not a matter in issue.
3. The differences between the parties turn on a claim for a deduction of $4,480 for meal expenses, representing the cost of meals purchased by the applicant during his various trips on behalf of his employer. A diary was kept and the cost of these meals was regularly noted in circumstances not here relevant to explore. There is no issue as to substantiation.
4. The 3 matters to be decided, therefore, are whether a deduction is allowable in terms of s 51(1) of the Income Tax Assessment Act for meals purchased in circumstances to which I will refer, whether a shortfall of tax exists in terms of s 226G of the Act and whether an assessment of additional tax was correctly made by the Commissioner in terms of s 227.
5. Mr Carlaw gave evidence by way of affidavit and orally concerning the conditions of his employment with Linfox, which is a contractor to Coles Myer. He said that on a typical day, a load would arrive at the distribution centre of Coles Myer at the Linfox depot warehouse. This load would be required to be delivered as soon as possible to a Coles store destination. This could be anywhere between Coffs Harbour, Armidale, Gunnedah and Dubbo and all points in between including the Sydney and Newcastle Metropolitan areas.
6. Mr Carlaw said that he could be called and be given directions at any time between midnight and 7 am, or be told on his arrival at work at 7 am where he was to take his load. His normal working week was Monday to Friday, together with Saturdays which he worked as overtime. His nominal working hours were from 7 am until 3-30 pm. However, because of being on call, he could be required to work at any time from midnight through to 7 am. The law prohibits any truck driver from working more than 18 hours in any 24 hours. Subject to this prohibition, Mr Carlaw said that he would work anything from 12 to 18 hours per day on each day on which he worked.
7. On some days, he would be told to arrive at 8 am and would be obliged to work without a break until midnight or thereafter. This shift would be composed of 14 hours of driving and 4 hours of breaks. Breaks are of a minimum of half an hour each.
8. He added that not every day was an 18-hour day. However each day is different and he had no idea until he arrived at work, or until he was contacted beforehand, where he would have to travel for the particular job on that day. During the 1993 fiscal year he worked 22 10-hour days, 40 12-hour days, 52 14-hour days, 37 15-hour days, 37 16-hour days, 8 17-hour days and 45 18-hour days. These hours, he said, did not take account of the half hour he spent travelling to and from the Linfox depot.
9. He commenced keeping his diary because of a letter sent by a firm of chartered accounts to his trade union. His return was prepared by the same firm of accountants whom he consulted concerning the availability of deductions.
10. In that diary are recorded details of his journeys and his purchases of meals. In his evidence, he said that if he left home before 6 am, he ordinarily purchased a cooked lunch. If he was not home before 7 pm he purchased a cooked dinner. He had a standing arrangement with his wife that unless he was home by 5-30 pm or thereabouts she was not to cook him a meal. Usually, he telephoned to inform her in advance of the proposed arrangements.
11. He said that he eats at home an average of 2 nights per week. His family dines between 5-30 pm and 6-30 pm each evening. If his part of the evening meal was cooked at that time and he was late in arriving, then it would need to be reheated and he said that he did not like reheated food. He also gave evidence that he did not like taking sandwiches for lunch when he set off in the early hours of the morning. He said that they are usually, if not always, soggy by the time they are eaten as they would be in a pack for up to 12 hours before this.
12. In cross-examination, he agreed that although there was a prohibition against having loose objects in the cabin of the truck for safety reasons, it would be possible to put a lunch box behind the driving seat in the tool compartment. Nevertheless Mr Carlaw insisted that this would be unsatisfactory to him because of the anticipated condition of the sandwiches at meal times. He agreed that he enjoyed going into cafes for lunches and dinners and that he preferred this procedure to taking his own food. He said that he liked his food fresh and not dried out. He was used to a cooked breakfast at home and felt the need of one when he was on the road after having left home early. He said: ``To sustain my energy I need food - meat and vegetables most often''.
13. Although the claim for deduction represents the total cost of meals purchased in these circumstances, an alternative claim was
ATC 2168also argued at the hearing. It was submitted that apportionment could be appropriate and that a proper basis would be to allow as a deduction the cost of meals purchased, less the cost to the family of providing the meals at home. There was undisputed evidence of the weekly grocery expenditure by Mrs Carlaw on behalf of herself, her husband and her children. Her evidence was that the typical evening meal for the family would consist of meat, 4 to 5 vegetables, dessert, bread, tea and coffee which she estimated would cost $4 per head. A typical lunch for the family would consist of sandwiches, fruit and juice drinks which she estimated would cost $1 per head. A typical breakfast which consisted of sausages, bacon, eggs, cereal, toast, tea and coffee would, she estimated, cost $1-90 per head. The evidence given by Mr Carlaw does not permit an accurate apportionment to be made on the basis suggested. No doubt, the exercise could be carried out. On the hearing, however, all that was available was the total of the numbers of breakfasts, lunches and dinners, purchased by Mr Carlaw during the relevant period. The cost of each meal and the net surplus expenditure above home costs was not put in evidence.
14. The award under which Mr Carlaw worked provided that where overtime is required, the worker was to be paid a meal allowance. In recognition of this, the Commissioner allowed from the initial claim of $4,480, the sum of $871, pursuant to s 51AE(5)(j). The basis for claiming the balance of the amount expended as a deduction is, it was submitted, to be found in s 51(1). The question to be determined therefore is whether that sum was incurred in gaining or producing Mr Carlaw's assessable income and whether that sum should properly be regarded as an outgoing of a private or domestic nature.
FC of T v Edwards 94 ATC 4255 at 4259, a Full Court of the Federal Court said-
``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.''
16. It may well be also that the proper construction of s 51(1) does not result in a universal proposition that the cost of meals could, ipso facto, never attract deductibility under the Act. It is clear that a taxpayer can not deduct ordinary living expenses (
Lunney v FC of T (1958) 11 ATD 404 at 414; (1958) 100 CLR 478 at 500). This does not necessarily mean however, that there is any kind of expense which by virtue of the nature of the expense alone will be an expense of ordinary living. Nor does it mean that there is any kind of expense whose nature would ordinarily compel its treatment as deductible. As the full Court put it, each case must be approached by the application of the section, properly construed, to its particular facts.
17. The ``universal proposition'' in relation to food was dealt with in an article by Mr JW Durack SC in volume 23, Australian Tax Review 205 at 208, 209 in these words, which I respectfully adopt-
``There will be many kinds of personal expenditure which, while necessary if income is to be derived, will not be incurred `in the course of' gaining the income. It might be thought that expenditure on food would almost always be in this category. After all, a taxpayer rarely earns income by the actual process of eating! However, it seems that it is not necessary to go so far as to show that income is earned by the actual process or function which is the immediate
ATC 2169occasion for the expenditure in order to establish deductibility. In Edwards' case it was not suggested that the taxpayer earned her income by actually wearing the clothes the subject of the relevant expenditure; rather the wearing of the clothes enabled her `to attend the wife, her employer, in the performance of her duties at many types of functions as Personal Secretary' [Gummow J quoted in the Full Court's reasons at 4257]. Although in Cooper's case Lockhart J noted that `the taxpayer was paid money to train for and play football, not to consume food and drink' it is clear that it was not this circumstance alone which led to the Commissioner's appeal being allowed by him and Hill J, and the absence of evidence as to the taxpayer's having to incur additional expenditure over and above his own or an average player's expenditure on food seems to have been regarded by both judges as of significance.
Moreover, in Roads & Traffic Authority v Federal Court of Taxation (the RTA case) [ 93 ATC 4508 at 4520] Hill J, in rejecting the Commissioner's contention that the cost of meals is deductible only in `exceptional circumstances' (a submission foreshadowing the similar submission in Edwards' case in relation to the cost of conventional clothing), said that there was `enshrined in s 51(1) a concept of deductibility of working expenses'. The concept of `working expenses' is the concept employed by Professor Parsons in the text cited earlier. To determine whether an expense satisfies either of the two positive limbs of s 51(1), Professor Parsons adopts the test of whether the expense is a `working', `constant demand', `operating' or `maintenance' loss or outgoing. He says [Income Taxation in Australia, p 306] that where:
`an expense is relevant to the derivation of income, to say that it is capital is to say that it is not working because it relates not to the process by which income is derived but to the structure of the activity that produces income, or to the property itself whence income is derived.'''
18. It is clear that on some occasions expenditure on food will be deductible. For example, where a taxpayer is visiting another city for business purposes, such an outgoing could be characterised as being the cost of sustenance incurred by the taxpayer because of his or her absence from home on business. The ``work connection'' referred to by Hill J in the RTA case is there evident. Furthermore, the cost of food could be deductible if its relevance to the derivation of the income were clear. Thus, a restaurant reviewer would very likely be entitled to a deduction for the cost of meals in appropriate circumstances.
19. Having said this however, I find myself unable to agree with the conclusions reached by Mr Durack (at 210) that one could perceive a wide range of what might previously have been considered private expenditure which, or at least part of which, will be deductible. He suggests that at least portion of the cost of meals purchased as a consequence of the exigencies of employment or business (when the taxpayer is not travelling away from home or is not in receipt of an overtime meal allowance) could be deductible. In my opinion, such a view is contrary to the weight of authority binding on this Tribunal. It would have to be said that there are still very few cases where the work connection would result in a deduction for the cost of meals. As in Lunney where it was held that although travel from home to work was necessary in order to gain assessable income it was an ordinary living expense, so also it may be said that the consumption of food is necessary in order to work and the cost of such food, whilst a prerequisite to the earning of the assessable income, is not ``in the course of'' actually earning the income (
FC of T v Cooper 91 ATC 4396 at 4401-4402). The deductibility of the expenditure still depends upon determining the essential character of that 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. The expense must still be incidental and relevant to the derivation of income. Neither Edwards nor RTA departed from that principle.
20. Facts similar to those presently under consideration were referred to in Case U148,
87 ATC 868. The Tribunal disallowed the cost of lunches but allowed some other costs of meals apparently on the basis of ``reasonableness''. As a later Tribunal pointed out in Case Y8,
91 ATC 166 at 168, ``reasonableness is not a litmus test'' to determine the extent to which expenditure is incurred in gaining or producing
ATC 2170the assessable income. I respectfully agree with this observation and consider that Case U148 ought not to be followed, to the extent that the decision depends upon the categorisation of the essential character of expenditure as ``reasonable'' rather than as having been incurred in the circumstances contemplated by the legislation. The English cases referred to in Case U148 namely
Nolder v Walters 15 TC 380 (which in turn referred to
Ricketts v Colquhoun 10 TC 118) depend peculiarly upon the wording of the English legislation and are an unsafe guide to the tests that ought to be adopted under the Australian legislation.
21. The expenditure incurred by Mr Carlaw was largely the result of his choice. That consideration can not govern the deductibility of the expenditure. It must be relevant and incidental to the earning of income and not form part of the ordinary cost of living. The expenses played no relevant part in the gaining of his wages. They may be viewed as essentially the same in this context as the cost of his fares to and from the Linfox depot.
22. In my view, Mr Carlaw has not demonstrated circumstances which would justify a finding that the total cost of meals in question could be regarded as working expenses. I am also of the view that this is not an appropriate case for apportionment. As I have indicated, I consider that the approach in Case U148 (certainly in relation to dinners) is inappropriate and that therefore there is no basis for apportionment to be derived from the reasoning in that decision. Having categorised the whole of the expenditure as part of the ordinary cost of living, there is also no basis for regarding any part of that expenditure as a work related expense. Furthermore, I consider the whole of the expenditure, in the circumstances of the present case, to be private or domestic in character and thus falling within the exemption in s 51(1). The fact that the applicant chose to eat as he did and to make the domestic arrangements which were in place strengthen that conclusion.
23. I now turn to the question of penalty tax. Section 226G provides that if a taxpayer has a tax shortfall for a year and the shortfall, or part of it, was caused by the failure of the taxpayer or of a registered tax agent to take reasonable care to comply with the Act or the regulations, then the taxpayer is liable to pay by way of penalty additional tax equal to 25 per cent of the amount of the shortfall or part. To indicate the Commissioner's understanding of the meaning of failure to take reasonable care, Taxation Ruling TR 94/4 was promulgated. Paragraph 6 of that ruling is in these terms-
``The reasonable care test requires a taxpayer to take the care that a reasonable, ordinary person would take in all the circumstances of the taxpayer to fulfil the taxpayer's tax obligations. Provided that a taxpayer may be judged to have tried his or her best to lodge a correct return, having regard to the taxpayer's experience, education, skill and other relevant circumstances, the taxpayer will not be liable to pay penalty.''
24. The taxpayer is a truck driver. He made claims for deductions pursuant to advice he received from a qualified tax agent, who had been engaged by his union. If a man in that position is advised that he may make a claim, can it be said that he fails to take reasonable care to comply with the Act if the claim is unsuccessful? I think not. Clearly the mere fact that a claim is made can not thereby render the conduct of a taxpayer careless, particularly when that claim is reasonably arguable.
25. The audit report included in the s 37 documents at T18.1 sets out the matters which the Commissioner's officer considered at the time of making his assessment of the additional tax to be imposed. That officer first assessed a penalty of 25 per cent and then gave reasons for not reducing that rate. He said that there should be no reduction in penalty as the taxpayer was warned that an audit would be carried out and was asked to voluntarily disclose any error. As the taxpayer did not come forward and a full audit was carried out. it was assumed that lack of reasonable care had been established.
26. In my view this can not be a correct approach to either the section or to the ruling. Whilst a taxpayer has an obligation to keep his or her claims for deduction within the bounds of reason, the mere fact that an officer of the Commissioner believes that the claim will fail is not of itself evidence that the taxpayer has shown a lack of reasonable care.
27. As it happens, Mr Carlaw had taken professional advice. That advice had some measure of support from Case U148, from the article of Mr Durack which I have quoted, and from observations made in Edwards and in the RTA case. Although in the circumstances of Mr
ATC 2171Carlaw's employment and consumption of food I do not consider that the expenditure claim is properly deductible, I do not consider that he has displayed a failure to take reasonable care to comply with the Act in making his claim. Indeed after the claim was made, part of it was allowed pursuant to s 51AE(5)(j). In all the circumstances, I consider that the penalty in relation to the meal expenses claimed should be reduced to nil.
28. I have no evidence concerning the reasonableness of the other claims referred to earlier in these reasons. Consequently I do not consider that Mr Carlaw has discharged the onus of showing that the penalties imposed for shortfalls created by those other claims are excessive.
29. In the result, I will set aside the objection decision under review and remit the matter to the Commissioner with the direction that a new assessment be made on the basis that with the exception of $871, the amount claimed for meal expenses, is not deductible in whole or in part and that the penalty imposed in relation to the shortfall caused by that claim should be reduced to nil.