OVENS v FC of T

Members:
SE Frost M

Tribunal:
Administrative Appeals Tribunal, Sydney

MEDIA NEUTRAL CITATION: [2009] AATA 166

Decision date: 13 March 2009

SE Frost (Member)

1. The Commissioner was dissatisfied with Mr Ovens' income tax return for the 2005 income year. There were two broad areas of dissatisfaction.

2. One area related to Mr Ovens' claim for deductions in relation to a "home office". In broad terms, the Commissioner was prepared to accept that Mr Ovens was entitled to a deduction for the "running costs" of a room in his home, although there was a disagreement as to the amount of that deduction. On the other hand, the Commissioner's view was that there was no entitlement to a deduction for "occupancy costs".

3. The other area related to car expenses. Mr Ovens had claimed a deduction of $24,556, and he had based his claim on entries in a "log book" that he had kept for a three-month period during the relevant year. The Commissioner was not satisfied that the log book accurately reflected the use that Mr Ovens had made of his car for income-producing activities.

4. Ultimately, the Commissioner issued a notice of assessment with which Mr Ovens was not satisfied. The Commissioner also assessed administrative penalty at 25 per cent for failure to take reasonable care to comply with a taxation law. Mr Ovens objected against both assessments, and when the objection decisions were decided against him, he applied to the Tribunal for review.

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The relevant legislation

5. Most of the case turns on the application of the general deductions provision in s 8-1 of the Income Tax Assessment Act 1997 ("the 1997 Act"), which is the successor to s 51(1) of the Income Tax Assessment Act 1936 ("the 1936 Act").

6. Section 8-1 of the 1997 Act says, as far as relevant:

  • "(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.
  • (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) … ; or
    • (d) … ."

7. In addition, in relation to the car expenses claim, Division 28 of the 1997 Act is relevant, especially Subdivisions 28-F and 28-G.

The background facts

8. Mr Ovens made a written statement in these proceedings, as did his wife, Julie, and a former colleague of his, Alison Monroe. All three also gave oral testimony. The following facts are derived from those statements and the oral testimony, from the documents filed with the Tribunal under s 37 of the Administrative Appeals Tribunal Act 1975, and from the various exhibits that were tendered during the hearing.

9. During the relevant year, Mr Ovens was engaged in two income-producing activities. The first of those was an activity of wine importing and wholesaling which he undertook in partnership with his wife under the name "KiWiNZ". This activity can be largely, if not entirely, disregarded for the purpose of these proceedings. The second activity was as an employee of a company known as Interim Pty Ltd ("Interim").

10. His employment with Interim resulted from an offer made to him by that company on 23 August 2004. He was employed on a full-time basis by Interim from 21 October 2004. He described his position as "sales manager" in outplacement services.

11. With Interim he continued a working arrangement that he had established with at least one of his previous employers - namely, to work extensively at or from home. He explained that he had earlier been a human resources director, but because of his wife's ill health he had had to undertake a career change in about 1996. He had to find a job for himself that would allow him to spend more time at home helping his wife, not only in relation to her health issues but also with the bringing up of their two children. As a result he "transformed" himself from an office worker to a salesman. As part of this transformation he set up what he described as a home office. This enabled him to do the work required of him by his employer, but in circumstances where he was on hand to assist his wife if she ever needed it.

12. His work at Interim involved helping people to rebuild their lives after they had lost their job, generally as a result of redundancy. There was a lot of "business development" involved in that role. For example, he was expected to identify potential clients who would be likely to require those services, and then formulate a proposal to those potential clients in the hope of securing an engagement on behalf of Interim. If he secured the engagement, then he would work closely with the employees who had been made redundant, and help them "collect their thoughts and find out where their next career is going to be".

13. Although Interim provided him with an office in the city, he did much of his work in his home office in his suburban home. This included making phone calls, sending emails to and receiving emails from prospective or established clients, and the writing of proposals. The actual delivery of the proposal - the "sales pitch" - generally took place at the client's premises. He said, and I accept, that once a week, on average, the affected employees of the

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clients would visit him at his home office and he would provide his services to them there. Alternatively, he would provide the services at the client's premises, or at Interim's office in the city.

14. He said, and I accept, that a typical working day would start sometime between 7:00 and 7:30 in the morning and last until 6:00 or 6:30 in the evening. Sometimes he would work later into the night, have dinner and then do some more work in the home office.

15. He worked in his home office with the knowledge and somewhat grudging concurrence of, rather than at the request of, his employer. But he did not only work in his home office. Sometimes he would use the office that Interim made available to him in the city. However, this office in the city was also used, on occasion, by other employees of Interim for the purpose of having meetings.

16. There were people at Interim who reported to Mr Ovens, and he would sometimes need to go to the city to maintain contact with them. In this regard, he said (Transcript, page 125):

"We had a weekly meeting on Monday generally, or if I was unable to make that I met with them individually about on average once a fortnight."

17. It was difficult for him to indicate how many hours a week he spent in the Interim offices in the city. He eventually said that it was "on average" two and a half hours a day for five days a week, but I took that answer to be a mathematical average (and possibly not an accurate one), rather than an indicator of what he commonly or usually did. The inference that I draw from his evidence is that he carried out his activities wherever the changing nature of those activities required them to be undertaken. He was very much "on the move".

18. The home office was a separate room included within the structure of the family home. There was an adjacent bathroom, including a bath, shower, toilet and basin, which is the bathroom that would have been used by anybody coming to see Mr Ovens for work-related purposes. There was also another room, described in the plan of the house at T5-41 as the "library", part of which was used on occasion as a waiting area for people who had come to see Mr Ovens for work-related purposes. This entire area, comprising the home office itself, the adjacent bathroom and that part of the library just described, is highlighted at T5-41 as representing what I will call the home office area.

19. The rest of the family home contains three bedrooms; a lounge room; a dining room; a central hallway; a bathroom apart from the one in the home office area; a laundry; a kitchen; an area adjacent to the kitchen described as a "dining nook"; and the remainder of the "library". There is also an external patio at the rear of the home.

20. In the home office itself Mr Ovens had various items of office equipment and some items of furniture. There was a desk, a desktop computer, a printer, a modem, a telephone (but using the same telephone line as the rest of the house), an office-type chair, a lounge chair and coffee table for visitors, and a filing cabinet. There was also, according to Ms Monroe, a television and a DVD player.

21. The home office area is located in one corner of the family home. According to the plans, it is readily accessible from the rest of the home, through an archway in the library, although there is a separate external entrance into the home office area, specifically into the "waiting area" part of the library.

22. The home office was not always set up the way it is now, but was initially used by the Ovens family as a spare family room. Nevertheless, since it was first configured in around 1996 as a home office, it has been used very extensively for work-related purposes by Mr Ovens. I find that Mr Ovens used it almost exclusively for work-related (and therefore income-producing) purposes during the relevant year. I cannot entirely exclude some incidental use by Mr Ovens (or by other members of his family) for purposes not related to Mr Ovens' work activities, but I find that such use in the relevant year was very minor indeed.

23. Apart from the activities that Mr Ovens carried out in his home office and at Interim's office in the city, he travelled extensively. He undertook much of this travel by car, but when travelling interstate he would travel by plane. The car that he used most of the time for work-related travel during the relevant year,

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particularly in the Sydney metropolitan area, was a BMW. He did have other cars, including two Subarus, one (or perhaps both) of which he usually used for the longer journeys to New South Wales country centres or to Canberra.

24. For a period of at least 12 weeks during the relevant year, in accordance with Subdivision 28-G of the 1997 Act, Mr Ovens kept a log book in relation to the BMW.

The deductions claimed in relation to the home office

25. The two broad categories of expenditure Mr Ovens claimed in relation to the home office were what the Commissioner described as "occupancy costs" and "running costs".

26. Within the first category were a portion of the interest charged on Mr and Mrs Ovens' home mortgage; a portion of the home building insurance premiums; a portion of the amount of local council rates and water rates paid; and costs relating to repairs and maintenance of the home (including painting).

27. Within the second category were items of expenditure such as a portion of the household gas and electricity bills; a portion of the household contents insurance premiums; a portion of the telephone bills; and depreciation on furniture, equipment, carpets etc.

28. The Commissioner claims that the distinction between the two categories is a valid one, and is based on the approach that the courts have taken to the question of deductibility of expenditure in relation to home offices.

The entitlement to deductions - what does the Act mean?

29. The starting point in this enquiry is, as it should always be, the language used in the legislation. A deduction is allowable under s 8-1(1)(a) of the 1997 Act for "any loss or outgoing to the extent that it is incurred in gaining or producing your assessable income". (Since Mr Ovens' activities with Interim were employment-related, paragraph (b), the so-called "business limb", is not relevant.)

30. The cases - most notably
Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47; 8 ATD 431 - have explained that the words "in gaining or producing" your assessable income mean "in the course of gaining or producing" that income. The questions, therefore, are these - first, did Mr Ovens incur the outgoings, or any of them, in the course of gaining or producing his assessable income; and second, if he did, to what extent did he do so?

31. Those questions are best considered, first, in the light of the decisions in
Handley v Commissioner of Taxation (1981) 148 CLR 182; 11 ATR 644; 81 ATC 4165 and
Commissioner of Taxation v Forsyth (1981) 148 CLR 203; 11 ATR 657; 81 ATC 4157. Both cases, heard within a week of each other by the same High Court bench, concerned deduction claims by barristers for certain home office expenses.

32. In Handley, the taxpayer claimed certain expenditure under s 51(1) of the 1936 Act. The Commissioner allowed the electricity and cleaning expenses, but disallowed mortgage interest payments, council rates and fire insurance premiums.

33. The High Court, by majority (Mason J, Murphy J and Wilson J), agreed with the Commissioner that the amounts disallowed were not deductible. Mason J, although acknowledging that the use to which the home office was put was "a matter of great importance", noted that the "essential character" of the expenditure would determine whether it was deductible or not. According to his Honour, the expenditure related to the home office was referable to the home; the "essential character of the expenditure", therefore, was that of a "capital, private or domestic nature" (at CLR 194; ATR 651; ATC 4171) - excluded, in other words, by what are now paragraphs (a) and (b) of s 8-1(2) of the 1997 Act.

34. Wilson J incorporated in his reasons those he had given in Forsyth, and said at CLR 201-2; ATR 656; ATC 4176:

"… The room used as a study does not cease to be part of the taxpayer's home merely because as a matter of convenience he uses it for professional purposes for twenty hours per week during forty-five weeks of the year. … But it remained essentially part of his home. … I conclude that no part of the outgoings possess the requisite character of outgoings incurred in gaining or producing assessable income …

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In any event, I believe that they must be regarded as outgoings of a capital, private or domestic nature, thus coming within the exception to s 51."

35. Murphy J also based his decision on the fact that the outgoing "was of a domestic nature even if it were incurred in earning assessable income": 148 CLR at 196; 11 ATR at 653; 81 ATC at 4173.

36. In Forsyth the taxpayer paid his family trust (which owned the family home) an amount described as "rent" for the use of a home study and ancillary space, both of them within the family home. Mason J thought that the "artificial arrangements" did not distinguish the case "in point of principle" from Handley (at CLR 207; ATR 658; ATC 4159). Murphy J considered (also at CLR 207; ATR 659; ATC 4159) that the arrangement "[did] not negate the domestic nature of the expenditure".

37. Wilson J said at CLR 215; ATR 664; ATC 4163-4164 that an important question was the relationship of the study and ancillary space to the house as a whole. His Honour noted the apparently "complete integration" of the work areas with the remainder of the home, the lack of "any physical exclusivity", the fact that the study was "indistinguishable" from other rooms in the private living area of the house, and the location of the ancillary space "at the side of the living room". After acknowledging that these matters were not decisive in themselves, his Honour noted other factors (again, not decisive), such as the fact that the taxpayer maintained chambers in the city, that there was "no compulsion" for him to work at home, but that he found it "convenient" to do so. His Honour continued:

"As I have said, in the last resort the question is one of fact and degree. Having regard to all the circumstances, I conclude that it is not open on the facts of this case to find that the outgoings in question were incurred in gaining or producing the assessable income, or were necessarily incurred in carrying on the taxpayer's professional business. The home was not his business premises. It was not open to be described, with any show of reality, as his base, or one of his bases, of operations …"

38. In
Swinford v Commissioner of Taxation [1984] 3 NSWLR 118; 15 ATR 1154; 84 ATC 4803, David Hunt J in the Supreme Court of New South Wales said:

"There can be no doubt that, as a result of those two cases [that is, Handley and Forsyth], it will be difficult (perhaps impossible) for any taxpayer to obtain a deduction where his home office is a study used in those circumstances. It is, however, to take a very large step further to say that, as a result of those decisions, no deduction will be available in relation to a home office as a matter of law."

39. Nevertheless, it is important to understand why the taxpayers in Handley and Forsyth were not successful. Mason J took the view that the expenditure that was being claimed was of a "capital, private or domestic nature", concluding, apparently, that to characterise the expenditure in that way necessarily excluded the possibility that it was incurred in gaining or producing assessable income. Murphy J agreed that the expenditure was domestic in nature, but seems to have recognised the possibility that expenditure can be both income-producing and domestic in nature - but to the extent that it is the latter, it cannot be deducted. Wilson J also recognised the scope for duality of characterisation, finding in each case that the expenditure was not incurred in gaining or producing assessable income, but in any event, that it was of a capital, private or domestic nature.

40. Mason J's reference in Handley to the "essential character" of the expenditure recalls the language of the High Court in
Lunney v Federal Commissioner of Taxation (1958) 100 CLR 478; 11 ATD 404. The expression has also been used in other cases, including (to mention only a few) Swinford (referred to above),
Commissioner of Taxation v Brixius (1987) 16 FCR 359; 19 ATR 506; 87 ATC 4963;
Fletcher v Federal Commissioner of Taxation (1991) 173 CLR 1; 22 ATR 613; 91 ATC 4950;
Macquarie Finance Limited v Commissioner of Taxation (2004) 57 ATR 115; 2004 ATC 4866; and
Spriggs v Federal Commissioner of Taxation (2008) 71 ATR 804; 2008 ATC 20-044.

41.

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More recently, a majority of the High Court (Gummow, Hayne, Heydon and Kiefel JJ) in
Commissioner of Taxation v Day 2008 ATC 20-064; [2008] HCA 53 has provided the following caution, at [29]:

"Reference in some cases to the expenditure having an "essential characteristic" must likewise be treated with some care. As Gaudron and Gummow JJ observed in [
Commissioner of Taxation v Payne [2001] HCA 3; (2001) 202 CLR 93], the use of the term may avoid the evaluation which the section requires. It is perhaps better understood as a statement of conclusion than of reasoning."

42. Their Honours went on to explain at [30] that the question posed by s 8-1(1)(a) is: "is the occasion of the outgoing found in whatever is productive of actual or expected income?" That inquiry, their Honours said:

"will provide a surer guide to ascertaining whether a loss or expenditure has been 'incurred in [the course of] gaining or producing … assessable income'."

43. The taxpayer in Day was an officer of the Australian Customs Service. He had claimed a deduction for legal expenses incurred in defending himself in relation to charges brought against him under the Public Service Act 1922. The majority held at [37] as follows:

"The [taxpayer's] outgoings, by way of legal expenses, followed upon the bringing of the charges with respect to his conduct, or misconduct, as an officer. He was exposed to those charges and consequential expenses, by reason of his office . (emphasis added)"

44. In conclusion, their Honours stated at [40]:

"… the occasion of the legal expenses is to be found in his position as an officer. It follows that the expenses were properly allowable as deductions."

Mr Ovens' entitlement to deductions for the home office

45. To return now to Mr Ovens' circumstances, I need to ask: "is the occasion of the outgoings found in whatever is productive of actual or expected income?" I should emphasise that the question is not whether he used his home office for income-producing purposes. I have already found that he did, but this is not enough. Unless I also find that the occasion of the outgoings - in his case there are various different items of expenditure that need to be considered - is found in his income-producing activities, he will not be entitled to the deduction.

46. I think it is appropriate to deal with the "occupancy costs" and the "running costs" separately.

47. The occasion of the outgoings that the Commissioner described as "occupancy costs" is not to be found in the work that Mr Ovens undertook in his home office. The reason why this is so will be seen from a brief analysis of the High Court's formulation of the test in Day, at [37] (quoted above). When the Court said that the taxpayer's incurring of legal expenses "followed upon" the charges brought against him as an officer, it was not talking of timing, but rather of causation. So much is clear from the next sentence, emphasised in [43] above. It was by reason of his office that the taxpayer was exposed to those charges, and to the consequential legal expenses. In other words, the occasion of the expenses - the reason they were incurred - was to be found, as the Court concluded in [40], in his position as an officer, which was his income-producing activity. That is the nexus which is both sufficient and necessary to establish the deductibility of the expenses.

48. In relation to Mr Ovens' "occupancy costs", that type of nexus is missing. It was not by reason of his working in the home office so as to earn income that Mr Ovens incurred the various items of expenditure described as "occupancy costs". Those items of expenditure - in their entirety - were incurred by reason of his and his wife's ownership of the home. They were incidents of home ownership, and of the desire (or need) to insure their family home. Mr Ovens is not entitled to a deduction for "occupancy costs".

49. That means that the following items shown at Appendix "A" of Exhibit A5 are disallowed:

50. It might be argued that "house repairs", "bathroom repairs" and "painting" should not be dealt with as "occupancy costs" but as "running costs". That may be so. The Commissioner's delineation into the two categories was done more for efficiency of treatment of somewhat unwieldy proceedings than as an exercise in absolute definitional precision. No matter where these three items belong, they were not incurred by reason of Mr Ovens' income-producing activities and are not deductible.

51. That brings me to the "running costs". These are items of expenditure, the occasion of which is indeed the work that Mr Ovens undertook in his home office. It is by reason of his working in the home office that he would switch on the gas heater in that area. It is by reason of his working in the home office that he would turn on the lights, and consume electricity through the use of the various items of electronic equipment that he had deployed in that room. It is by reason of his working in the home office that he incurred that part of his home contents insurance expenditure that related to the equipment in his office.

52. Nevertheless, in some cases the proportion of an item of expenditure that he claimed was excessive. I could find no justification, for example, for his claim for 40 per cent of the entire household electricity bill for the income year (even though he was only employed by Interim for a little over eight months of the year). Similarly, a claim for 70 per cent of the household contents insurance could not be sustained.

53. Doing the best I can with the material before me, and reluctantly noting, with respect, the words of Stephen J in Handley, at [26] (148 CLR at 193; 11 ATR at 650; 81 ATC at 4171), that "after all, any apportionment of the kind contemplated by s 51(1) must necessarily very often be a rough and ready process", I allow deductions to the following extent (to be recalculated by the Commissioner):

54. That leaves the claims for depreciation, based on Division 40 of the 1997 Act. Those items not conceded by the Commissioner relate to a notebook, a fax machine and a pocket PC.

55. Appendix "A" of Exhibit A5 notes that the supporting document for the "notebook" is Document 85. Ms Hammond established upon questioning Mr Ovens that Document 85 referred to two notebooks, not one (Transcript, pages 137-8). The purchase price was $4,100. He claims 30 per cent use for Interim purposes, and I accept that proportion as reasonable, but only in relation to one notebook, not two. However, it is not clear to me how the purchase price fed into the depreciation calculation. On the material before me I cannot conclude that there is any amount allowable for depreciation or, if there is, what that amount may be. However, that may have resulted, at least in part, from my having encouraged Mr Ovens' representative to present his client's case in categories rather than line by line of claimed items. As a matter of fairness, Mr Ovens should be given the opportunity to establish his claim if he can. I will remit this particular item to the Commissioner to allow the taxpayer further time to explain and quantify his claim.

56. The claim for the fax machine, referred to at Document 86, is based on 53 per cent of its usage for purposes relating to Mr Ovens' employment at Interim. In relation to the pocket PC, Document 96, he claims 30 per cent use for Interim purposes. I accept both percentage claims as reasonable, but again the fact of acceptance does not readily convert to an allowable deduction amount. I will also remit these two further questions of quantum to the Commissioner to allow the taxpayer further time to quantify his claim.

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Car expenses - the "log book" method

57. Division 28 of the 1997 Act specifies that, unless an exception applies (which it does not in Mr Ovens' case), a taxpayer wishing to claim deductions for car expenses must use one of four statutory methods: s 28-12. One of those methods is the "log book" method. This is the method that Mr Ovens chose to use for the relevant year.

58. The first instruction in Subdivision 28-F, contained in s 28-90(1), is deceptively simple:

"To use the 'log book' method, you multiply the amount of each *car expense by the *business use percentage."

59. Critical to that calculation is the "business use percentage", a term defined in s 28-90(3) as, in summary, business kilometres divided by total kilometres. The expression "business kilometres" means, relevantly, the number of kilometres the car travelled in the course of producing assessable income: s 28-90(4)(a). As far as this "business kilometres" component is concerned, s 28-90(5) explains:

"You calculate the number of business kilometres by making a reasonable estimate. The estimate must take into account all relevant matters, including:

  • (a) any log books, odometer records or other records you have; and
  • (b) any variations in the pattern of use of the *car; and
  • (c) any changes in the number of cars you used in the course of producing your assessable income."

60. There are several things you must do if you wish to use the "log book" method. You must, for example, substantiate the car expenses under Subdivision 900-C: s 28-100(1). You must also keep a log book (s 28-100(2)) and odometer records (s 28-100(3)). In this context the word "keep" means "maintain" (in the sense of recording regularly), rather than "retain"; the rules relating to retention of the log book are in Subdivision 28-I.

61. Subdivision 28-G tells you how to keep a log book. One of the things you must do is "record journeys made in the car during the log book period in the course of producing your assessable income": s 28-110. The expectation is that a taxpayer will record in the log book all journeys which, in the opinion of the taxpayer, are made in the course of producing assessable income. It might be that not all of those journeys are in fact made "in the course of producing assessable income" because there will sometimes be some uncertainty as to the precise location of the borderline between those journeys that qualify and those that do not. Sometimes - perhaps most of the time - the taxpayer will be right; sometimes the taxpayer might be wrong. But a wrong judgment by a taxpayer as to whether a journey (or perhaps a number of journeys with similar characteristics) satisfied the description "made in the course of producing assessable income" does not render the entire log book unreliable. It will simply be one of the "relevant matters" to be taken into account under s 28-90(5) in making the estimate of "business kilometres" travelled.

62. Nowhere is there a requirement to record in the log book those journeys that may be described as "private" journeys (that is, those that are not made "in the course of producing assessable income"). Of course, there is no logical reason why such journeys should need to be recorded. These are the journeys that are represented by the difference between business kilometres and total kilometres, and their extent can be deduced arithmetically once "business kilometres" and "total kilometres" are known.

63. For those journeys that are recorded in the log book, s 28-125(2) is prescriptive:

"A journey is recorded by making in the log book an entry specifying:

  • (a) the day the journey began and the day it ended;
  • (b) the *car's odometer readings at the start and end of the journey;
  • (c) how many kilometres the car travelled on the journey;
  • (d) why the journey was made.

The record must be made at the end of the journey or as soon as possible afterwards."

Mr Ovens' log book

64. Mr Ovens relies on a log book that he says records his use of the BMW for the period 1 February 2005 to 7 May 2005. The log book indicates a total distance of 6647 km travelled in that period. Mr Ovens identified 287 km as

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private kilometres travelled. The remaining 6360 km he identified as "business kilometres" travelled during the period. From these figures he calculated a "business use percentage" of 95.6%.

65. The log book also notes the odometer readings of the car at the beginning and at the end of the financial year. From these readings Mr Ovens calculated the total distance travelled in the car during the financial year as 25,518 km.

66. There are about 60 journeys entered in the log book. A typical entry will show a "start date", an "end date" and, in the column headed "Purpose of journey", a description such as "Client mtg" followed by a suburb name and a company name. Often there will be more than one place visited. The "odometer start" and "odometer end" will be recorded, and there is a space for "kilometres travelled", either "business" or "private". Most of the "kilometres travelled" are recorded in the "business" column - of all the entries recorded, only 12 of them note any "private" kilometres.

67. Mr Ovens freely admitted that he chose to use the BMW on his travel for Interim "to get the best tax deduction" (Transcript, page 46), and there is nothing wrong with that. He continued: "That's the reason I drove it and kept very precise logs on it … I very carefully kept records on that."

68. Ms Hammond asked him (Transcript, page 105):

"When did you complete your log book - was it on the day that the trip was made or was it at another time?---On the day.

Do you say that your log book is an accurate reflection of the mileage you drove for work related purposes?---Yes, it is.

Have you included any entries in your log book that you did not make?---No."

69. She asked him some questions about the document taken into evidence as Exhibit A7, the so-called "log book part 2". He explained that he had a personal organiser - a personal digital assistant, or "PDA". In the PDA he kept details of his daily activities, including meetings. The details in the PDA included the names of people he had met and, often, the times he had met them. To that extent the information in the PDA was more comprehensive than what he had recorded in the log book in the column headed "Purpose of journey". He took the information from the PDA, created a spreadsheet from it, and printed it out. It is this print-out that became Exhibit A7. The information in the print-out was meant to supplement and support the records in the log book.

70. There were discrepancies between the log book and Exhibit A7. Mr Ovens put the discrepancies down to human error. There were some errors in transcription, he said, because he had put the spreadsheet together "in a hurry". He thought the errors were "not of great significance" (page 106), but in the event of inconsistency between the log book and Exhibit A7, he was relying on the log book. In answer to a question from Ms Hammond, he agreed that the log book was "the correct book to use".

71. After highlighting for Mr Ovens some of the inconsistencies between the log book and Exhibit A7, Ms Hammond asked him once again whether he had made the entries in the log book on the day that he made the trip or at a different time. He said (Transcript, page 110):

"Generally I recorded them every day I went through because I had to do the start finish."

72. There are many anomalies in the log book records. The most significant ones are:

73. I asked Mr Ovens for some further detail on his log book recording practices (Transcript, page 155 onwards). He confirmed again that he "generally" made the entries in his log book on the day. He acknowledged that he may not always have done it immediately after the journey, and volunteered one example where he had gone to a function one evening and had not recorded the entry for that day until the next day.

74. He said that he kept the log book in the glove box of the car. At page 159:

"MR FROST: You had the discipline, did you, to reach over to the glove box, take the log book out and write in the details?---By and large yes I did. There would have been one or two occasions - I'm thinking of the one where I went and met [a client], running late, didn't do it, caught the bus in next morning and redid it - did it then. So that's from memory. Now, I can't remember every entry. I do - I do recall trying to be vigilant about this. I took it pretty seriously to make sure that I did put the start/finish dates in there and data in between backed up with more detailed information in my Sony organiser."

75. When I asked him about the altered odometer readings, referred to at [72](c), he explained that he had been very busy at the time, and that he had been under significant stress because of his wife's health issues (pages 160-161).

76. During the relevant year, Mr Ovens also claimed "mileage" reimbursement from Interim. He said that the reimbursement always related to one or other of the Subarus, and never the BMW (page 106).

77. Certain documents produced by Interim in response to a summons were taken into evidence as Exhibit R4. Included within that bundle are the expense claims that Mr Ovens lodged with Interim covering the period 17 December 2004 to 30 June 2005. Mr Ovens' claim form for the month of February 2005 contained, among others, the following entries:


"Date Nature of expense Amount
11/2/05 Mileage HV Conference 356 206.48
…    
25/2/05 Mileage Newcastle GWF 385 223.30
Feb Client Visits Mileage 648 375.84"

78. The March claim form included the following entries:


"Date Nature of expense Amount
18/3/05 Mileage Newcastle GWF 383 222.14
…    
March Mileage 486 km 281.88"

79. Mr Ovens explained (Transcript, page 110):

"These dates and expense claims aren't always the date on which they're doing. We just have to put a date in there. Whether I travel on that date is not related to my diary."

80. Meanwhile, his log book entries were:


"Start date End date Purpose of journey
9/2/05 10/2/05 Prospect mtg Chubb, Canterbury, Mtg AMP Email Rosebery, Mtg Sanofi Nth Ryde Drive to Company Conference Hunter Valley
11/2/05 11/2/05 Return from Hunter Valley Conference
…    
22/2/05 22/02/05 Travel to Newcastle meet Lion Nathan Project & interview Contractor
…    
25/2/05 25/2/05 Proposal meeting Swift & Moore Homebush Mtg EDI Downer, Office for staff meeting"

81. Clearly, something is wrong here. The log book contains only two references to George Weston Foods - "GWF" - in February, and they are on the 1st and the 3rd, and the meetings are said to have taken place in Chatswood, not Newcastle. Those references are consistent with what is contained in Exhibit

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A7. So, while the dates shown on the expense claim form might assume no significance, the inconsistency between the clients visited - GWF according to the expense claim, and Lion Nathan according to the log book - is less easy to fathom. In relation to the "Hunter Valley conference" expense claim, Ms Hammond asked Mr Ovens:

"Is this the same mileage that you're claiming with respect to the travel that you did in your BMW?---Well, I must have accidentally claimed it twice. It appears that way."

82. Mr Ovens also claimed a "car hire" expense of $288.73 during February, and on his expense claim he put the date "17/2/05" next to the expense. The receipts that he submitted to Interim were attached to the expense claim. Included in the receipts is one that was issued by Budget Car and Truck Rental, for $288.73. The receipt has the following information printed on it:

"RENTED FROM: 339 MELBOURN [sic] 17/02/05

DUE AT: 325 MELBOURN [sic] 19/02/05"

83. There is also a receipt, issued by a hotel in Melbourne for sundry expenses, which has on it "Arrival 17/02/2005" and "Departure 18/02/2005".

84. But his log book says that on 17 February 2005 he was driving the BMW around Sydney, travelling 83 km on "business":

"Mtg Channel 10 business pitch, Mtg Arnotts (Huntingwood) discuss Project, Mtg Qantas Mascot discuss supply services"

85. Exhibit A7 provides the following detail for that date:

"9am meeting Mr Kethel, Network Ten, Pyrmont scope proposal for talent. Drove to city office. Drove to 1pm meeting Ms Nell, Arnotts Huntingwood to scope career transition proposal. Drove to city office. Drove to meeting Mr Jenkins, Qantas at 4pm to follow up on proposal sent for career transition work. Drove to home office."

86. His log book entry for 18 February 2005 records the following, comprising 68 km of "business" travel:

"Prospect mtg AGL, Mtg Coca Cola, Prospect mtg Lion Nathan"

87. Exhibit A7 says, for that date:

"9am meeting Mr Bennett, AGL, North Sydney find out process to tender for work. Drove to city office. Drove to 1pm meeting Ms Frew, Coca Cola Frenchs Forest to discuss results of work carried out. Drove to city office. Drove to meeting Lion Nathan 4pm with Mr Barbour at Auburn to discuss prior work in career area and seek new work. Drove to home office."

88. There are two further expense receipts that undermine the accuracy of Mr Ovens' log book. They are parking display tickets, issued by the City of Port Phillip (a Melbourne local government area) and dated 18 February 2005, one of them expiring at 2:08pm and the other at 4:07pm.

89. Ms Hammond's questioning of him, at page 112 of the Transcript (although directed at his log book entry for the 17th, rather than the 18th), brought this:

"How is it that you explain the car travel that's listed for the 17th if you were in Melbourne?---I must have got the dates wrong."

90. At page 114 of the Transcript Ms Hammond asked him about a trip to Canberra, recorded as having taken place on 29 March and for which he claimed 685 "business" kilometres:

"Did you make this trip?---I certainly made a trip around that day, I just - I certainly did go to Canberra.

Okay. Why did you take a taxi from Canberra airport to Canberra CBD the day that you drove to Canberra?---Again, I don't know that date is correct. I did go back and forward. We had a project going on there. I did go back and forward. On one occasion I did fly. But I did drive on other dates. So whether I've got those dates wrong."

91. With respect to the "Private travel" entry mentioned in [72](b) above, Exhibit A7 explains "Error as used another car I own rego […] on this Saturday and did not add to mileage". That is an entirely unsatisfactory explanation. The explanations that he offered for other shortcomings in his record-keeping, as

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noted in [89] and [90], were no more convincing. They do not sit well with his claim that he recorded the entries in his log book "generally" on the day of the journey. The identified shortcomings are not supportive of his assertion that he "kept very precise logs on it … I very carefully kept records on that": [67] above. It is much more likely that the records were not kept contemporaneously. The matters mentioned at [72](b), (c) and (d) are, in fact, consistent with Mr Ovens' having identified that the arithmetic arising from the odometer readings is wrong, and then having attempted to correct the mistakes after the event.

92. Keeping a log book is a mechanical exercise. Under s 28-125(2) of the 1997 Act you need to record the start and finish date of the journey, the start and finish odometer readings, the distance travelled and a brief description of the journey. You must record those details "at the end of the journey or as soon as possible afterwards". Those requirements are not onerous. Nevertheless, they must be complied with - if not with absolute perfection, then at least substantially - by anyone wishing to use the log book method.

93. I am not satisfied that Mr Ovens' log book complies substantially with the requirements of s 28-125(2). In particular, I find that, if he ever undertook the journeys that are described in the log book:

94. Mr Ovens cannot, therefore, use the log book method to claim his car expenses for the relevant year.

95. The Commissioner has indicated a preparedness to accept a claim based on whichever of the other methods set out in Division 28 is of greatest advantage to Mr Ovens. I will remit the matter to the Commissioner to allow that to be done.

Administrative penalty

96. Any taxpayer who makes a statement to the Commissioner that is "false or misleading in a material particular" is liable to an administrative penalty if the statement results in a "shortfall amount"; a "shortfall amount" arises if the tax liability worked out on the basis of the statement is less than it would be if the statement were not false or misleading: ss 284-75(1) and 284-80 in Schedule 1 to the Taxation Administration Act 1953 ("the Administration Act").

97. The "base penalty amount" is set by the table in s 284-90(1) in Schedule 1 to the Administration Act. Failure to take "reasonable care to comply with a taxation law" results in a base penalty amount of 25% of the shortfall. The penalty may be remitted in whole or in part: s 298-20(1).

98. Administrative penalty was assessed at 25% of the amount of the deductions that Mr Ovens claimed but the Commissioner disallowed. No part of the penalty was remitted.

99. In Mr Ovens' case there are several statements that have led to several shortfall amounts. In relation to each statement there are two questions to be addressed: first, what is the proper base penalty amount; and second, is any remission warranted?

100. The "statements" are:

101. In respect of matters (ii) to (iv), the base penalty amount of 25% is appropriate. To the extent that his statements led to a shortfall amount, it was because of a failure to take reasonable care to comply with a taxation law. Although the discretion to remit the penalty in

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whole or in part is very wide, I have not identified any reason why the penalty should be remitted.

102. Matter (i), however, is a little different. He and his agent, to some extent, took reasonable care in making the statement that he was entitled to a deduction for "occupancy costs", and to that extent there is no "shortfall amount": s 284-215(2) in Schedule 1 to the Administration Act. However, it is also true that to some extent he and his agent did not take reasonable care.

103. More particularly, Mr Ovens and his agent took reasonable care in making the statements (even though I have found the statements to have been wrong) that he was entitled to a deduction for those items of expenditure set out at [49] of these reasons, provided that the amount claimed in relation to his employment at Interim was no more than 11% of the total expenditure for the particular item. If more than 11% was claimed in his return, then it is not the case that Mr Ovens and his agent took reasonable care in making the statement.

104. Therefore, in respect of "occupancy costs", I remit the administrative penalty issue to the Commissioner for recalculation in accordance with the following directions:

Conclusion

105. The objection decisions are affirmed, except to the following extent:

106. If, despite the detail with which I have dealt with matters, either party is of the view that an issue that I was meant to resolve has not been resolved, I allow each of them 14 days from the date of publication of these reasons to apply for clarification or for further directions.

 

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