Federal Commissioner of Taxation v Green

(1950) 81 CLR 313
24 ALJ 303; 9 ATD 142

(Judgment by: Latham CJ, McTiernan J, Webb J, Fullagar J, Kitto J)

Between: Federal Commissioner of Taxation
And: William Herbert Green

High Court of Australia

Latham CJ

McTiernan J

Webb J

Fullagar J

Kitto J

Subject References:
Income Tax (Cth)

Judgment date: 21 June 1950

Judgment by:
Latham CJ

McTiernan J

Webb J

Fullagar J

Kitto J

This is an appeal from an order of Philp J. of the Supreme Court of Queensland made upon an appeal to the Supreme Court against the disallowance of objections by the taxpayer William Herbert Green to an assessment under the Income Tax Assessment Act 1936-1945. (at p317)

The assessment related to income received in the income year ending on 30th June 1945. The questions raised upon the appeal relate to claims of the taxpayer that certain deductions should be allowed from his assessable income in order to determine his taxable income by reason of the provisions of s. 51 of the Act. Section 51 (1) of the Act is in the following terms:-

"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." (at p317)

It has been held in the case of Amalgamated Zinc (De Bavay's) Ltd. v. Federal Commissioner of Taxation (1935) 54 CLR 295 , that the words in the initial part of s. 51

"All losses or outgoings to the extent to which they are incurred in gaining or producing the assessable income"

mean such losses and outgoings as are incurred in the course of gaining or producing the assessable income. Further, in the case of Ronpibon Tin No Liability and Tongkah Compound No Liability v. Federal Commissioner of Taxation (1949) 78 CLR 48 , at p 56 , it was said with reference to s. 51:-

"For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing an assessable income, it must be incidental and relevant to that end. The words 'incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income" and "In brief substance, to come within the initial part of the subsection it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or if none be produced would be expected to produce assessable income."

(1949) 78 CLR, at p 57. (at p317)

It is not enough in order to establish a right to a deduction to show that it was proper or reasonable for the taxpayer to make the expenditure which he claims as a deduction. For example, it is perfectly reasonable and proper for a taxpayer to incur living expenses and many expenses of a private or domestic nature, but such expenditure is expressly excluded from deductibility by the final words of the first sub-section of s. 51. Thus, as has been stated in the course of argument, a taxpayer cannot deduct ordinary living expenses. It is true that such expenses are necessarily incurred if any income is to be earned or otherwise derived, but such expenses would be incurred whether income was earned or otherwise derived or not. (at p318)

In the present case the income returned by the taxpayer included first, director's fees paid to the taxpayer by seven companies, secondly, rents from five properties at Cairns and Townsville, thirdly, dividends from two companies, and fourthly, interest from two mortgages. There were other items of income, including a payment of 250 pounds made in thanks for the services of the taxpayer in helping to supervise a druggist's business while the owner was absent at the war. (at p318)

The deductions in question which were claimed by the taxpayer were disallowed by the commissioner but were allowed by his Honour Mr. Justice Philp. They are deductions which are said to relate to the items of income which I have mentioned. (at p318)

In the first place a deduction is claimed in respect of a salary paid to the taxpayer's daughter for her services in acting as a secretary or clerk in attending to the taxpayer's financial affairs. This is in all an amount of 150 pounds in the year in question and it has been apportioned by the taxpayer between income derived from personal exertion and income from property. In the second place a claim is made for the deduction of audit fees amounting to some 35 pounds, also apportioned between the two sources of income mentioned. The taxpayer employed an accountant who lived at Townsville and who was familiar with his affairs. The accountant was paid an annual fee, with second-class railway fares. His functions were described in this manner in a statement made on behalf of the taxpayer to the commissioner:

"He balances off my books (not completed by my clerk and myself). He then audits the books, compiles my annual profit and loss account and balance sheet and makes out my income tax returns and also the Federal and State land tax returns. He also advises during the year on any income tax matters and supervises my property interests in Townsville."

In the third place a deduction is claimed for part of the expenses of travelling to Townsville and Cairns to inspect, supervise and generally look after the properties which the taxpayer owned there and which he had let to tenants. This was apparently an annual expenditure, a regular expenditure. Only 15 pounds was claimed, though more was spent upon these visits, and 15 pounds, it was held by the learned judge, was barely enough to cover railway fares. Accordingly, in so far as any part of this latter expenditure could be regarded as devoted to a capital purpose in the protection of the reversion of the taxpayer in these properties, allowance has been made for that matter by the learned judge. (at p319)

His Honour found that it was reasonably necessary for the taxpayer to keep books and records and to have them audited and to have a person in attendance in Brisbane to deal with matters affecting his financial affairs which arose during his absence from Brisbane, and his Honour held that it was reasonably necessary to inspect and supervise from time to time the properties from which rents were derived. The evidence supported these findings. The expenditure, a deduction of which is claimed, was incurred in relation to the management of the income-producing enterprises of the taxpayer. If this is so it is immaterial that there might be a difficulty in holding that the taxpayer was carrying on in a continuous manner an identifiable business of some particular description. (at p319)

Section 51, it should be observed, is not limited to deductions from income derived as being the proceeds of a business. Section 51 is a general provision relating to deductions claimable in relation to expenses, losses or outgoings incurred in gaining or producing any income whatever and not merely in relation to income derived from a business. (at p319)

The evidence shows, with respect to what have been referred to as audit fees, which were accountancy fees as well as audit fees, that the accountant not only performed ordinary accountancy work, but that he made out income-tax returns and land-tax returns and advised on income-tax matters which arose. The proportion of his fee - it is a small amount, I think 35 pounds in all - which would be attributable to these particular matters, that is, preparing taxation returns and advising on income-tax matters, must be very small, and so small really as to be a negligible amount, and for this reason we think that no attention need be paid to it in this case, but we are not to be taken as deciding whether or not the cost of preparing taxation returns or of advising in relation to taxation liability is a deductible expenditure. (at p319)

For these reasons we are of opinion that the appeal should be dismissed. The appeal is dismissed with costs. (at p319)