CASE 9/2009

Members:
J Block DP

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2009] AATA 627

Decision date: 21 August 2009

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J Block (Deputy President)

Part A - Preliminary and Background

1. The objection decision under review in this matter is the disallowance by the Respondent of an objection by the Applicant dated 16 August 2007 against an assessment made against the Applicant, in respect of the year ending the 30 June 2006 ("the relevant year").

2. The Applicant was self-represented. Ms K. Deards, of counsel, instructed by the Legal Services Branch of the Australian Taxation Office (ATO), appeared for the Respondent.

3. The Tribunal had before it the T documents (numbering 217 pages) lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975. It also admitted into evidence exhibits as follows:

• (a) Exhibit A1 is the Applicant's application for review of the objection decision together with all of its numerous attachments; the Applicant's application proper is included in the T documents but without its attachments;
• (b) Exhibit R1 is a letter by the Applicant to the ATO dated 21 March 2009;
• (c) Exhibit R2 is a letter by the Applicant to the ATO dated 26 March 2009;
• (d) Exhibit R3 is the Applicant's tax return for the relevant year; and
• (e) Exhibit R4 is the Applicant's tax return for the relevant year as computed by the Respondent and taking into account his disallowance of certain deductions claimed by the Applicant.

4. This matter was heard in confidence and these reasons are written accordingly. It is for this reason that certain universities at which the Applicant has studied, or is studying, are not referred to by name. Similarly the hospital by whom the Applicant is employed is not referred to by name. Moreover, a specific confidentiality order in accordance with section 35(2)(d) of the Administrative Appeals Tribunal Act 1975 was made in respect of T 11, which commences at T 11 - 30, and which describes the specific scientific project (referred to as "the Project") which gave rise to nearly all of the Applicant's deduction claims.

5. In addition to the documents referred to previously, the Tribunal was furnished with written submissions by the Respondent, the Respondent's statement of facts and contentions and also the Respondent's amended statement of fact and contentions dated 7 August 2009; this latter document is referred to in these reasons as the "RASFC". The Applicant furnished the Tribunal with a document entitled "Transcript of hearing document by Applicant" which, in effect, constituted his submissions. There was no oral evidence before the Tribunal; the parties accepted that all of the relevant facts are contained in the documentary evidence before the Tribunal.

6. The Applicant, from the bar table, informed the Tribunal that he came to Australia some 20 years ago. He first attended a TAFE and thereafter obtained an honours degree in science from a university outside New South Wales. He is currently engaged in doctoral studies at a university in New South Wales. He

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is a full-time employee of a hospital in Sydney; he described his position at the hospital as "hospital scientist".

7. The facts which have given rise to this application are not in dispute and it is thus convenient to draw on the RASFC and (subject only to clause 8 below) to include its content contained under the head of "Facts"; clauses 4 to 20 of RASFC read as follows:

• "4. The applicant is an employed scientist in a clinical diagnostic laboratory within a hospital.
• 5. Separate to his employment the applicant claims to have undertaken part of what he describes as a laboratory based project within the field of biotechnology (the "Project"). [The aim of the Project was stated].
• 6. In a letter dated 21 March 2009 the applicant stated that the Project is comprised of the following steps:
  • the initial development of the project concept;
  • research and review the subject;
  • feasibility assessment;
  • patent search;
  • the decision to proceed with the project;
  • financing and transaction structuring;
  • purchase a Unit and convert part of it to a laboratory facility;
  • purchase equipments;
  • the commencement of laboratory experimental activities;
  • the decision to cease the laboratory experimental activities;
  • deposit the [product];
  • file patent application;
  • licence the patent to manufacturers; and
  • income producing in the form of royalties.
• 7. The applicant further stated that steps (a) to (h) form the preparatory stage of the Project; steps (i) and (j) form the operating stage; and steps (k) to (n) form the commercialisation stage of the Project.
• 8. The Project began on 3 June 2005. The applicant estimated that the 'project life' of the Project to be three years.
• 9. The Project has not progressed beyond step (i) above. The respondent does not know which other steps have been completed by the applicant.
• 10. As far as the respondent is aware, the Project has not been sold, abandoned or otherwise disposed of.
• 11. In his income tax return for the income year ending 30 June 2006 the taxpayer claimed:
• a 'project pool' deduction of $32,169; and
• deductions totaling $22,543 for other work related expenses.
• 12. The 'project pool' deduction of $32,169 was said to relate to a 'project amount' of $21,446 which was comprised of two principal groups of expenses:
• 13. A proportion of the purchase price of a residential unit by the applicant, part of which is said to be used as a laboratory, together with a proportion of utilities, funding and purchasing costs, and other costs; and
• 14. Expenditure on laboratory equipment, furniture, glassware, tools, electricity, stationery, books, transport, meals and other costs.
• 15. As a result of an audit conducted by the respondent, the project pool deduction was disallowed and the work related expense deductions were disallowed in the amount of $21,499. A notice of assessment was issued on 18 July 2007.
• 16. A penalty was imposed under s 284-75 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) in the amount of 25% of the tax shortfall.
• 17. On 16 August 2007 the applicant objected to the disallowance of the project pool amount and to the penalty imposed in the amount of $3,911.50.
• 18. The applicant also objected to $635 of the disallowed work related deductions which were allowed on objection and are not the subject of this appeal.
• 19. On 11 September 2008, the balance of the objection was disallowed and on 3 November 2008 the applicant sought review of the objection decision by the Administrative Appeals Tribunal.

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  ATC 193

  20. On 1 October 2008 the respondent remitted the administrative penalty by $62.42 to $3,848.98 to reflect the part of the objection that was allowed.
• 21. On 14 October 2008 the applicant made an application to the Tribunal for a review of the respondent's decision to disallow the applicant's objection.
• 22. In his application for review the applicant now claims that he is entitled to:
• 23. A 'project pool' deduction in the amount of $34,214. That amount was calculated by apportioning the purchase price and other costs associated with the acquisition of the applicant's home between the part of the home said to be used for private purposes (35.5 square metres) and the part of the home said to be used for the applicant's laboratory (17.5 square meters).
  

  Project amount	Total
  Laboratory facility	17.5/53 × $206,230 = $68,095
  Storage facility	1/3 × 1000 = $333
  Total	$68,428
  Total deduction	$68,428 × 150%/3 = $34,214

• 24. The 'laboratory facility' amount is calculated in this way:
  

  Expenditure	Amount
  Unit price	$204,000
  Legal fee	$1,879
  Cost related to buying the unit (newspaper, transport fares and meals)	$351
  Total	$206,230

  • b) Deductions totalling $4,656 under s 40-25 of the ITAA 1997 in respect of the cost of the laboratory and other equipment. The schedules produced by the applicant in support of that claim are in Annexure 1 to this statement."

8. In including clause 5 of the RASFC I have edited the second sentence so as to delete references to the precise product to which the Project is referable.

9. As appears from the RASFC, the Applicant originally, in his tax return for the relevant year, claimed a project pool deduction of $32,169. However, in his application for review (Exhibit A1, Attachment 2, page 10), the Applicant subsequently claimed that he was entitled to a project pool deduction amounting to $34,240. In addition, and in his return for the relevant year, the Applicant claimed a deduction in an amount of $22,543 in respect of work related expenses; reference was made during the hearing to that claim as "home office expenses". In respect of that latter claim an amount of $635 was allowed; the Applicant did not seek a review by the Tribunal of the disallowance of the remainder of that amount.

10. The Applicant, in his application for review (Exhibit A1, Attachment 2, page 13 and Attachments 2.12 2.13 and 2.14), claimed that he was entitled to deductions totalling $4656 under section 40 - 25(1) of the Income Tax Assessment Act 1997 ("the 1997 act") in respect of the decline in value of assets used in the Project during the relevant year. That claim was not included in the Applicant's objection; the Applicant was thus obliged, pursuant to section 14ZZK(a) of the Taxation Administration Act 1953 ("TAA"), to seek the Tribunal's leave in order to raise this issue at the hearing. The Respondent did not oppose that application and leave was accordingly granted.

11. Attachments 1, 2 and 3 to Exhibit R2 contain details in respect of the Applicant's depreciation claims. Attachment 1 relates to assets whose cost was $300 or less; Attachment 2 relates to assets falling within the Low-Value Pack for the relevant year, and Attachment 3 refers to other depreciating assets in respect of which the Applicant elected to use the diminishing value method. Exhibit R2 is included in full in these reasons as follows:

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"[Applicant's name and address]

26/3/2009

Mr [Officer],

ATO

I'd like to provide a list of the deduction claimed for 05/06 income year on the basis of the application of AAT.

• 1) Deduction of cost of depreciating assets used for the Project.
  

  Type	Total deduction	Attachment
  Cost<A300	3388	1
  Low-value pool	510	2
  Diminishing value	227	3
  Total deduction	4125

• 2) Deduction of project amount for the Project.
  

  Capital expenditure of the Unit	Total amount
  Unit price*	204,000
  Legal fee*	1879
  Cost related to buying the Unit (newspaper, transport fares and meal)*	351
  total	206,230

  
  

  Project amount	total
  Laboratory facility*	17.5/53 × 206230 = 68095
  Storage facility *	1/3 × 1000 = 333
  Total	68428
  Total deduction	68428 × 150%/3 = 34214

• 3) Remission of penalty A3848.98.
• 4) Interest for withhold tax from Oct, 2006.

Attachment 1

Deduction of Cost of Depreciating Assets $300 or <$300 for 05/06 Income Year

name	price	Travel or delivery	total
waterbath	220		220
Magnetic stirrer	88		88
Votex mixer	220		220
glass bottle with cap	132		132
Modified vaccum cleaner	159		165
bench top table and steel safety cabinet			297
Filing cabinet	79		79
Wall shelf cabinet	99		99
Bacto lab. Glassware 27/10/05	249		249
Tech trade glassware 18/11/05	131	23	153
Bacto lab. Glassware 11/11/05	61		61
thermometer	11		11
Tulip clip 250m1	55		55
Tulip clip500ml	55		55
Stirring bar	7		7
Laboratory equipment 08/06/06	206		206
whiteboard	50		50
Electrical equipment, shelving, soldering iron, stockpot and tool	323		323
Laboratory equipment	290		290
Microwave 220× 50%=110	110		110
transport			261
ATC 195 meal			257
Total deduction			3388

Attachment 2

Deduction of the Cost of Depreciating Assets in Low-Value Pool for 05/06 Income Year

name	price	Travel or delivery	total
Orbital shaker	549
balance	440
432 L refrigerator(usage percent 880×50%)	440
Washing machine (usage Percent 570×10%)	57
Dryer (usage percent	43
Dinning table (usage percent 410×50%)	205
Total amount	1338	8
Deduction	502	8
Total deduction			510

Attachment 3

Deduction for the Cost of Depreciating Assets using the Diminishing Method for 05/06 Income Year

name	•	price	deliver	total
Digital incubator		1870	44	1914
	deduction	1914×30/365×200%/3		106
microscope		1265		1265
	deduction	1265×40/365×200 %/3		92
autoclave		1000	50	1050
	deduction	1050×15/365×200 %/3		29
Total deduction				227

12. As set out previously in these reasons, the Applicant originally claimed deductions in respect of work-related expenses referred to also as "home office expenses". The Applicant did not seek the review of the disallowance of most of the amount claimed; however the home office expenses are relevant to the question of

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ATC 196

penalty. This aspect will be dealt with in detail later in these reasons.

13. The Applicant's project pool deductions were calculated, both originally and as subsequently amended, by reference to the area proportion of his one bedroom home Unit ("the Unit") used in respect of the project, in relation to the whole area of the Unit. He acquired the Unit for a price of $204,000 but added to that amount a legal fee in an amount of $1879 and also costs related to buying it (newspaper, transport fares and meal) and so that the total was $206,230. Put in other words, his claim under this head included a part of the capital cost of the Unit. (That capital cost was also relevant in respect of his home office claim). Attachment 2 to Exhibit R2, in respect of his depreciation claims, indicates that, in respect of some items, he claimed a percentage only of them, presumably on the basis that they were used both domestically and in respect of the project. (I refer in this context in particular to his claims in respect of refrigerator, washing machine, dryer and dining table). During the course of the hearing the Applicant referred also to storage costs; he referred, in particular, to a wardrobe which was apparently used in part for domestic purposes and in part to store laboratory equipment. It is unnecessary for the Tribunal to deal in specific terms with the extent to which specific items were duplicated or overlapped, because the Tribunal has come to the conclusion that the Applicant was not entitled in the relevant year to any of the deductions claimed.

14. There is one common thread which is applicable in respect of all of the Applicant's claims. By the end of the relevant year the project was still in an experimental phase and so that there was no basis of any kind upon which it could be said to be capable (then or thereafter) of giving rise to the derivation of revenue. In fact, and as the Applicant said at the hearing, the project is still, even at this time, in its experimental phase, although he thought that the experiments might be completed in approximately a year from now. As to whether the project will, or will not, be completed, or, if completed, will be successful in whole or in part is not known. The Applicant said that the Project has not reached a stage at which it would be possible to apply for a patent or any other intellectual property rights.

Part B - The issues

15. It follows then that at the hearing of this application there were, in effect, three issues:

• (a) whether the Applicant was entitled to any deduction for the relevant year in respect of the project pool claim; this issue is referred to as the "project pool issue" and it is dealt with in Part D below;
• (b) whether the Applicant was entitled to any deduction for the relevant year in respect of depreciation; this issue is referred to as the "depreciation issue" and it is dealt with in Part E below; and
• (c) whether, and to what extent (if any), the penalty should be further remitted? This issue is referred to as the "penalty issue" and it is dealt with here in Part F below.

Part C - The facts

16. The steps in respect of the project are set out in clause 6 of the RASFC.

17. As set out in clause 9 of the RASFC, the project had not at the end of the relevant year progressed beyond step (i), and, in fact it has still not yet progressed beyond step (i).

18. The facts reveal that the project is carried out in the Applicant's Unit in which he resides. The Unit is a one-bedroom Unit and, in respect of which the laboratory referable to the project, takes up a substantial part of the available space and including part of the living area.

19. It must be remembered that the Applicant is employed by a hospital in a full-time capacity. There was no evidence before the Tribunal as to how, having regard to this factor, and the fact that he is also engaged in doctoral studies, he finds time to pursue the activity referable to the project. One thing is clear and that is that the project was at the end of the relevant year, and still is, in its experimental phase.

19. In his tax return for the relevant year, the Applicant reflected taxable income of $63,382 and deductions totalling $53,668. (T15 - 149 and exhibits R3 and R4). The Applicant contended that he completed his return in accordance with Tax Pack 2006 (T20 - 198). He said also that he received advice from an officer in the employ of Respondent to the

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ATC 197

effect that "the project part of the claim is OK". Against this statement must be set the fact that the conversation with an ATO employee took place after he had lodged his return for the relevant year. In any event, it is trite law that there cannot be an estoppel against the operation of a statute. The Applicant claimed that the home office claim constituted an "honest mistake". It is perhaps worthy of note that the Applicant's tax return for the relevant year was filed early in July 2006; tax would have been deducted from his hospital salary under PAYE and so that the question of a refund may have been a relevant factor.

20. The Applicant is a person of education who occupies a responsible full-time position. He said that his written submissions were composed entirely by him; they demonstrate fluency in English. His oral English is not as fluent, although this may be a matter of accent. His oral submissions consisted in their entirety of his reading of his written submissions.

Part D - The project pool deduction issue

21. I should note that, in respect of this Part D and also Part E I have drawn to some extent on the Respondent's written submissions, which I found particularly helpful.

22. Subdivision 40-I of the 1997 Act provides for deductions for capital expenditure over time associated with a "project" carried on by a taxpayer, and allows deductions for certain business expenses that would not otherwise be deductible under section 8-1. These deductions are known colloquially as the "black-hole expenditure" rules, and they apply to expenditure incurred on or after 1 July 2001.

23. The deductions for capital expenditure associated with a "project" are calculated by allocating certain expenditure to a "project pool", which is given a 50% uplift, and from which deductions are allowed over the "project life". The operative provision, section 40-830 of the 1997 Act, provides, relevantly:

" SECTION 40-830 Project Pools

• (1) You can allocate * project amounts to a project pool.
• (2) You can deduct amounts for * project amounts that are allocated to the project pool.
• (3) You calculate your deduction for an income year for a project pool in this way:
  

  Pool value × 150 % DV project pool life

• where:
• 'DV project pool life' is:
  • (a) the * project life of the project; or
  • (b) if its project life has been recalculated--its most recently recalculated project life.
• 'pool value' is:
  • (a) for the first income year that a * project amount is allocated to the pool--the sum of the project amounts allocated to the pool for that year; or
  • …"

24. The term "project amount" is defined in s 40-840(2) of the 1997 Act to mean, relevantly:

• "(2) Another amount of capital expenditure you incur is also a project amount so far as:
  • (a) it does not form part of the * cost of a * depreciating asset you * hold or held; and
  • (b) you cannot deduct it under a provision of this Act outside this Subdivision; and
  • (c) it is directly connected with a project you carry on or propose to carry on for a * taxable purpose; and
  • (d) it is one of these:
  • …
  • (v) an amount incurred to obtain information associated with the project;
  • (vi) an amount incurred in seeking to obtain a right to *intellectual property; or
  • …"

25. A "taxable purpose" is, relevantly, the purpose of producing assessable income: ss 995-1(1) and 40-25(7) of the 1997 Act. Something is done for the "purpose of producing assessable income" if it is done for the purpose of gaining or producing assessable income, or in carrying on a business for the purpose of gaining or producing assessable income: s 995-1(1) of the 1997 Act.

26.

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The the Applicant's project pool costs were not deductible in the relevant year because they fail the taxable purpose test in section 40-840(2) (c) of the 1997 Act. As has been demonstrated the project was at the end of the relevant year still in the experimental stage and for that matter it is still at this time in the experimental stage. It may, or may not, prove to be successful but it is clear that, in respect of the relevant year, the taxable purpose element was not satisfied.

27. There is a second reason why the project pool costs could not be deducted in the relevant year and that is because no amount in respect of those costs fell within any of the paragraphs listed in section 40-840(2) (d) of the 1997 Act. In particular, there was no amount which was incurred in order to obtain information associated with the project (within subparagraph (v)) and there was no amount incurred in seeking to obtain a right to intellectual property (within subparagraph (vi)).

28. The associated costs referable to the purchase of the Unit (and see in particular clause 2 of Exhibit R2 quoted in full previously in these reasons) do not constitute capital expenditure and thus do not fall within the opening words of section 40-840(2) of the 1997 Act.

29. In any event, the laboratory facility costs which consisted principally of a proportion of the purchase price of the Applicant's Unit were not directly connected with a project carried on for a taxable purpose because they are private or domestic expenses. They are directly connected not with any "project" of the required kind, but rather with the acquisition of a personal residence for the Applicant. It was not the intention of the legislature in introducing section 40-830 that a deduction be allowed for expenditure that is private or domestic in nature: see para 8.10 of the Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances) Bill 2001.

30. As Mason J said in
Federal Commissioner of Taxation v Faichney 72 ATC 4245; (1972) 129 CLR 38 at 43 (albeit in the context of section 51(1) of the 1936 Act):

"To my mind, a study in a taxpayer's home, no matter how great the extent of its dedication in point of use to the pursuit of those activities, from which the taxpayer earns his income, is a part of that home. Expenditure incurred in the erection of the study or in its renovation is as much an outgoing of a capital, private or domestic nature as expenditure on any part of the home".

31. See also
Handley v Federal Commissioner of Taxation 81 ATC 4165; (1981) 148 CLR 182 at 194;
Federal Commissioner of Taxation v Forsyth 81 ATC 4157; (1981) 148 CLR 203 at 216 - 7.

32. In any event, the project was, at the end of the relevant year, still in an experimental phase so that, as set out previously, the taxable purpose test could not be satisfied. The Tribunal notes that this finding is made in the interests of completeness, although it is not strictly necessary for the Tribunal to do so, because the Tribunal has found against the Applicant in respect of the project pool issue on other grounds. Moreover, and as set out previously, the Applicant did not, in the 2006 year, "carry on or propose to carry on a project for a taxable purpose". The project that the taxpayer carried on or proposed to carry on in the 2006 year of income did not include steps (k) to (n) of the Project alleged by the Applicant. Those steps did not have anything other than a speculative connection with activities carried on or proposed to be carried on by the taxpayer in the 2006 year, which were in fact confined to "laboratory experimental activities".

33. Section 40-845 of the 1997 Act requires a taxpayer to "work out" the "project life" of a project by estimating how long it will be from when the project starts to operate until it stops operating. The project life must be capable of being "worked out" because it is the denominator in the formula in s 40-830(3) of the 1997 Act. The Applicant estimated the life of the Project to be three years. If the relevant "project" includes all the steps in the Project as defined, the "project life" is not capable of estimation because of the intrinsically hypothetical and speculative relationship between steps (a) to (j) on the one hand and steps (k) to (n) on the other. If a project life cannot be worked out, then it is not possible to calculate an amount to be deducted under s 40-830 of the 1997 Act.

34.

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The "storage facility" cost is, in any event, excluded from the definition of "project amount" in s 40-840(2) by reason that it forms part of the cost of a depreciating asset (s 40-840(2)(a) of the 1997 Act). The "storage facility" is a "facility to store research papers, small laboratory equipment and tools". It occupies one third of a built-in wardrobe in the Applicant's home. A storage facility of that kind is likely to have a limited effective life and can reasonably be expected to decline in value over the time it is used (and see definition of "depreciating asset" in s 40-30(1) of the 1997 Act).

35. Section 40-855 of the 1997 Act provides that a taxpayer may start to deduct amounts for a project pool in the first income year in which the "project" starts to operate. While project amounts may be allocated to a project pool at any time, the taxpayer can only deduct amounts allocated to that pool from the first income year when the project starts to operate.

36. The project starts to "operate" when the construction or preparatory stage of the project is completed. A project is something that a taxpayer carries on (or proposes to carry on) for a taxable purpose, and so it does not begin to "operate" until the taxpayer starts to do the things that themselves will support that purpose. This means that a project will start to operate when the taxpayer starts to do the things which themselves will produce assessable income. The example given in the Revised Explanatory Memorandum to the New Business Tax System (Capital Allowances Bill) 2001 is that, if the project is carrying on a mining operation to produce assessable income, the project will start to operate when the taxpayer starts the extraction activities.

37. The Respondent submits, and the Tribunal agrees, that the Project had not started to operate in the 2006. The Applicant had not started to do the things that would support the purpose of gaining or producing assessable income, namely, the licensing activities in step (m) of the Project. When the Project does start to operate, at which time the Applicant will be able to determine the "project life", the Applicant will be entitled to deduct any amount he has properly allocated to the project pool. For example, if he incurs expenditure in seeking intellectual property protection for his discovery he will be entitled to allocate and eventually deduct that amount. The Applicant contended that his original estimate of three years was just that, an estimate and that it might be subject to change over time. That contention is correct so far as it goes but it does not alter the fact that the calculation of the project life is a necessary element in the calculation of the amount which is capable of deduction.

38. For all of these reasons the project pool issue must be decided against the Applicant.

Part E - The depreciation issue

39. In respect of this issue also the Tribunal has drawn on the Respondent written submissions.

40. The Respondent contended that the Applicant is not entitled to claim a deduction of $4,656 under s 40-25 of the 1997 Act in respect of the cost of laboratory and other equipment.

41. Section 40-25 of the 1997 Act provides, relevantly:

• "(1) You can deduct an amount equal to the decline in value for an income year (as worked out under this Division) of a * depreciating asset that you * held for any time during the year.
• …
• (2) You must reduce your deduction by the part of the asset's decline in value that is attributable to your use of the asset, or your having it * installed ready for use, for a purpose other than a * taxable purpose."

42. The Applicant claims that the assets listed in Attachments 2.12, 2.13 or 2.14 to the application for review were "used for the Project".

43. The Respondent contends, correctly, that the Applicant has not demonstrated that any of the assets listed in Attachments 2.12, 2.13 or 2.14 were used or installed for use for a taxable purpose. "Taxable purpose" is defined in section 40-25(7) of the 1997 Act as, relevantly, the purpose of producing taxable income. It is clear enough that the Applicant will not commence his income producing activity until he has a patentable discovery capable of being commercially exploited. His activities to date have been of a preliminary or investigatory nature and lack the requisite degree of

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commitment by the Applicant to a taxable income producing activity: see
Goodman Fielder Wattie Ltd v Federal Commissioner of Taxation 91 ATC 4438; (1991) 29 FCR 376 at 387 and
Esso Australia Resources Ltd v Federal Commissioner of Taxation 98 ATC 4768; (1998) 84 FCR 541 at 556-9; contrast
Federal Commissioner of Taxation v Ampol Exploration Limited 86 ATC 4859; (1986) 13 FCR 545.

44. The Applicant is thus, and in consequence, not entitled to claim a deduction of $4,656 under s 40-25 of the 1997 Act in respect of the cost of laboratory and other equipment and the depreciation issue too must be decided against the Applicant.

Part E - The penalty and remission issues

45. It is clear that there was a tax shortfall in respect of the relevant year in an amount of $15,959.92. The tax shortfall arose because of the disallowance of nearly all of the work-related expenses claimed in an amount of $22,543, and the whole of the project pool deduction claim originally in an amount of $32,169, but increased thereafter as set out previously in these reasons.

46. On the amount of $22,543 claimed in respect of work-related expenses an amount of $635 was allowed thus reducing the amount disallowed to $21,908.

47. The Respondent originally imposed a penalty of $3911.60 under section 284 - 75 of Schedule 1 to the TAA.

48. Section 284 - 225 of Schedule 1 to the TAA reads as follows:

• "284-225 Reduction of base penalty amount
  • 1) The * base penalty amount for your * shortfall amount or * scheme shortfall amount, or for part of it, for an accounting period is reduced by 20% if:
    • (a) the Commissioner tells you that a * tax audit is to be conducted of your financial affairs for that period or a period that includes that period; and
    • (b) after that time, you voluntarily tell the Commissioner, in the * approved form, about the shortfall or the part of it; and
    • (c) telling the Commissioner can reasonably be estimated to have saved the Commissioner a significant amount of time or significant resources in the audit.
  • (2) The * base penalty amount for your * shortfall amount or * scheme shortfall amount, or for part of it, for an accounting period is reduced under subsection (3) or (4) if you voluntarily tell the Commissioner, in the * approved form, about the shortfall amount or the part of it before the earlier of:
    • (a) the day the Commissioner tells you that a * tax audit is to be conducted of your financial affairs for that period or a period that includes that period; or
    • (b) if the Commissioner makes a public statement requesting entities to make a voluntary disclosure by a particular day about a * scheme or transaction that applies to your financial affairs--that day.
  • (3) The * base penalty amount for your * shortfall amount, or for part of it, is:
    • (a) reduced by 80% if the shortfall amount, or the part of it, is $1,000 or more; or
    • (b) reduced to nil if the shortfall amount, or the part of it, is less than $1,000.
  • (4) The * base penalty amount for your * scheme shortfall amount, or for part of it, is reduced by 80%.
  • (5) If you voluntarily tell the Commissioner, in the * approved form, about your * shortfall amount or * scheme shortfall amount, or part of it, after the Commissioner tells you that a * tax audit is to be conducted of your financial affairs, the Commissioner may treat you as having done so before being told about the audit if the Commissioner considers it appropriate to do so in the circumstances."

49. The Respondent, when it allowed $635 in respect of work-related expenses, reduced the penalty which had been imposed by him by $62.42 to $3,848.98. That reduced penalty related to the remaining work-related expenses (in respect of which the Applicant did not seek

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review) and also the project pool deduction claim.

50. The Respondent subsequently decided to grant a further remission of the penalty imposed; he remitted an amount of $2425, being the whole of the penalty referable to the project pool claim. The remaining penalty, amounting to $1486.50, relates to the disallowed work-related expenses and was referred to during the hearing as "home office expenses". The only contention by the Applicant as regards the penalty issue was that it should be reduced by 80% in that, before the audit commenced, he made a disclosure to the effect that his home office claim was made in accordance with an "honest mistake".

51. T6 - 17 is a letter by the Respondent to the Applicant dated 13 October 2006 which indicated that his return for the relevant year had been selected for audit and that the audit would commence on 28 October 2006.

52. The Applicant replied to the Respondent by letter dated 22 October 2006; that letter appears at T7- 19 and T7 -20 and it reads as follows [sic]:

"[Applicant's name and address]

Dear Ms [surname]

Regarding the claim of 'Home Office' expenses for year 05/06 tax return, I found that my calculation is incorrect but I would argue that I might be entitled to that claim.

After discussion of the matter of the claim of expenses for 'Study/Home Office' with you on the phone and referring to Taxation Ruling TR 93/30, I realized that I misunderstood the definition of study and home office for taxation purposes. There is no clear definition of Home Office in the TaxPack 2006. That is why I used the term of 'study/home office' instead of 'home office' and used the same calculation for mini-laboratory for the Project.

However, I would argue that I might be entitled to claim the expenses of 'Home Office'. The section 2 of the TR 93/30 describes the 'where part of the home is used for income producing activities and has the character of a "place of business"' and 'in such case some of the expenses incurred…. May be partly deductible' (s 2., pp. 1, TR93/30). In other words, to qualify an area or room of the home as a 'home office', the area or room must have two characters. One of the characters is that the area or room must be used for income producing activities and other is a 'place of business'.

In my case, I have to use an area of my home exclusively to write the manuals and read the manuals from different sections of the laboratory of my workplace as a hospital scientist. Also, I have to bring some difficult cases of the patients' results to home and use this area to make a diagnosis by referring to textbooks and/or journal articles. These activities demonstrate that the area of my home is used for income producing activities.

The same area of my home is also used for the Project which is for seeking a patent right, one of the Intellectual Property. The process of the generation of a patent right can be defined as a process of a business because 'a patent is a form of personal property and can be sold outright for a lump sum, or its owner can give anyone permission to use invention covered (license it) in return for loyalty payments. (se. B, para.4 pp. Patent it yourself). I have to use this area of my home to conduct journal and patent literature research for the Project and design the Project. I also used this area to discuss any fault of instruments with the technician from suppliers. Therefore, this area of my home has a character of 'a place of business'.

The area of my home is used for income producing activities and has a character or a 'place of business'. Therefore, this area can be defined as a 'Home Office' for taxation purpose based on the clause that 'where part of the home is used for income producing activities and has the character of a "place of business"' and 'in such case of some of the expenses incurred…. may be partly deductible' (s.2, pp.1. TR93/30).

Yours sincerely

[Applicant's signature]"

53.

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ATC 202

On 23 October 2006 the Applicant requested an extension of time for voluntary disclosure; that letter appears at T8- 21 and it reads as follows [sic]:

"[Applicant's name and address]

Dear [Officer]

Taxation Office

Regarding to your letter dated 16 October 2006, I request an extension for voluntary disclosure from 28 October 2006 to 30 Octobe 2006.

I request an extension for voluntary disclosure from 28 October 2006 to 30 October 2006 due to sickness last week and receiving the letter on 19 October 2006. I need time to conduct an in-house audit.

Yours sincerely

[Applicant's signature]"

54. On 27 October 2006 (one day before the audit was scheduled to commence) the Applicant wrote to the Respondent as regards his home office claim; T 9 - 22 reads (under the head of "other work-related expenses") as follows [sic]:

"Dear [Officer]

Taxation Office

Regarding to your letter for audit of my year 05/06 tax return, I found some error and omission for other work-related expensive and project pool.

For other work-related expensive

1) This error occurred because I misunderstood the definition of study and home office for taxation purpose. There is no clear definition of home office in the TaxPack 2006. Only after discussion of the matter with you on the phone and referring to Taxation Ruling TR93/30, I realised that I misunderstood the definition of the home office for taxation purposes.

2) Conference expensive should be excluded.

The conference held on the second of July 2005 but the payment occurred before the first of July 2005.

3) Books should be combined with the professional library.

The receipts of a number of books in the professional library could not be found at this time but there are price tags on the back of the books. The total amount of the library on the claim is an estimated one.

4) The cost of the fax machine

The receipt for fax machine could not be found at this moment.

5) Electricity cost

Its cost should be calculated for the home office. I choose fixed rate instead of actual one. I will recalculate the expensive for home office.

7) Laser printer

I could not found the receipt for repairs of the printer at this time.

8) Professional membership

I decline this claim because the professional association joined is not related to my current work.

For the project pool

1) Total cost of the property

The total cost of the property is 219339.

2) The area for project I ommitted

Mini laboratory	0.5 m2
Built-in cabinet	1.5 m2
Washing area	2 m2 × 50% = 1 m2
Occupied by Autoclave	1 m2
Occupied by incubator	1 m2
Occupied by refrigerator	1 m2 × 50%=0.5 m2

3) The amount allocated to the project

The total amount is 10052.

4) The total deduction

The deduction should be 41237.

Yours sincerely

[Applicant's signature]".

55. The Applicant, as I have noted, claims that the remaining penalty should be reduced by 80% because he made a voluntary disclosure before the audit commenced. At the hearing, the

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ATC 203

Applicant would not accept that the wording of section 284-225 of Schedule 1 to the TAA is such that the voluntary disclosure must be made before notice is given of the fact that an audit will commence. That this is so is clear from the wording of subsection 284-225 (2)(a) of Schedule 1 to the TAA. It is altogether clear that the section requires disclosure before the notice if there is to be a remission of 80% of the penalty.

56. It remains to consider whether, having regard to section 284 - 75(1) of Schedule 1 to the TAA, the Applicant is entitled to a remission of the penalty by 20% or in other words a reduction of a penalty by one fifth of the amount thereof.

57. The claim by the Applicant that he made an honest mistake must in all the circumstances be doubted. The timing of his disclosure indicates that he did so at the last possible moment before the audit was due to commence, and only after he had received notice that an audit was to take place. The Applicant is an educated man who has demonstrated some knowledge of tax law and how the tax system operates. It is important to note that the Applicant's claim related in large part to the actual purchase price of the Unit and not for example in respect of interest on borrowings in order to fund its purchase. The Applicant said that he has paid for the Unit in full.

58. The Applicant confined his argument as regards the penalty issue to a contention that the penalty should be reduced by 80% under subsections 284-225 (2) and (3) of Schedule 1 to the TAA. He did not, in other words, contend that he was entitled to a 20% deduction under subsection 284-225(1). However the Applicant did in fact make a disclosure as to his home office expenses (albeit after receiving notice as to an audit) and the Tribunal considers that it should nevertheless deal with the possibility that subsection (1) might operate to allow him a further 20% remission. It is necessary, for this purpose, to have regard in particular to subsection 284-225(1) (c) and the question of whether the disclosure saved a significant amount of the Respondent's time or resources.

59. Nothing was said at the hearing as to the extent to which the disclosure could be said to have saved the Respondent time or resources. The disclosure, in its terms, stated merely that the Applicant had made an "honest mistake" in respect of his home office claim. The Respondent clearly proceeded to give consideration to the work-related expenses; and that this is so is indicated by the fact that a small part of the relevant expenses claimed was, in fact, allowed.

60. Insofar as the claim related to the actual cost of the Unit, it was always devoid of any prospect of success, and it is reasonable to infer that the Respondent did not need to spend time (and whether a significant period or otherwise) in a consideration of this question.

61. The term "significant" in subsection 284-225(1) (c) is not defined; it must have its ordinary meaning and must be construed in such manner that it means a period of time or resources in excess of that which is purely nominal.

62. On the evidence before it, the Tribunal cannot come to a conclusion that the voluntary disclosure did comply with subsection 284-225(1)(c) and certainly and in relation to onus the Applicant, as has been said, sought to rely only on subsections (2) and (3). It follows that the penalty assessed (as already reduced in accordance with the preceding provisions of these reasons) does not warrant any further reduction.

Part F - Conclusion

63. For the reasons set out previously in this decision, the Applicant cannot succeed in respect of any of the three issues and, accordingly, the objection decision under review must be affirmed.