Ogden v Commissioner of Taxation

[2014] AATA 385

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(Decision by: Ms G Ettinger, Senior Member)

Ogden
vCommissioner of Taxation

Tribunal:

Member:
Ms G Ettinger, Senior Member

Subject References:
Taxation
deductibility of items claimed
difficulties with substantiation
objection decision varied

Legislative References:
Income Tax Assessment Act 1997 - s 8-1; s 32-5; s 34-10; s 40-25
Taxation Administration Act 1953 (Cth) - s 14ZZ; s 14ZZK(b); Division 900; Schedule 1 s 284-75; Schedule 1 s 284-90; Schedule 1 s 284-225; Schedule 1 s 298-20

Case References:
Bradshaw and Federal Commissioner of Taxation - (1999) 41 ATR 1195
Federal Commissioner of Taxation v Cooper - (1991) 29 FCR 177
Federal Commissioner of Taxation v Day - (2008) 236 CLR 163
Federal Commissioner of Taxation v Edwards - (1994) 49 FCR 318
Federal Commissioner of Taxation v Faichney - (1972) 129 CLR 38
Fletcher & Ors v Federal Commissioner of Taxation - (1991) 173 CLR 1
Morris v Federal Commissioner of Taxation - (2002) 50 ATR 104
Nicoll v Federal Commissioner of Taxation - (2002) 51 ATR 1160
Ovens and Commissioner of Taxation - (2009) 75 ATR 479
Palmer and Federal Commissioner of Taxation - (1998) 98 ATC 2353
Re Fox v Federal Commissioner of Taxation - [2013] AATA 471
Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation - (1949) 78 CLR 47
Taxation Case B55 - (1970) 70 ATC 264
Taxation Case F55 - (1974) 74 ATC 308
Thomas v Federal Commissioner of Taxation - (1972) 46 ALJR 397

Other References:
Business Equipment Industry (Technical) 1999
MA000021 - Business Equipment Award 2010
Taxation Ruling TR 93/30 Income tax: deductions for home office expenses
Taxation Ruling TR 97/12 Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear
Taxation Ruling TR 98/5 Income tax: calculating and claiming a deduction for laundry expenses
Taxation Ruling TR 98/6 Income tax: real estate industry employees - allowances, reimbursements and work-related deductions
Taxation Ruling TR 2004/6 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses

Hearing date: 18 March and 6 May 2014
Decision date: 20 June 2014

Sydney

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Decision by:
Ms G Ettinger, Senior Member

SUMMARY

1. Mr Garry Ogden who is a professional sales commission agent, has appealed the objection decision of the Commissioner of Taxation (the Commissioner), dated 11 October 2012, which disallowed a number of claims made by him, and imposed an administrative penalty. Mr Ogden is advised by Mr David McNeice, a registered tax agent, who also represented him at the hearing before me. The Commissioner, the Respondent in these proceedings was represented by Mr Ram Pandey, solicitor of the Australian Taxation Office.

2. The dispute arose out of an audit of Mr Ogden's tax affairs triggered by his 2010 tax return in which he declared a taxable income of $21,377, and claimed deductible items to the value of $97,162.

3. The Commissioner refused many of the Applicant's claims on the basis of insufficient or unsatisfactory substantiation, although certain portions of the claims made by the Applicant were allowed in part even as the hearing progressed.

4. Ultimately I was not satisfied that the Applicant had discharged his onus of proof in regard to all of the items in dispute, although where I held he did, is indicated below.

5. I was satisfied that the penalty which had been imposed by the Commissioner was the correct or preferable one, and was satisfied that there were no special circumstances in order to warrant remitting the penalty. I varied the decision of the Respondent to take into account those items in dispute where I was satisfied that the Applicant had discharged his onus. My reasons follow.

RELEVANT LEGISLATION

6. The relevant legislation in this matter is the Income Tax Assessment Act 1997 (Cth), (the ITAA), in particular section 8-1, and the Taxation Administration Act 1953 (Cth) (the TAA), in particular section 14ZZ. Sections 284-225, 298-20 of Schedule 1 to the TAA are also relevant.

7. The Applicant has, under sub-section 14ZZK(b) of the TAA, the burden of proving that the amount of the assessment and penalty assessment is excessive for the income tax year ended 30 June 2010. The burden of quantifying the amount by which the assessment and penalty assessment are considered to be excessive, also lies with the Applicant (Palmer and Federal Commissioner of Taxation (1998) 98 ATC 2353).

8. Section 8-1 of the ITAA provides as follows:

8-1 General deductions

(1)

You can deduct from your assessable income any loss or outgoing to the extent that:

(a)

it is incurred in gaining or producing your assessable income; or

(b)

it is necessarily incurred in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income.

(2)

However, you cannot deduct a loss or outgoing under this section to the extent that:

(a)

it is a loss or outgoing of capital, or of a capital nature; or

(b)

it is a loss or outgoing of a private or domestic nature; or

(c)

it is incurred in relation to gaining or producing your *exempt income or your

*non-assessable non-exempt income; or

(d)

a provision of this Act prevents you from deducting it.

....

9. What is essential to the inquiry whether a loss or outgoing was incurred in the course of gaining or producing actual or expected income is the determination of what it is that is productive of assessable income: see Federal Commissioner of Taxation v Day (2008) 236 CLR 163 at 179 [31] per Gummow, Hayne, Heydon and Keifel JJ; Ronpibon Tin NL and Tongkah Compound NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 436 [57]. A mere causal connection between the expenditure and the derivation of assessable income is not sufficient. There must be a sufficient nexus or link to the income producing activity.

10. In determining the essential character of an outgoing, an objective test is applied. The purpose of the taxpayer is not the determining factor, although it may be considered if relevant (Fletcher & Ors v. Federal Commissioner of Taxation (1991) 173 CLR 1).

11. In concluding this short summary of the onus of proof, I note that the Respondent provided a comprehensive outline of the burden of proof and the law from paragraphs 23 - 39 of the Commissioner's Outline of Submissions dated 22 April 2014. I have not reproduced those paragraphs here, but adopt the content which is uncontroversial in as far as it refers to the legislation and relevant case law.

BACKGROUND

12. Mr Ogden stated that he has been a professional sales commission agent since July 1994. In the relevant period, during the year ended 30 June 2010, Mr Ogden was employed by two business entities: Enterprise Solution Pty Ltd from 1 July 2009 to 8 March 2010, and by IBM Australia Ltd from 15 June 2010 to 30 June 2010. The Applicant's employment during the relevant period required him to use his own motor vehicle to visit clients and attend meetings.

13. Mr Ogden's evidence was that he was not provided with a permanent office by either of his employers. Mr Ogden stated that he attended the employers' offices for sales team meetings and business team meetings, or to drop documents off as required. He also explained that there was a system of hot desking where any sales person who was in the office could use an available desk. The first employer also had serviced offices, which he was authorized to use a maximum of 10.5 days per year, and not exceeding 10 hours in any one week. Accordingly, Mr Ogden argued extensively with regard to deductions he claimed in relation to earning his assessable income involving the use of parts of his home as a home office, car space, and other related expenses with which I have dealt below.

14. Mr Ogden earned a retainer and commission on sales. The full details of his earnings were in his affidavit, Exhibit A4, dated 17 April 2014, and are not repeated here.

ISSUES IN DISPUTE

15. The application concerns:

•

whether Mr Ogden is entitled to various deductions disallowed by the Commissioner in regard to his income tax return for the year ending 30 June 2010;

•

whether he should be subject to an administrative penalty imposed at a rate of 25% of the shortfall amount for a lack of reasonable care; and,

•

if so, whether the penalty should be remitted pursuant to section 298-20 to Schedule 1 of the TAA.

16. During the course of the proceedings before the Tribunal, the parties reached agreement in respect of various deductions. Some are difficult to reconcile.

17. The Commissioner provided the following agreed deductions in paragraph 2 of his written Outline of Submissions dated 22 April 2014, only a few days before the resumed hearing on 6 May 2014:

1)

Work related car expenses of:

$16,889 in respect of one motor vehicle;

$ 64 in respect of another motor vehicle;

2)

Work related travel expenses of:

$639 in respect of tolls;

$1,383.75 in respect of parking;

$117 in respect of public transport. [additional]

18. In paragraph 156 of his Outline of Submissions the Respondent indicated that he was agreed that the Tribunal vary the Commissioner's Decision on Objection dated 11 October 2012 for the income year ended 30 June 2010 to include the following deductions:

19. That did not seem to be final, however. I am satisfied that a further amount of $64 was added to the motor vehicle deductions claim. I did not deal with that at the hearing, and record it here solely for the sake of completeness.

20. As to work related travel expenses; the paragraph above states that the amount the Commissioner is prepared to allow is $2,317.78. However, on adding up the work related travel expenses in the paragraphs above, the figure comes to only $2,139.75. As the Commissioner has proposed the higher figure of $2,317.78, I am satisfied that Mr Ogden should have the benefit of that. The above covers tolls, parking and public transport. A further travel claim is dealt with below.

21. In further submissions dealing with interest submitted by the parties following the hearing, they agreed that a deduction for interest on investments of $5,015 be allowed, and that a deduction for the interest on the rental property of $1,610 be allowed.

22. The remaining claims are discussed in the paragraphs which follow. I have noted that there is extensive correspondence between Mr Ogden, Mr McNeice and the Commissioner. Whilst I appreciate having the benefit of the reasoning behind each of the remaining claims, ultimately, I must decide whether the Applicant has satisfied me that the necessary nexus exists between the outgoings and the gaining or producing of his assessable income pursuant to section 8-1 of the ITAA, such that Mr Ogden is entitled to claim a deduction for a particular item, as listed below:

Work related travel expenses of $768 (now $483)

Work related clothing/laundry expenses of $833

Other work related expenses of $19,640

Cost of managing tax affairs of $8,216

Trust distribution deductions of $29,828

Work related travel expenses of $483

23. Work related travel expenses refers mainly to accommodation and meals. Of the claim for $768, the Commissioner had allowed $451 by the time of the hearing, so that only $483 remained in dispute before me. I am mindful that Mr Ogden, as advised by Mr McNeice, had some unusual views about deductibility of accommodation and meals, and that inaccuracies in the calculations were discovered during the Tribunal process.

24. Essentially the cost of accommodation is private in nature, and thus not deductible pursuant to section 8-1(2)(b) of the ITAA (Re Fox v Federal Commissioner of Taxation [2013] AATA 471). It is accepted however, that if the accommodation involves a business trip where the taxpayer is required to be away from home at night, then that is generally a deductible expense.

25. Expenditure on food and drink will not ordinarily be deductible as it will not have the necessary nexus to income production, but will usually be held to be a private expense (Federal Commissioner of Taxation v Cooper (1991) 29 FCR 177). In fact an analysis of the detailed information provided by the Applicant in his final Closing Submissions and in other documents, such as his statement (Exhibit A4), indicated that at least some of the meals and purchases of food for which he claimed deductions were family outings. I am satisfied that the claims were largely not substantiated as work related, and must be rejected. I am satisfied that they are of a private nature, and thus not deductible (section 8-1(2)(b) of the ITAA).

26. Further, I reject the Applicant's argument, as advised by Mr McNeice, that if a person works more than ten hours that person is entitled to a meal allowance. There is no case law and no basis for that claim. I also reject Mr McNeice's references to various industrial awards in regard to meal allowances. They included 'MA000021 - Business Equipment Award 2010' and 'Business Equipment Industry (Technical) 1999'. I prefer the Commissioner's submissions on the non-applicability of those awards to Mr Ogden. There is no actual evidence linking Mr Ogden to any awards. I have taken into account TR2004/6 (Taxation Ruling TR 2004/6 Income tax: substantiation exception for reasonable travel and overtime meal allowance expenses).

27. As noted above, the Commissioner and the Applicant had already agreed upon a further deduction of $451 of the $768 claim. The Commissioner allowed a further claim for meals when the Applicant was working away from home. I accept the Commissioner's calculation of $178 based on the detailed information provided by the Applicant. I did not find any other of Mr Ogden's claims for accommodation and meals substantiated.

Work related clothing/laundry expenses of $833

28. This claim was addressed in detail in Mr Ogden's affidavit (Exhibit A4), and the closing submissions made on his behalf. Mr Ogden's evidence was, in summary:

•

He is required to wear a badged polo shirt at trade shows. An email from the IBM marketing manager dated 14 April 2014 informed him that he was required to wear the badged polo shirt at all 5 of the upcoming Solution Connect events and future such events (Exhibit A4). Mr Ogden told me that he is required to wear the shirt 6 - 12 times a year.

•

He claims $100 for his broad brim hat, solely used for business (revised down from $140).

•

He relies on Morris v Federal Commissioner of Taxation (2002) 50 ATR 104, with regard to the claim for a hat, submitting that in that case, an auditor succeeded in such a claim. Mr Ogden compares himself to taxpayers who work in the sun, including delivery and courier services personnel.

•

He claims $50 for rubber soled shoes which he says prevent him from receiving a static electricity shock when using his computer. He cited his training by various organisations in regard to the static electricity issue. He relies on TR/97/12 for the cost of shoe repairs being tax deductible (Taxation Ruling TR 97/12 Income tax and fringe benefits tax: work related expenses: deductibility of expenses on clothing, uniform and footwear).

•

He travels by car to his various appointments, and has been advised by his doctor to use sunscreen and a hat. He claims $335 for prescription sunglasses (reduced from $643) which he needs to wear to avoid headaches, and $34 for sunscreen.

•

He claims $38 for home laundry to wash the badged shirts separately from other items; $1 per load per week for 38 weeks.

29. The Commissioner's submission regarding home laundry referred to Division 900 of the ITAA and TR 97/12, TR98/5 (Taxation Ruling TR 98/5 Income tax: calculating and claiming a deduction for laundry expenses). He refused the claim for laundry on the basis that there was no evidence that Mr Ogden was actually required to wear the badged shirt during the relevant period, nor that it was registered as a non-compulsory uniform (section 34-10 of the ITAA).

30. I am satisfied from Mr Ogden's evidence that he was required to wear the badged shirt 6 - 12 times a year. I noted that IBM's email referred to five events in 2014, and accepted that it was likely such occasions also arose during the 2010 tax year. I accordingly allow $12 for the laundry claim to wash the shirt 12 times a year based on Mr Ogden's evidence of how often he had to wear the shirt. I also took into account the legislation and tax rulings.

31. The Commissioner submitted that protective clothing and footwear must be shown to have a sufficient connection to the activities productive of assessable income such that its essential character is work related, and not private or domestic in nature. Mr Pandey argued that conventional clothing would generally not be allowable as deductions. He cited the case of Commissioner of Taxation v Edwards (1994) 49 FCR 31 8, where the Full Court of the Federal Court accepted that Ms Edwards was required to wear formal clothing additional to her normal clothing as a result of her occupation. I accepted the Commissioner's argument that Mr Ogden's clothing did not have that character, and that he had not discharged his onus in that regard.

32. As to the shoes, sunglasses and other protective items; I was not satisfied that Mr Ogden's situation was as submitted, i.e. comparable with that in Morris. Mr Ogden can of course choose to wear a hat, sunglasses and sunscreen, and follow common sense and the advice of his doctor. However, his evidence before me was that when he went to his office for meetings, he drove to the city, parked in an underground parking station, and then had a short walk to an indoor meeting at the office. I do not find his a Morris situation. He was not required to work outdoors. Nevertheless as the Commissioner allowed $10 for sunscreen, I am prepared to agree with that.

33. The Respondent rejected Mr Ogden's submissions regarding rubber soled shoes and I prefer that view to Mr Ogden's argument on the basis the shoes were not required for the job Mr Ogden carried out during the relevant period, and that they were not special protective footwear.

34. I allow $12 for the laundry claim based on Mr Ogden's evidence, and the legislation and tax rulings. I am not satisfied that Mr Ogden has discharged the onus in relation to hats, sunglasses or footwear, and those claims are rejected.

Other work related expenses of $19,640

35. Mr McNeice told me that other work related expenses claimed related to the internet, depreciation, heating, lighting, electricity, telephone, printing and stationery, the home office, insurance, staff amenities, interest and computer software.

Home office

36. The home office and use of the carport were perhaps the most contentious issues, and findings in relation to those would influence other deductions such as lighting, heating, electricity, cleaning, and so on. I was concerned that the Applicant and his advisor provided several different figures in regard to measurements for the house, home office and garage. Ultimately in order to succeed, the Applicant has to satisfy me that the 3% calculated by the Commissioner for the home office is wrong, and if so, what the correct figure should be.

37. Letters from Mr Ogden's employers to the ATO clarified his situation with regard to the location of his workplace. NSC Enterprise Solutions Pty Ltd's letter to the ATO dated 21 November 2011 indicated that: NSC provided a flexible office arrangement where Gary was able to work from home, our corporate office in North Ryde or at other serviced office locations located in the Sydney CBD. A letter from IBM Australia Ltd to the ATO dated 6 December 2011 confirmed Mr Ogden had been employed with IBM since 15 June 2010, and stated that: IBM provides a flexible work office environment that allows Gary work from any IBM office location, Business Partner office, or home location. No IBM funding is provided to Gary for home office facilities.

38. I accept Mr Ogden's evidence that he was not provided with a permanent office by either of his employers at the relevant time, that much of his work was prepared and done at home, and that he was otherwise out on the road. I accept this arrangement is not unusual for people employed in sales. Mr McNeice submitted that Mr Ogden spent more than 20 hours a week working from home and that business visitors came for two hour meetings once a month to conduct business there. Mr Ogden's evidence regarding his residence was that the formal lounge area at the front of the house was used exclusively for business purposes, and that the children were not allowed in that part of the house. He told me that his wife used the area approximately once a month to sit and read a book and, in any case, during the day when she was at work and the children at school, he was the only one at home.

39. Mr McNeice submitted photographs and measurements of the areas of the house which he said Mr Ogden used exclusively for work purposes. The Applicant claims that the total area used exclusively for business is 85.83 square metres, which is 30.4%, (differing from the revised figure in Exhibit A4 which was 89.3525 square metres, and 31.6%). He submits that he originally claimed 25% of the home used exclusively for his home office, which did not, according to him, include the shared use areas.

40. Mr Ogden relied on TR93/30 (Taxation Ruling TR 93/30 Income tax: deductions for home office expenses) and TR98/6 (Taxation Ruling TR 98/6 Income tax: real estate industry employees - allowances, reimbursements and work-related deductions) and the case of Nicoll v Federal Commissioner of Taxation (2002) 51 ATR 1160. Mr McNeice submitted that in Case B55 (1970) 70 ATC 264 (No 2, Board of Review 20 August 1970) concerning a medical specialist who had rooms in a practice and a room in his house as a consulting room for urgent cases outside of clinic hours, the decision maker had allowed 12.5% of the occupancy expenses, even though the evidence was that the doctor only used the home consulting room every six weeks or so. Mr McNeice contrasted Mr Ogden's situation with that of the doctor in that Mr Ogden's evidence was that he spent approximately 20 hours a week in his home office, and that he conducted business meetings from there. Mr McNeice submitted that hence his claim for 25% or 31% of the house to be claimed as a home office was quite reasonable.

41. Mr McNeice also contrasted Mr Ogden's situation with that of the taxpayer, a computer sales person, in Case F55 (1974) 74 ATC 308 (No 1, Board of Review 17 September 1974) and mentioned many other cases.

42. The Commissioner acknowledged that the running costs of a home office are deductible pursuant to section 8-1 of the ITAA to the extent that they are incurred in gaining or producing assessable income. The Commissioner relied, amongst others, on the cases of Thomas v Federal Commissioner of Taxation (1972) 46 ALJR 397 and Bradshaw and Federal Commissioner of Taxation (1999) 41 ATR 1195, where the taxpayers were refused deductions. The former concerned a barrister who claimed for a home office which he said had been set aside for his professional work.

43. In his written submissions, the Commissioner also made a point of saying that the Applicant had chosen to work from home as a matter of convenience rather than as a requirement of his employment. I did not fully agree with that submission, and accept that Mr Ogden worked out of his home and the designated home office for at least part of the time.

44. The Commissioner did not accept that the lounge and dining rooms were used exclusively for income producing activities because the number of client visits, as indicated by the Applicant, was small. I am mindful that there was no diary kept, and only one record of a business meeting conducted at Mr Ogden's home. I am satisfied on the evidence before me, including one letter from a client who said that he and a colleague had a business meeting with Mr Ogden on or about 29 January 2010, that the number of business meetings Mr Ogden conducted at his home was small. I accepted the Commissioner's argument in relation to the formal lounge/dining areas, and did not include them in the home office calculation.

45. As to the garage, the Respondent submitted that the evidence indicating that 87% of Mr Ogden's motor vehicle use is for business, does not qualify the garage for a deduction. The Commissioner submitted that the garage is an integral part of the family home, and that its existence and/or use cannot be considered to be a home office or be otherwise attributable to the Applicant's income earning activities. Cases cited in support of the Commissioner's argument were, amongst others, Case B55 and Case F55. The Commissioner submitted that the case of Nicoll be distinguished because on the facts it was quite different from Mr Ogden's situation in that Mr Nicoll was required to relocate to oversee a work project for a certain period, and the deductions claimed were with regard to a rental property acquired for that purpose.

46. Mr Ogden's view was that the 3% allowed by the Commissioner for his home office was unreasonable.

47. In coming to a decision regarding the home office, I have already stated that notwithstanding the letters from Mr Ogden's employers referred to above which indicate that he could use their offices, he was not supplied with a permanent office. I accept Mr McNeice's submission that Mr Ogden worked out of home for certain parts of the working week. However, I am not satisfied that he necessarily worked at home for 20 hours a week, and consider that it is more likely than not that he was on the road for most of the week, either conferring with clients and potential clients, or attending meetings at his company.

48. I prefer the submissions of the Respondent in regard to the parts of the house which were used for business purposes. I accept the storage areas and five square metres of office space as the home office. I do not accept Mr Ogden's evidence that the formal lounge and dining areas were used exclusively for client meetings which, from the evidence, occurred at best once a month. There is only one letter in the materials before me indicating a client had a meeting with Mr Ogden at his home, on or about 29 January 2010. I accept that Mr Ogden stored his files at home, and have noted the spaces used for those as indicated above. I do not accept the common areas of the house such as corridors and stairs as deductible for the purposes of a home office.

49. I accept that Mr Ogden's motor vehicle is used largely for his work. The Commissioner has acknowledged that in allowing a deduction for his motor vehicles as indicated in the paragraphs above. However, Mr Ogden has a garage where he parks his car, and I am satisfied that a certain percentage of that space should be allowed in connection with the home office. I have noted the Commissioner's argument that Nicoll should be distinguished, and that the car space issues were not fully elaborated in Nicoll. I do not accept that argument, and whilst Nicoll does not bind me, it is persuasive.

50. The details as submitted by the Applicant and Mr McNeice in relation to spaces and the area of the house were, however, inconsistent and difficult to follow. Nevertheless, what follows is likely to be an approximation based on Mr Ogden's evidence:

•

Storage cupboard in the downstairs laundry-bathroom converted to storage. The area is said to be 2.0 metres by 2.0 metres (4 square metres);

•

Storage area under the stairs has plastic tubs full of files, proposals and records, 3.3 square metres;

•

Storage area upstairs, similar;

•

Upstairs 19.53 square metres, 6.9%;

•

Home office is 2.11 metres wide and there is insufficient room to hold a meeting; accordingly, meetings are held in the formal lounge; (my understanding is the office measurement is approximately five square metres);

•

Meeting room, formal lounge, 20.64 square metres, 7.3%;

•

Office and first storage area, are 9.91 square metres, 3.5%;

•

Garage 35.75 square metres, 12.6%; in Exhibit A4 Mr Ogden claimed 50% of the floor space of the garage as a business expense.

51. I am satisfied that it is likely that the four storage areas comprise 4 square metres, 3.3 square metres, 9.03 square metres and 7.20square metres making a total of 23.53 square metres. Whereas in dot point five above, I have recorded Mr Ogden's evidence that the home office is 2.11 metres wide, in Exhibit A4, he deposes that it is 3.85 x 2.45 metres which is 9.4325 square metres. Some of that comprises storage, and it is more correct to consider the office space occupies five square metres.

52. On the basis of the evidence that the whole house and garage comprise approximately 282 square metres, I am satisfied from the evidence that 11.7% of the 282 square metres, (house and garage) are deductible for a home office. That includes what Mr Ogden characterizes as his office, storage areas for files, and a part of the garage, but excludes the formal living areas and common useage areas.

Heating and lighting

53. Mr Ogden dealt with heating and lighting in paragraphs 104 - 110 of his Affidavit, Exhibit A4, and stated that he relied on TR93/30. He calculated the amount claimed to be $802 over 38 weeks. He stated this represented 36% of the cost of lighting and heating incurred during the relevant period, and attributable to work use. That was corroborated in his written Closing Submissions.

54. The Commissioner's argument rests in part on the fact he attributed only 3% of the house to home office use. His calculations for heating and lighting take into account that calculation, and the fact many of the appliances in the house are items not for office use, such as kitchen and laundry appliances, and television sets. The Commissioner was prepared to accept $101 as an estimate of the additional electricity costs attributable to the home office.

55. I am satisfied, and have allowed 11.7% of the house and garage as a home office. Accordingly, the heating, lighting, cleaning, insurance, Council rates and water should be allowed proportionately.

Replacement items, $639

56. The replacement items claimed by Mr Ogden and allowances made by the Commissioner were as follows:

•

Mouse for desktop computer $63.14 - Respondent 80% of the mouse, being $50.51;

•

Elegato Eye TV $149.95 - Respondent 50% of the Elegato, being $74.98

•

Desk lamp $13

•

Linksys BY Cisco 10/100 5 port work group $40.35 - Respondent 70% of the wireless internet hub, being $28.25

•

Chair $138

•

Printer $234.86 - Respondent 70% of the printer, being $164.40

57. The Respondent submitted that the other items claimed were private use items for which an appropriate apportionment for private use had not been undertaken.

58. I was satisfied that in addition to the items allowed by the Commissioner, as noted above, 70% of the chair and 70% of the lamp should be allowed as deductions.

Depreciation

59. Mr McNeice provided an amended depreciation schedule (Exhibit A1) which identified the original cost of items, including office storage cupboards, the hot water service, carpet and computers for the 2010 year as $24,342. He apportioned private use, and provided a figure of $2,408 as the depreciated amount.

60. Mr Ogden, in his Affidavit, stated that he relied on TR 93/30, TR98/6 and the decisions, amongst others, in Federal Commissioner of Taxation v Faichney (1972) 129 CLR 38 and Nicolls. He claimed $109 for use and resulting depreciation of the carpet in the hallway and stairs, leading to the work spaces. He also claimed $225 for the air conditioner, and explained percentages claimed for the computer and office furniture.

61. The Respondent, in his schedule, submitted that the depreciation originally claimed was $1,360, and revised to $2,774. $318 had been allowed at the objection stage. The Respondent's position was that $1,278 should be allowed, reduced for the period of Mr Ogden's unemployment. The Respondent relied on section 40-25 of the ITAA which allows a deduction for the decline in value of a depreciating asset to the extent it is used for a taxable purpose. The Commissioner submitted that the additional claims made by the Applicant related to items whose original value was less than $300, and further that they did not have the required nexus in regard to the test for depreciation.

62. I have considered the depreciation schedule provided by the Applicant, and the items stated to have been depreciated in paragraph 106 of the Respondent's written Closing Submissions which add up to $1,777.50. I am satisfied that $1,777.50 is the correct figure for depreciation.

Staff and client amenities, $1,300

63. The claims for $1,300 expenditure on biscuits and other items to entertain clients who came to his home on work related matters did not match up with the number of clients and visits Mr Ogden was able to establish had occurred. The evidence that meetings of clients occurred at his home office at least monthly was supplemented by a single letter from a client with regard to a business meeting at Mr Ogden's home stating that one had taken place on or about 29 January 2010.

64. The Respondent refused the full claim on the basis that the Applicant has no staff, and had not provided evidence to support his claim that he held meetings at his house. In any event, those expenses were not allowed because they were by way of entertainment expenses pursuant to section 32-5 of the ITAA, according to the Commissioner.

65. I noted the Applicant's evidence that amongst other items, toilet paper, handwash, tea, coffee and light refreshments were expected from him when clients came to his home office. He conceded that some of the biscuits and food were bought for his family.

66. I preferred the submissions of the Commissioner in regard to staff and client amenities and on perusing the list of expenses, found that they should be categorised as entertainment, and were not deductible pursuant to section 8-1 of the ITAA.

Internet use $654

67. The claim for internet use was agreed at the hearing to be $654 which Mr Ogden had calculated as 70% of his claim. I concur.

Telephone $208

68. The parties agreed that the amount of $208 should be allowed as a deduction for the telephone. I concur.

Printing, stationery, postage, office supplies and batteries, $369

69. Mr Ogden argued that 80% of $52.28, being the cost of batteries which he considered acceptable after deducting for private use, was $41.82, but that actually the full amount of $52.28 for batteries should be allowed. He accepted the Respondent's offer of $58.92 (of the claimed $69.95), for the HDMI cable. Mr Ogden gave extensive explanations in regard to the printing, stationery and allied items claimed at paragraphs 114- 126 of Exhibit A4.

70. The Respondent submitted that $267 should be allowed comprising the following:

•

Copy paper $10.38

•

Batteries $17.70

•

Cables $58.92

•

General stationery and other cables $120.08

•

Headset $59.95

71. The Commissioner submitted that the remainder comprised of items purchased for private use, for which appropriate apportionment for private use had not been undertaken e.g. school supplies and additional batteries.

72. In the discussion between the parties, there was reference by Mr McNeice to concessions the Commissioner may have made in regard to various items during a Conciliation Conference at the Tribunal. That is of course not evidence before me nor binding in any way.

73. I am satisfied from Mr Ogden's submissions and the evidence that 80% in relation to batteries, that is $41.82, the Respondent's offer of $58.92 (of the claimed $69.95), for the HDMI cable, and general stationery and cables at $120.08 and the headset at $59.95 were business expenses, and should be allowed.

Computer software, $159

74. The revised claim for computer software was for $159. Mr Ogden gave a fulsome explanation of the purpose of the computer software in his Affidavit at paragraphs 149 - 152. Mr McNeice made a strong argument that Mr Ogden's computer software was solely for business purposes.

75. The Commissioner submitted that 50% of the annual subscription to software program Ice TV, being $35.80, should be allowed. He submitted that in the absence of diary entries indicating full business use, 100% of the costs should not be allowed.

76. I found Mr McNeice's argument persuasive, and did not find that the absence of diary entries was necessarily indicative of private use. The amount of $159 for computer software should be allowed as a deduction.

Cost of managing tax affairs, $8,216

77. In his submission, Mr McNeice discussed his service agreement with Mr Ogden. He noted that certain items, including the cost of travel to consult him (Mr McNeice), in Wollongong had been allowed, but that the monthly fee paid to his practice by Mr Ogden was paid out of the Applicant's superannuation fund, and was hence not allowed by the auditor. At the hearing, he withdrew that claim and I have therefore not dealt with it.

78. However, Mr McNeice maintained his argument for the cost of meals ($240), which he characterized as a business expense because the meals were consumed on business premises (Mr Ogden's home), and during the course of work. The Commissioner rejected that argument.

79. The Commissioner also commented that an amount of $3,607 had been allowed for a part of this claim under the heading Other Deductions.

80. I concur with the submissions of the Commissioner in regard to non-deductibility of payments from the Applicant's superannuation fund, and the cost of meals. Neither qualify for deductions. I affirm the decisions of the Commissioner in regard to the cost of managing Mr Ogden's tax affairs.

Deductibility of interest

81. Upon request, both parties further clarified in writing, submissions made at the hearing regarding deductions for interest. Mr McNeice also took the opportunity of replying to the Commissioner's submissions on interest. I am indebted to both parties for the additional work in preparing these submissions.

82. I was also pleased to see that following further consideration there was agreement between the parties in relation to the deductibility of $5,015 for interest on investments, and the interest on the rental property of $1,610.

83. Submissions on behalf of Mr Ogden were, in summary, that although he was pleased two items had been settled, he felt frustrated at having been asked by the Commissioner to recalculate his interest on several occasions. Further he did not agree with the method used by the Commissioner who had gone back and reworked Mr Ogden's interest situation over a number of years. He did agree however, in the document, 'Response to the Respondent' dated 15 May 2014 (dealing with the interest calculations), that he would drop the work related expenses component for the 2005 taxation year and reduce the work related expenses by 5/12 for the 2006 taxation year. He provided detailed year by year figures from 2006 for the Portfolio loan.

84. The remaining claims by the Applicant were 100% of $9,213 for work related expenses, and 25% of $18.305 being $4,576 for home loan interest.

85. The Commissioner submitted that the review of the Applicant's income tax return for 2010 revealed serious issues with deductions claimed, such that the amounts claimed in earlier years (which were unaudited), are unlikely to have been an accurate reflection of the Applicant's actual work related and other deductions. He referred in particular to motor vehicle claims, tolls, meals and other private expenses which had been claimed as work deductions. Based on the claims I have had to deal with in making a decision in this matter, I concur with the Commissioner's opinion.

86. The Commissioner also queried and explored when the Applicant commenced using the Portfolio loan for incurring deductible expenses, concluding that from December 2005 the Applicant's bank statements indicated that his salary was being paid into the Portfolio loan, and that from that date, the account was used as an everyday transaction account. Hence it was possible to conclude that deductible expenses would have been paid out of that account from that date.

87. The Commissioner's third concern was what portion of the amount considered to be attributable to the Applicant's home loan should be allowed as a deduction in connection with his home office. I have found in the paragraphs above that the home office, including the garage, comprises 11.7% of Mr Ogden's home, and that accordingly, the portion of interest expenses on the Portfolio loan attributable to his mortgage on his house that can be allowed is 11.7%. I remit the calculation of the dollar value to the Commissioner.

88. The calculation of the figure for the work related expenses is also remitted to the Commissioner for calculation based on the findings above in relation to the individual items.

Trust distribution deductions $29,828

89. The Respondent noted that Mr Ogden originally claimed $29,828 for deductions for trust income. This was revised, and $14,843 was allowed by the Commissioner at objection. In Attachment A to the Respondent's written 'Outline of Submissions', the Commissioner agreed to $17,411.

90. As I have no further submissions or evidence from the Applicant in regard to trust income, I accept the Commissioner's position, and affirm his decision in that regard.

PENALTY

91. The Commissioner imposed a 25% administrative penalty pursuant to sections 284-75 and 284-90 of Schedule 1 to the TAA on the basis that the Applicant and his tax agent failed to take reasonable care in preparing and lodging his income tax return for 2010. I had to consider whether that was correct given all the circumstances, and whether the penalty imposed should be remitted in full or in part, pursuant to section 298-20 of Schedule 1 to the TAA.

92. Mr McNeice argued on behalf of Mr Ogden that he had made full disclosure at the audit stage, and that accordingly, he should, pursuant to section 284-225 of Schedule 1 of the TAA, have his penalty reduced. In his closing submissions, the Applicant referred to the matter of Ovens and Commissioner of Taxation (2009) 75 ATR 479 where the Tribunal reduced the base penalty for occupancy costs. He submitted that in his case, the shortfall penalty should be proportionately reduced by the amount of deductions allowed on appeal, and further that all other penalties should be reduced to 10% due to Mr Ogden's medical conditions.

93. The Commissioner submitted that the Applicant and/or his tax agent failed to take reasonable care in preparing and lodging his income tax return for the 2010 year. He submitted that the Applicant failed to take reasonable care by action in that he had provided receipts to his tax agent which included expenditure on personal items such as family meals and school supplies, that he included claims for deductible expenditure during the time he was unemployed, and that he failed to keep detailed log and receipt books in regard to his home office, the use of his wife's motor vehicle, and the internet.

94. The Commissioner submitted further, that the Applicant made false and misleading statements in his income tax return by claiming amounts as deductions when they were not permissible, and that these had led to a shortfall. By way of example, the Commissioner referred to claims of a private or domestic nature, including, but not limited to, a family holiday, a family dinner at KFC, biscuits consumed by his family, and tolls for which Mr Ogden had previously received a reimbursement via cash back repayment.

95. The Commissioner submitted that the Applicant's tax agent had also failed to take reasonable care, in that amongst other things, he failed to adequately advise the Applicant of his record keeping requirements, such as keeping a diary for home office use, failed to account for the period of unemployment in making claims on behalf of the Applicant, and failed to adequately explore the Applicant's claims, and provide correct advice.

96. The Commissioner also submitted that the Applicant and his tax agent failed to take reasonable care when they failed to reconsider the content of the Applicant's tax return when it disclosed a taxable income of $21,377 which would not have been sufficient to meet the Applicant's personal living expenses. The Commissioner noted that the Applicant's original claims equated to him having expended 71.5% of his net salary and wage income on work related expenses.

97. The Respondent submitted that accordingly a penalty of 25% was warranted because it correctly reflected the level of care taken by the Applicant, via his tax agent, being that they failed to take reasonable care in the preparation of Mr Ogden's 2010 tax return. The Commissioner submitted that there was no basis upon which the discretion to remit the penalty could be properly exercised as the penalty was warranted and necessary to act as a deterrence to the Applicant from making such claims again in the future, and to deter others taxpayers from acting in the same way.

98. In coming to a decision regarding the penalty, I have noted the submissions of both parties, and am mindful that Mr Ogden made false or misleading statements in his 2010 tax return by claiming items and amounts of money which were of a private or domestic nature, and not permissible as deductible claims. These included, as already noted, family outings, tolls for which he had received reimbursement, and food claimed as amenities for clients. I am satisfied that Mr Ogden and Mr McNeice as his advisor, failed to take reasonable care in reliance on documentation provided to him by Mr Ogden, and failed to take reasonable care in preparing and submitting the taxpayer's 2010 tax return.

99. The following quote from paragraph 261 of Mr Ogden's Affidavit (Exhibit A4), is a good example of the lack of reasonable care taken by the Applicant and his advisor:

With the exception of a few minor errors in calculation all expenditure claimed has been substantiated. I was not aware that I was not entitled to claim expenditure during the period of unemployment and Mr McNeice did not pick up on that issue in the short time that we have to complete the tax returns. I gave Mr McNeice a spreadsheet and Mr McNeice took the totals from my spreadsheet.

100. Mr McNeice argued on behalf of Mr Ogden that that he had made full disclosure at the audit stage, and that accordingly, he should, pursuant to section 284-225 of Schedule 1 to the TAA, have his penalty reduced. I am mindful that Mr Ogden may have made some disclosure at the time of the audit, yet Mr McNeice, who relied on receipts provided to him by Mr Ogden without, it seems, distinguishing whether the expenditure was incurred for private or domestic purposes, continued to claim for items which were clearly non deductible. Even at the hearing, Mr McNeice insisted, erroneously, that meals could be claimed if the taxpayer had worked for a period of more than ten hours. He also referred me to industrial awards which were completely irrelevant to Mr Ogden's situation.

101. I have considered whether there are grounds for justifying the remittal of penalty pursuant to section 298-20 of Schedule 1 to the TAA. I reject Mr McNeice's submission that all other penalties should be reduced to 10% due to Mr Ogden's medical conditions as there was no evidence before me to justify this claim. The only medical evidence referred to before me was the Applicant's advice from his doctor that he wear a hat and sunscreen.

102. On the basis of the evidence before me, I accept the Commissioner's submission that the Applicant and his tax agent had failed to take reasonable care in filing the taxpayer's income tax return.

103. I did not have any evidence before me to convince me that the penalty imposed should be remitted in full or in part pursuant to section 298-20 of Schedule 1 to the TAA. I affirm that part of the Commissioner's decision.